PUBLIC OPINION***


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THE NEW YORK STOCK EXCHANGE AND PUBLIC OPINION

by

OTTO H. KAHN

Remarks at Annual Dinner
Association of Stock Exchange Brokers
Held at the Astor Hotel, New York
January 24, 1917







Published by The New York Stock Exchange




The New York Stock Exchange


A couple of weeks ago I went to Washington to contradict under the
solemn obligation of my oath a gross and wanton calumny which, based
upon nothing but anonymous and irresponsible gossip, had been uttered
regarding my name.

On my way between New York and Washington, thinking that, once on the
stand, I might possibly be asked a number of questions more or less
within the general scope of the Committee's enquiry, I indulged in a
little mental exercise by putting myself through an imaginary
examination.

With your permission, I will read a few of these phantom questions and
answers:




Should the Exchange Be "Regulated"?


Question:

_There is a fairly widespread impression that the functions of the
Stock Exchange should be circumscribed and controlled by some
governmental authority; that it needs reforming from without. What have
you to say on that subject?_


Answer:

I need not point out to your Committee the necessity of differentiating
between the Stock Exchange as such and those who use the Stock
Exchange.

Most of the complaints against the Stock Exchange arise from the action
of those outside of its organization and over whose conduct it has no
control. No doubt there have at times been shortcomings and laxity of
methods in the administration of the Stock Exchange just as there have
been in every other institution administered by human hands and brains.

[Sidenote: _Should the Exchange be regulated?_]

Some things were, if not approved, at least tolerated in the past which
are not in accord with the ethical conception of to-day.

The same thing can be said of almost every other institution, even of
Congress. Until a few years ago, the acceptance of campaign
contributions from corporations, the acceptance of railroad passes by
Congressmen and Senators were regular practices which did not shock the
conscience either of the recipients or of the public. Now they have
rightly been made and are looked upon as crimes.

Ethical conceptions change; the limits of what is morally permissible
are drawn tighter. That is the normal process by which civilization
moves forward.

The Stock Exchange has never sought to resist the coming of that higher
standard. On the contrary, in its own sphere it has ever endeavored to
maintain an exemplary standard, and it has ever shown itself ready and
willing to introduce better methods whenever experience showed them to
be wise or suggestion showed them to be called for.

[Sidenote: _Should the Exchange be regulated?_]

In its regulations for the admission of securities to quotation, in the
publicity of its dealings, in the solvency of its members, in its rules
regulating their conduct and the enforcement of such rules, the New
York Stock Exchange is at least on a par with any other Stock Exchange
in the world, and, in fact, more advanced than almost any other.

The outside market on the curb could not exist if it were not for the
stringency of the requirements in the interest of the public which the
Stock Exchange imposes in respect of the admission of securities to
trading within its walls and jurisdiction.

There is no other Stock Exchange in existence in which the public has
that control over the execution of orders, which is given to it by the
practice--unique to the New York Stock Exchange--of having every single
transaction immediately recorded when made and publicly announced on
the ticker and on the daily transaction sheet.

I am familiar with the Stock Exchanges of London, Berlin and Paris, and
I have no hesitation in saying that, on the whole, the New York Stock
Exchange is the most efficient and best conducted organization of its
kind in the world.

[Sidenote: _Should the Exchange be regulated?_]

The recommendations made by the Commission appointed by Governor Hughes
at the time were immediately adopted in toto by the Stock Exchange.
Certain abuses which were shown to have crept into its system several
years ago were at once rectified. From time to time other failings will
become apparent--there may be some in existence at this very moment
which have escaped its attention--as failings become apparent in every
institution, and will have to be met and corrected.

I am satisfied that in cases where public opinion or the proper
authorities call attention to shortcomings which may be found to exist
in the Stock Exchange practice, or where such may be discovered by the
governing body or the membership of the Exchange, prompt correction can
be safely relied upon.

Sometimes and in some respects, it is true, outside observers may have
a clearer vision than those who are qualified by many years of
experience, practice and routine.

If there be any measures which can be shown clearly to be conducive
towards the better fulfilment of those purposes which the Stock
Exchange is created and intended to serve, I am certain that the
membership would not permit themselves to be led or influenced by
hidebound Bourbonism, but would welcome such measures, from whatever
quarter they may originate.




Is the Exchange Merely a Private Institution?


Question:

_Do I understand you to mean, then, that the Stock Exchange is simply
a private institution and as such removed from the control of
governmental authorities and of no concern to them?_


Answer:

I beg your pardon, but that is not the meaning I intended to convey.
While the Stock Exchange is in theory a private institution, it
fulfills in fact a public function of great national importance.

