Chapter II: The Period of Suspension (1)

During the same morning on which the momentous action of closing was taken the Committee of Five met and elected the President of the Exchange as their Chairman. The acute crisis was over, the danger of a cataclysm had been averted, but the situation that remained was big with problems full of menace and uncertainty.

Just what effect the closing of the market would have was a matter of doubt. On all previous occasions when the facilities of the Exchange had been inadequate, or had been shut off, an unregulated market had established itself in public places and proceeded uncontrolled. Thus during the Civil War, when the volume of speculation had completely outgrown the limited machinery of the old Board of Brokers, a continuous market developed partly in the street and partly in a basement room called the "Coal Hole" and flourished during the day, while in the evening it was continued in the lobby of the Fifth Avenue Hotel. This market did more business than was done upon the Exchange itself, and a few years after the War, many of its members, who had organized into the "Open Board of Brokers," were admitted to the Stock Exchange in a body. The suspension of business in 1873 was too brief to allow of the formation of a market such as the above, but, while it continued, cash transactions for securities were being carried on every day in the financial district.

Would results such as these obtain on this occasion? Much depended upon the length of time before the Exchange could re-open, but this in itself was a problem for which no one could venture a solution. Again, a vast volume of contracts made on July 30th had been suspended. How long could the enforcement of these contracts be successfully prohibited, and above all how long would the banks and financial institutions which were lending money on Stock Exchange collateral refrain from calling loans when they were deprived of any measure of the value of their security? Over its own members the New York Stock Exchange might exercise a rigid control, and it could safely be assumed that the other Stock Exchanges of the country would coöperate with it, but numberless outside agencies existed such as independent dealers unaffiliated with exchanges, and auctioneers, any of whom might establish a market. If declining prices were made through media of this description, and the press felt called upon to furnish them to the public, the closing of the Exchange might not suffice to prevent panic and disaster.

Oppressed by these considerations, and by an appalling sense of responsibility, the new Committee of Five began its labors in the morning of July 31st. The first step decided upon was to communicate with the Bank Clearing House Committee. Mr. Francis L. Hine, President of the Clearing House, was invited to meet the Committee of Five which he did, a little later in the day, and presented to them the following statement of the action taken by the Clearing House.

"There was a meeting of the Clearing House Committee this morning
in view of the closing of the New York Stock Exchange. It was the
opinion of the Committee that the business and financial
condition of New York and the entire country was sound but that
the situation in Europe justified extreme prudence and
self-control on the part of the United States; that the closing
of the Stock Exchange was a wise precaution by reason of the
disposition of all Europe to make it the market for whatever it
wished to sell, and that in this country there was no occasion
for any serious interruption of the regular course of business,
either financial or mercantile."

After the retirement of Mr. Hine, the Chairman of the Committee on Clearing House of the Exchange stated that all the checks given to the Clearing House had been certified, and a notice was thereupon sent out instructing members to call for their drafts at the usual hour. Thus all the differences due on the day's transactions of July 30th were settled, and a first encouraging step was taken. It was also decided to permit the offering of call money on the floor of the Exchange.

The Committee held its second meeting on August 1st and the first of the long series of problems growing out of the closing of the market was at once presented to it. A letter from a brokerage house doing business with Europe was received in which it was pointed out that "arbitrageurs" who had sold stocks in New York and bought them in London during the previous fortnight had made their deliveries by borrowing stock in New York; that the stock purchased in London was due to arrive on this side, and that the usual process of financing it by returning the previously borrowed stock had been cut off through the suspension of unfulfilled contracts. This was likely to lead to very grave embarrassment because call money had practically disappeared and houses to whom this foreign stock was consigned might not be able to meet their obligation to pay for it as it arrived. There being no arrivals of foreign stock expected that day, the Committee deferred action, and thus gained time to think out ways and means of meeting the difficulty.

The second problem presented came in the form of a request for permission to sell securities outside of the Exchange. The firm of S. H. P. Pell & Co. had suspended, and a house which had been lending them money wished to be authorized to sell out the collateral. This was the first of many cases brought before the Committee, during its long tenure of office, in which individuals sought for a special privilege to sell securities they were anxious to market while trading in general was forbidden. In this case the applicants were referred to that section of the Constitution of the Exchange in which it is provided that members having contracts with insolvents shall close out these contracts in the Exchange when the securities involved are listed. The Exchange being closed, this provision answered the question without necessitating any independent action on the part of the Committee.