That function is to afford a free and fair, broad and genuine market
for securities and particularly for the tokens of the industrial wealth
and enterprise of the country, i.e., stocks and bonds of corporations.

Without such a market, without such a trading and distributing centre,
wide and active and enterprising, corporate activity could not exist.

[Sidenote: _Is the Exchange merely a private institution?_]

If the Stock Exchange were ever to grow unmindful of the public
character of its functions and of its national duty, if through
inefficiency or for any other reason it should ever become inadequate
or untrustworthy to render to the country the services with constitute
its raison d'etre, it would not only be the right, but the duty of the
authorities, State or Federal, to step in.

But thus far, I fail to know of any valid reasons to make such action
called for.




Short Selling--Is it Justifiable?


Question:

_You have commenced your first answer with the words, "I need not
point out to your Commission." That is a complimentary assumption, but
I don't mind telling you that we here are very little acquainted with
the working of the Stock Exchange or the affairs of you Wall Street men
in general. What about short selling?_


Answer:

I do not mean to take a "holier than thou" attitude, but personally, I
have never sold a share of stock short in my life.

Short sellers are born, not made. But if there were not people born who
sell short, they would almost have to be invented.

Short selling has a legitimate place in the scheme of things economic.
It acts as a check on undue optimism, it tends to counteract the danger
of an upward runaway market, it supplies a sustaining force in a
heavily declining market at times of unexpected shock or panic. It is a
valuable element in preventing extremes of advance and decline.

[Sidenote: _Short selling Is it justifiable?_]

The short seller contracts to deliver at a certain price a certain
quantity of stocks which he does not own at the time, but which he
expects the course of the market to permit him to buy at a profit.

In its essence that is not very different from what every contractor
and merchant does when in the usual course of business he undertakes to
complete a job or to deliver goods without having first secured all of
the materials entering into the work or the merchandise.

The practice of short selling has been sanctioned by economists from
the first Napoleon's Minister of Finance to Horace White in our day.
While laws have at various times been enacted to prohibit that
operation, it is a noteworthy fact that in every instance I know of
these laws have been repealed after a short experience of their
effects.

[Sidenote: _Short selling Is it justifiable?_]

I am informed on good authority--though I cannot personally vouch for
the correctness of the information--that there is no short selling on
one nowadays fairly important Stock Exchange,--that of Tokyo, Japan.
You will have seen in the papers that when President Wilson's peace
message (or was it the German Chancellor's peace speech?) became known
in Tokyo, the Stock Exchange there was thrown into a panic of such
violence that it had to close its doors. It attempted to reopen a
couple of days later, but after a short while of trading was again
compelled to suspend.

Assuming my information to be correct, you have here an illuminating
instance of cause and effect.

Short selling does become a wrong when and to the extent that the
methods and intent of the short seller are wrong.

The short seller who goes about like a raging lion [or bear] seeking
whom he may devour; he who deliberately smashes values by dint of
manipulation or artificially intensified selling amounting in effect to
manipulation, or by spreading alarm through untrue reports or even
through merely unverified rumors, does wrong and ought to be punished.

[Sidenote: _Short selling Is it justifiable?_]

Perhaps the Stock Exchange authorities are not always alert enough and
thorough enough in running down and punishing deliberate wreckers of
values and spreaders of evil omen; perhaps there is altogether not
enough energy and determination in dealing with the grave and dangerous
evil of rumor mongering on the Stock Exchange and in brokers' offices.
But after all even Congress, with the machinery of almost unlimited
power at its hand, does not always seem to find it quite easy to hunt
the wicked rumor-mongers to their lairs and subject them to adequate
punishment.

Yet the unwarranted assailing of a man's good name is a more grievous
and heinous offence than the assailing, by dint even of false reports,
of the market prices of his possessions.

I need hardly add that the practices to which I have above referred are
equally wrong and punishable when they aim at and are applied to the
artificial boosting of prices as when the object is the artificial
depression of prices.




Does the Public Get "Fleeced"?


Question:

_We hear or read from time to time about the public being fleeced.
There is a good deal of smoke. Isn't there some fire?_


Answer:

If people do get "fleeced," the fault lies mainly with outside
promoters or unscrupulous financiers, over whom the Stock Exchange has
no effective control. Some people imagine themselves "fleeced," when
the real trouble was their own get-rich-quick greed in buying highly
speculative or unsound securities, or having gone into the market
beyond their depth, or having exercised poor judgment as to the time of
buying and selling. Against these causes I know of no effective remedy,
just as there is no way to prevent a man from overeating or eating what
is bad for him.

In saying this, I do not mean to imply that stockbrokers have not a
duty in the premises.

[Sidenote: _Does the public get fleeced?_]

On the contrary, they have a very distinct and comprehensive duty
towards their clients, especially those less familiar with stock market
and financial affairs, and towards the public at large. And they have
furthermore the duty to abstain from tempting or unduly encouraging
people to speculate on margin, especially people of limited means, and
from accepting or continuing accounts which are not amply protected by
margin. In respect of the latter requirement, the Stock Exchange has
rightly increased the stringency of its rules some years ago, and it
cannot too sternly set its face against an infringement of those rules
or too vigilantly guard against their evasion.

Against unscrupulous promotion and financiering a remedy might be found
in a law which should forbid any public dealing in any industrial
security [for railroad and public service securities the existing
Commissions afford ample protection to the public] unless its
introduction is accompanied by a prospectus setting forth every
material detail about the company concerned and the security offered,
such prospectus to be signed by persons who are to be held responsible
at law for any wilful omission or misstatement therein.

[Sidenote: _Does the public get fleeced?_]

Such a law would be analogous in its purpose and function to the Pure
Food Law, Any, let us call it, "anti-fleecing" law which went beyond
that purpose and function would overshoot the mark. The Pure Food Law
does not pretend to prescribe how much a man should eat, when he should
eat or what is good or bad for him to eat, but it does prescribe that
the ingredients of what is sold to him as food must be honestly and
publicly stated. The same principle should prevail in respect of the
offering and sale of securities.

If a drug contains water, the quantity or proportion must be shown on
the label, so that a man cannot sell you a bottle filled with water
when you think you are buying a tonic. In the same way the proportion
of water in a stock issue should be plainly and publicly shown.

The purchaser should not be permitted to be under the impression that
he is buying a share in tangible assets when, as a matter of fact, he
is buying expectations, earning capacity or goodwill. These may be, and
often are, very valuable elements, but the purchaser ought to be
enabled to judge as to that with the facts plainly and clearly before
him.

[Sidenote: _Does the public get fleeced?_]

The main evil of watered stock lies not in the presence of water, but
in the concealment or coloring of that liquid. Notwithstanding the
unenviable reputation which the popular view attaches to watered stock,
there are distinctly two sides to that question, always provided that
the strictest and fullest publicity is given to all pertinent facts
concerning the creation and nature of the stock.




Do "Big Men" Put the Market Up or Down?


Question:

_Is it not a fact that some of the "big men" get together from time
to time and determine to put the market up or down so as to catch
profits going and coming?_


Answer:

As to "big men" meeting to determine the course of the stock market,
that is one of those legends and superstitions inherited from olden
days many years ago when conditions were totally different from what
they are now, and when the scale of things and morals, too, were
different, which it is hard to kill.

The fluctuations of the stock market represent the views, the judgment
and the conditions of thousands of people all over the country, and
indeed, in normal times, all over the world.

The current which sends market prices up or down is far stronger than
any man or combination of men. It would sweep any man or men aside like
driftwood if they stood in its way or attempted to deflect it.

[Sidenote: _Do "big men" put the market up or down?_]

True, men at times discern the approach of that current from afar off
and back their judgment singly, or sometimes even a few of them
together, as to its time and effect. They may hasten a little the
advent of that current, they may a little intensify its effect, but
they have not the power to either unloosen it or stop it.

If by the term "big men" you mean Bankers, let me add that a genuine
Banker has very little time and, generally speaking, equally little
inclination to speculate, and that his very training and occupation
unfit him to be a successful speculator.

The Banker's training is to judge intrinsic values, his outlook must be
broad and comprehensive, his plans must take account of the longer
future. The Speculator's business is to discern and take advantage of
immediate situations, his outlook is for tomorrow, or anyhow for the
early future; he must indeed be able at times to disregard intrinsic
values.

[Sidenote: _Do "big men" put the market up or down?_]

The temperamental and mental qualifications of the Banker and
Speculator are fundamentally conflicting and it hardly ever happens
that these qualifications are successfully combined in one and the same
person. The Banker as a stock market factor is vastly and strangely
over-estimated, even by the Stock Exchange fraternity itself.

May I add, in parenthesis, that a sharp line of demarcation exists
between the speculator and the gambler? The former has a useful and
probably a necessary function, the latter is a parasite and a nuisance.
He is only tolerated because it seems impossible to abolish him without
at the same time doing damage to elements the preservation of which is
of greater importance than the obliteration of the gambler.




To the Members of the Exchange


Now by this time the Committee would surely feel that it has had a
surfeit of my wisdom, as I am sure you must feel, but if you will be
indulgent a very little while longer, I should like to say a few words
more to you whose guest I have the honor to be this evening.