* * * * *

From the moment of the closing of the Exchange a growing pressure arose to determine just when and how it should be re-opened. The desire for information on this point was widespread, and when the gravity of the situation became clearer to the community, a great anxiety developed that the re-opening should, above all, not be premature. Realizing that the fear of sudden and ill considered action on this question was becoming dangerous to the restoration of confidence, the Committee of Five, at its meeting of August 3rd authorized the following statement.

"Announcement is made by the President of the Stock Exchange, in
answer to inquiries as to when the Exchange will open, that ample
notice of such opening will be given."

In spite of this notice fear that the Stock Exchange might act injudiciously lingered for some time longer until the constant reiteration by its officers of their intention to act only in conjunction and in consultation with the banks permanently allayed it.

By Monday, August 3rd, a steady stream of letters had begun to pour in upon the Committee asking advice and direction upon any number of questions raised by the closing of the market, and offering every kind of suggestion and advice. In addition to this it soon became evident that interviews would have to be held with large numbers of people for the purpose of securing their cooperation, influencing their conduct, and obtaining information. The resolution of the Governing Committee by virtue of which the Committee of Five was brought into being merely stated that questions such as these should be considered and reported back "at the earliest possible moment." Clearly here was an impossible situation. The immense detail of the work which was beginning to unfold itself could never be handled by so large a body as the Governing Committee itself. Realizing that this difficulty must be met without a moment's delay the Committee of Five requested the calling of a special meeting of the Governors for twelve o'clock the same day and presented to them the following resolution, which was unanimously adopted.

"RESOLVED: That the Special Committee of Five, appointed by the
Governing Committee on July 31st, be, and it hereby is,
authorized during the present closing of the Exchange, to decide
all questions relating to the business of the Exchange and its
members."

This action of the Governing Committee, while it was rendered necessary by the peculiar requirements of the situation, was unprecedented in the history of the Exchange, for never before had such powers and such responsibilities been put in the hands of so few individuals. It was one of a series of "war measures" by means of which ends were achieved that would not have been reached in any other way.

Clothed with complete authority the Committee met again in the afternoon of August 3rd and was at once confronted with a request for a ruling on the question of how far members were to be restrained from dealing outside of the Exchange. After a lengthy discussion the following was approved as their opinion.

"It was the intention in closing the Stock Exchange that trading
should be stopped and it is the duty of loyal members to comply.
If cases come into your office where it is absolutely necessary
to trade, do so as quietly as possible and prevent the quotation
from being published."

It will be noticed that the policy adopted here was less stringent than what came later when the growth of an outside market increased the dangers of the situation.

* * * * *

With the question of outside dealings there at once arose the closely connected question of the danger arising from having price quotations of such dealings made public. The quotation machinery of the Exchanges had been silenced by the closing of those institutions, but there remained the public auctioneers whose sales, if they took place, would be disseminated by the press and might spread panic among security holders and money lenders. The auctioneers in New York, Boston, Philadelphia, and Chicago were at once approached, not only directly but through their bankers and other advisers. It was a disagreeable task as these auctioneers had to be urged to cease doing business, but it was rendered unexpectedly easy by the courtesy and friendliness with which they coöperated for the general welfare. So loyal were these various agencies that not a single sale, either of listed or unlisted securities, occurred in any auction room of the country until the urgent phases of the crisis had passed.

It was not in auction rooms alone, however, that prices might be made; dealings were liable to occur in any unexpected locality, and it was urgent that prices of an alarming character should be kept from the public. For this most important purpose the coöperation of the press was absolutely necessary. To obtain this, at the outset, was no easy matter. The closing of the Stock Exchange placed the financial news writers of the daily press in a curious position. With them were allied that group of financial writers connected with the various Wall Street news agencies, the several financial journals that are exclusively devoted to Wall Street affairs, and the financial correspondents of out of town newspapers. All told there were about one hundred salaried men in these various groups, men experienced in financial affairs, widely known and respected, engaged in a work which had never been interrupted and which, as far as could be foreseen, promised to furnish them with a continuous vocation.

The first effect of the war was a general curtailment of newspaper advertising, a rise in the price of paper, and a greatly increased cost of the news of the day owing to excessive cable charges for foreign dispatches. Thus the newspapers suffered a rapidly diminishing revenue, and they found it necessary to discharge many of their employees and to reduce the salaries of others. With the Stock Exchange closed, naturally the salaried financial writers were among the first to feel this hardship.