My recent observation of and contact with Congressmen and others in
Washington have once more fortified my belief that the men by and large
whom the country sends to Washington to represent it, desire and are
endeavoring, honestly and painstakingly, to do their duty according to
their light and conscience, and that, making reasonable allowance for
the element of party considerations, they represent very fairly the
views and sentiments of the average American.

[Sidenote: _The pioneer period of economic development is ended_]

Most of them are men of moderate circumstances. Very few of them have
had occasion to familiarize themselves with the laws, the history and
the functionings of finance and trade; to come into relation to the big
business affairs of the country, or to compare views with its active
business men.

It may be assumed that, very naturally, not a few of them have failed
to come to a full recognition of the facts that the mighty pioneer
period of America's economic development came definitely to an end a
dozen years ago, that with it came to an end practices and methods and
ethical conceptions, which in the midst of the magnificent achievements
of that turbulent period were, if not permitted, yet to an extent
silently tolerated, and that business has willingly fallen into line
and kept in line with the reforms which were called for in business as
in other walks of our national life.

The opinions of the world, and particularly of the political world,
travel along well worn roads. Men are reluctant to go to the effort of
reconsidering opinions once definitely formed and fixed.

[Sidenote: _The vacuum cleaner of reform and regulation_]

Many in and out of Congress are still under the controlling impress of
the stormy years when certain deplorable occurrences affecting
corporations and business men were brought to light, when it was
demonstrated that certain abuses which had accumulated during well nigh
two generations needed to be done away with for good and all, and when
the people went through the ancient edifice of business with the vacuum
cleaner of reform and regulation, using it very thoroughly, perhaps, in
spots, a little too thoroughly.

Not a few politicians are still sounding the old battle cry, although
the battle of the people for the regulation and supervision of
corporations was fought to a finish years ago _and won by the people_,
and although the people themselves of late, on the few occasions when
a direct proposition has been put up to them, such as recently in
Missouri, have indicated that they consider the punitive and
probationary period at an end and want business to be given a fair
chance and a square deal.

When the right of suffrage was thrown open to the masses of the people
in England, a great Englishman said, "Now we must educate our masters."

In this country it is not so much a question of educating our masters,
the people and the people's representatives [who, moreover, would
resent and refuse to tolerate for a moment any such patronizing
assumption], as of getting them to know us and getting ourselves to
know them.

[Sidenote: _The need for closer contact and better understanding_]

All parties concerned will benefit from coming into closer contact with
each other and becoming acquainted with each other's viewpoints.

Can we honestly say that we are doing our full share to bring about
such contact and to get ourselves and what we believe in properly
understood, believe in not only because it happens to be our job in
life and our self-interest, but because in the general scheme of things
it serves a legitimate and useful and necessary function for our
country?

How many of us have taken the trouble to seek the personal acquaintance
of the Congressmen or Assemblymen or State Senators representing our
respective districts?

How many of us make an effort to come into personal relationship with
people, both here and in the West, outside of our accustomed circles?
Yet an ounce of personal relationship and personal talk is worth many
pounds of speech making and publicity propaganda.

[Sidenote: _"To be one of fifteen men around a table"_]

When you look a man in the face and talk to him and question him and
realize in the end that he is sincere in his viewpoint, whether you
share it or not, and that he is made of the same human stuff as you,
and has neither horns nor claws nor hoofs, much animosity, many
preconceived notions are apt to vanish and you are not so cocksure any
longer that the other fellow is a destructive devil of radicalism or a
bloated devil of capitalism, as the case may be.

I recall in this connection an incident which concerns my great friend,
the late E. H. Harriman. He talked to me about his wish to be elected
to a certain railroad board. I said, "I don't really see what use that
would be to you. You would be one of fifteen men, of whom presumably
fourteen would be against you." He answered: "I know that, but all the
opportunity I ever want is to be one of fifteen men around a table."

And the result has shown that that was all the opportunity he needed.

We cannot all have the conquering genius and force of a Harriman, but
every one of us, in a greater or lesser degree, every one in some
degree has the power of co-operating in the vastly important task of
personal propaganda for a better understanding, a juster appreciation
of each other, between East and West and South, between what is termed
Wall Street and the men who make our laws, between business and the
people.

[Sidenote: _This is the age of publicity_]

This is the age of publicity, whether we like it or not. Democracy is
inquisitive and won't take things for granted. It will not be satisfied
with dignified silence, still less with resentful silence.

Business and business men must come out of their old time seclusion,
they must vindicate their usefulness, they must prove their title, they
must claim and defend their rights and stand up for their convictions.
Nor will business or the dignity of business men be harmed in the
process.