Those whose services were retained throughout this crisis were confronted with divided responsibilities. It was their duty to interpret a mass of more or less fantastic rumors at a time when nerves were overwrought and points of view magnified and distorted. They wished to prevent the publication of anything of an incendiary nature, while at the same time a necessity arose for presenting to the public the news to which it was entitled. Placed in such a position there was a very natural impatience here and there to have the Exchange reopened, while now and then a tendency became manifested to publish certain news of the day which, while interesting to the public, tended to handicap the efforts of those bent only on reassurance and calm counsel. At times it became somewhat difficult to prevent the publication of some of these matters, particularly of the prices made in the so called "gutter" market which sprang up in New Street. And yet on the whole nothing could have exceeded the fairness and the spirit of coöperation of these gentlemen in this trying time. One newspaper even went so far as to cease the publication of a remunerative page of small advertisements having to do with dealings in outside securities. This was done at the request of the Committee without hesitation. Others coöperated in the suppression of advertising on the part of questionable people, while correspondents of out of town newspapers, both foreign and domestic, cheerfully acceded to requests to suppress all disturbing financial reports. In a word, the financial department of the whole newspaper press accepted the situation philosophically, bearing their losses without complaint and supporting without cavil the restrictive measures which it was necessary to employ.

This loyal conduct of the press and of the auctioneers was one of the great factors without which the critical days of the suspension of business could not have been successfully surmounted.

* * * * *

It will be remembered that in the morning of July 31st, the Governing Committee not only voted to close the Exchange but also declared that the delivery of securities should be suspended until further notice. The motive of this latter action was to prevent the possible insolvencies that were likely to be forced if purchasers were compelled to pay for their securities in the absence of a call money market. At the earliest moment that attention could be given to it the Committee of Five requested the Chairman of the Stock Exchange Clearing House to place before it the exact figures of the outstanding contracts. These figures when presented showed that there were stock balances open on Clearing House order amounting to $38,700,000 and Ex-Clearing House contracts amounting to about $61,000,000. Roughly speaking there had been about $100,000,000 of stock sold in the Exchange on July 30th, the delivery of which to the purchasers had been suspended by the action of the Governing Committee. Obviously a first great step toward clearing up the situation and preparing the ground for the ultimate reopening of the market was to get this great volume of contracts settled, so that if any failures were inevitable they would be disposed of beforehand.

It being probable that many of the purchasers of stock on July 30th were in a position to finance their purchases even in the midst of the crisis the Committee deemed it wise to offer every possible facility for the immediate settlement of contracts when the purchaser was in this position. They therefore issued the following notice on August 4th:

"The Special Committee of Five appointed to consider questions
connected with the closing of the Exchange state that the
resolution of the Governing Committee suspending deliveries
until further notice does not mean that settlement may not be
made by mutual consent wherever feasible. The Clearing House of
the Exchange is prepared to advise and assist, and inquiries
should be made in person there."

At the request of the Committee of Five the Committee on Clearing House at once undertook the task of assisting members of the Exchange in closing up these contracts and used its clerical force for that purpose, thus involving much careful and detailed work. They held daily continuous meetings, giving their personal attention in assisting members, and using a care that involved both tact and arduous labor. Through their efforts such extraordinary progress was made, in this complex and difficult task, that by September 22nd announcement was made that the delivery of all Clearing House balances had been completed with the exception of those of the few firms whose affairs were in the hands of receivers. These were settled shortly afterwards and at the same time the great volume of Ex-Clearing House contracts were also completely fulfilled.

This is one of the most extraordinary and gratifying experiences of the great crisis. In about seven weeks, at a time when money was unobtainable and the condition of panic was at its height, this huge volume of unsettled contracts was met and consummated by voluntary coöperation and without compulsion of any kind. In some few cases selfishness or indifference delayed action on the part of individuals, but these were all brought to a final adjustment by the influence and persuasion of the Committee.