No healthy organism is hurt by exposure to the open air. No dignity is
worth having or merited or capable of being long preserved which cannot
hold its own in the market place.

Democracy wants "to be shown." It is no longer sufficient for the
successful man to claim that he has won his place by hard work, energy,
foresight and integrity.

[Sidenote: _The use of the power that goes with success_]

Democracy insists rightly that a part of every man's ability belongs to
the community. Democracy watches more and more carefully from year to
year what use is being made of the rewards which are bestowed upon
material success, and particularly whether the power which goes with
success is used wisely and well, with due sense of responsibility and
self-restraint, with due regard for the interests of the community.

And if the consensus of enlightened public opinion should come to
conclude that on the whole it is not so used, the people will find
means to limit those rewards and to curtail that power.

And what is true of the public attitude towards individuals holds good
equally of its attitude towards organizations such as the Stock
Exchange.

There can be little doubt that a great deal of misconception prevails
as to its methods, spirit and practices, as to its functions, purposes
and its place in the country's economic structure.

It is of great and urgent importance that the Stock Exchange should
leave nothing undone to get itself better and more correctly
understood. It should not only not avoid the fullest publicity and
scrutiny, but it should welcome and seek them.

[Sidenote: _The Stock Exchange a National Institution_]

It has nothing to hide and it should be glad to show that it has
nothing to hide. It should miss no opportunity to explain patiently and
in good temper what it is and stands for, to correct misunderstandings
and erroneous conception.

If it is attacked from any quarter deserving of attention, it should go
to the trouble of defending itself. If it is made the object of
calumny, it should contradict and confound the slanderer.

Its members should ever remember that while in theory the Stock
Exchange is merely a market for the buying and selling of securities,
actually and collectively they constitute a national institution of
great importance and great power for good or ill.

They are officers of the court of commerce in the same sense in which
lawyers are officers of the court of law. They should not be satisfied
with things as they find them, they should not take the way of least
resistance, they should ever seek to broaden their own outlook and
extend the field and scope of the Stock Exchange's activities.

[Sidenote: _American opportunity for foreign trade_]

One of the reasons for London's financial world position is that its
Stock Exchange affords a market for all kinds of securities of all
kinds of countries. The English Stock Broker's outlook and general or
detailed information range over the entire inhabited globe. It is
largely through him that the investing or speculative public is kept
advised as to opportunities for placing funds in foreign countries. He
is an active and valuable force in gathering and spreading information
and in enlisting British capital on its world-wide mission.

The viewpoint of the average American investor is as yet rather a
narrow one. Investment in foreign countries is not much to his liking.
The regions too far removed from Broadway do not greatly appeal to him
as fields for financial fructification.

Yet, if America is to avail herself fully of the opportunities for her
trade which the world offers, she must be prepared to open her markets
to foreign securities, both bonds and stocks.

If America aspires to an economic world position similar to England's,
she must have amongst other things financial [such as, first of all, a
discount market] a market for foreign securities.

[Sidenote: _We are at a turning point in American History_]

In educating first themselves and then the public to an appreciation of
the importance and attractiveness of such a market, with due regard to
safety, and to the prior claim of American enterprise in its own
country, the members of the Stock Exchange have an immense field for
their imagination, their desire for knowledge and their energy.

We all of us must try to adjust our viewpoint to the situation which
the war has created for America, and to the consequences which will
spring from that situation after the war will have ceased.

As Mr. Vanderlip so well said in a recent speech: "Never did a nation
have flung at it so many gifts of opportunity, such inspiration for
achievement. We are like the heir of an enormously wealthy father. None
too well trained, none too experienced, with the pleasure-loving
qualities of youth, we have suddenly, by a world tragedy, been made
heir to the greatest estate of opportunity that imagination ever
pictured."

America is in a period which for good or ill is a turning point in her
history. Her duty and her responsibility are equally as great as her
opportunity. Shall we rise to its full potentiality, both in a material
and in a moral sense?

The words of an English poet come to my mind:

    "We've sailed wherever ships can sail,
      We've founded many a mighty state,
    God grant our greatness may not stale
      Through craven fear of being great."

It is not "craven fear" that will prevent us from attaining the summit
of the greatness which it is open to America to reach, for fear has
never kept back Americans--any more than Englishmen--and never will.

Indifference, slackness and sloth, lack of breadth and depth in thought
and planning; the softening of our fibre through easy prosperity and
luxury; unwise or hampering laws, inadequacy of vision and of
purposeful, determined effort, individual and national, are what we
have to guard against.

God grant America may not fail to grasp and hold that greatness which
lies at her hand!



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