This achievement not only reflects undying credit upon the members of the Exchange by showing both the sound condition of their business and their zeal to act for the general welfare, and creates a deep sense of obligation to the Clearing House Committee who for many long weeks worked unceasingly to overcome the difficulties that beset the path, but it justifies and confirms the wisdom of the New York Stock Exchange in adhering to the practice of daily settlements. In all the great European centers, where trading on the fortnightly settlement basis is in vogue, the restoration of dealings was terribly complicated by the herculean task of clearing up back contracts that extended over many days. In New York, when conditions so shaped themselves as to warrant reopening the Exchange, the back contracts of its members had all been settled up _two months_ before. Had our system, like the European, involved "trading for the account," every additional day of back contracts added to the $100,000,000 worth of July 30th would have stood in the way of a final settlement, and the reopening of the market (which was long postponed as it was) would have been much further delayed.

* * * * *

On August 4th, a problem which had loomed upon the horizon the day after the closing of the Exchange, was brought squarely before the Committee. A delegation of houses dealing in securities for European account appeared and stated that approximately $40,000,000 to $50,000,000 of securities were to arrive "this week, beginning to-morrow, Wednesday," and that they would be accompanied by sight drafts which would have to be financed. This alleged great volume of securities had been sold in this market for foreign account and borrowed in New York in order to make the immediate deliveries that our day to day system requires. The suspension of the fulfillment of contracts declared by the Exchange made it impossible to return this borrowed stock, and the houses doing this business were therefore obliged either to allow the drafts to go to protest or finance the incoming stock until the free enforcement of contracts was again permitted.

With money practically unobtainable, and general panic prevailing, it is needless to say that these statements of the delegation of houses doing foreign business were a severe shock to the Committee of Five. A remedy proposed by one or two of these banking houses was that the people from whom they were borrowing stock should be required to take it back. This simple expedient, while eminently satisfactory from the standpoint of the borrower of stock, was not very helpful to the Committee, as it would merely have shifted the problem of financing the stock from one set of brokers to another, and would have raised the dangerous question of a general enforcement of contracts in borrowed securities. It was an interesting illustration, among some others to be subsequently experienced, of the manner in which certain minds can become entirely absorbed in that aspect of a question which deals solely with personal interest. After careful discussion it was determined that the coöperation of the Clearing House banks should be sought in solving the difficulty. The Committee of Five thereupon sent a communication to the Bank Clearing House committee setting forth all the circumstances connected with the expected consignment of securities as stated by the delegation of banking houses and requested an appointment to meet them, or a sub-committee of their members, and discuss the matter. The appointment was obtained for the following morning, August 5th, and the Chairman and Mr. H. K. Pomroy were appointed a sub-committee to confer with the Bankers and directed to take Mr. Richard Sutro with them as a representative of the houses doing foreign business.

At the meeting with the Clearing House bankers it was very properly decided that a solution of the problem could only be reached when an exact knowledge of the amount of money required to pay for the incoming securities had been obtained, the figures stated by the banking houses which were seeking assistance being only estimates. The representatives of the Stock Exchange agreed to obtain this exact information at once, and having returned and stated the circumstances to the Committee of Five, it was directed that the following communication be sent to a list of members of the Exchange who, it was understood, were to have foreign drafts presented to them:--

"The Special Committee of Five requests that by three o'clock
to-day they may have in their possession from you information as
to the number and amount of drafts which you expect will be
presented to you from Europe on any steamers arriving to-day or
subsequently. They would particularly like to know how much you
expect on each steamer. In case any of these have already been
financed please so state in your communication.

"The Committee would also like to have you tabulate in your
reply, so far as you can, the banks, trust companies or bankers
from whom you expect drafts to be presented.

"This communication is confidential and it is requested that you
do not discuss this matter with any one outside your own firm.
Your answer is expected by bearer, in order that the financing of
these drafts may be facilitated."

By three o'clock, the same afternoon, replies had been received from thirteen houses that they expected securities on the _Olympic_ and _Mauretania_, and had also received advices of other securities forwarded but did not know on what steamers; the drafts to be presented they said would be approximately for four and one half millions. Replies from twelve other houses stated it as a possibility but not a certainty that securities might reach them on the steamers above mentioned to the amount of about four millions; and, finally, twelve firms sent replies stating that they either expected no securities or had made the necessary arrangements to finance what was coming. These facts--so far below the estimate at first presented to the Committee--came as a great relief, and were at once taken before the Bank Clearing House Committee. After a careful discussion with these gentlemen the Committee of Five again met and sent the following communication to the firms who had reported that securities and drafts were about to be tendered to them.

"Members of the Exchange to whom foreign drafts are presented for
payment, are requested to confer with the Committee of Five at 9
A.M. to-morrow, Thursday, the 6th inst., in the Secretary's
office, with details of such transactions in hand, when efforts
will be made to facilitate the adjustment."

The next morning the few firms who had drafts to meet on that day were provided with the necessary loans by two banks and a trust company at 8 per cent. The amount of securities due from Europe was undoubtedly large, but the great bulk of it had not been shipped and the shipment of it was postponed for many weeks afterward. The extraordinary statement that $40,000,000 or $50,000,000 were about to be landed in New York is interesting as showing the hysterical state of mind to which many business men had been reduced at that time. The actual amount of stocks sold to arrive, against which borrowings had been effected in New York, was finally shown to amount to $20,000,000. That this amount was not increased at an embarrassing period in these important negotiations was due in large measure to the action of the Committee in calling together the various foreign arbitrage houses, and securing from them an agreement to cable to their correspondents in Europe not to make further shipments of securities, because borrowed stocks could not be returned and deliveries effected. This as it turned out was an important step in the right direction.

* * * * *

Owing to the sudden and severe pressure of business to which the Committee of Five was subjected almost from the moment of its organization, some matters were unavoidably overlooked which should have had immediate attention. Conspicuous among these was the question of the rate of interest to be charged upon open contracts which the action of the Governing Committee had suspended. This matter was not reached until the meeting of August 4th, when the following ruling was made:

"The Special Committee rules that interest on the delivery at the
rate of 6 per cent. shall accrue from August 5th on all unsettled
contracts for delivery of securities, except that interest shall
cease when a receiver of securities gives one day's notice to a
deliverer that he is ready to receive and pay for same.

"The Special Committee further rules that sales of bonds on July
30th carry interest at the rate specified in the bond to July
31st, and that between July 31st and August 5th they are 'flat';
interest thereafter to be 6 per cent. on the amount of money
involved, subject to the exemption stated in the previous
ruling."

In view of the fact that no action had been taken up to August 4th and that a number of private settlements had been arranged in the meantime the Committee thought it wise to avoid a retroactive ruling, and imposed the 6 per cent. rate from August 5th. Injustice was done, in some cases, by permitting a lapse of five days when no interest charge was required, but this injustice was cheerfully borne owing to the unusual exigencies of the situation.

On this same day the Committee received the first communication which indicated that some members of the Exchange had not yet appreciated the necessities and dangers of the situation. This came in the form of a letter from the Baltimore Stock Exchange which contained the following passage:--

"A representative New York Stock Exchange house has been guilty
of going directly to one of the Trust Companies here, and made
offerings of bonds dealt in on both your Exchange and our own, at
a large concession."

The Committee directed the Secretary to make the following reply:--

"In the matter of your letter of August 1, 1914, I am instructed
by the Special Committee appointed by the Governing Committee on
July 31, 1914, to inform you that in the opinion of said
Committee the offering down of securities in places where money
is loaned on securities is most reprehensible, and that members
of this Exchange ought not to engage therein. If possible, I
would like the name of the member of the New York Stock Exchange
who made such offer."

It may be urged in extenuation of the act of the Stock Exchange house that, August 1st being only one day after the closing, a thorough appreciation of the gravity of the situation had not yet become general.

* * * * *

By August 5th the work of the Committee had assumed the form that was to continue unremittingly until the Exchange reopened four and one half months later. A constant stream of communications either by letter or by personal appearance filled the days sometimes from nine o'clock in the morning until six in the afternoon. The communications asked advice and made suggestions of every conceivable kind, but, above all, they were loaded with problems and difficult situations which had grown out of the breakdown of the financial machinery in general.

The labors of the Committee in striving to straighten out this formidable tangle of business affairs led to their issuing a series of rulings, which were binding upon all members of the Exchange. These rulings were sent over the "Ticker" whenever they were passed, but on August 5th it was decided to supplement the "Ticker" by distributing the rulings in circular form, and thus insure the possession by every member of a full copy of the entire number. It is a gratifying fact, both from the standpoint of the Committee and of the Stock Exchange, that no one of the very numerous rulings was a failure or had to be rescinded, and that they were all accepted without cavil or serious criticism by the members. In the relatively few cases where an indisposition to live up to these rulings was brought to the attention of the Committee, an appeal from them to loyalty and good judgment never failed to bring a recalcitrant member to terms.

On this day, August 5th, a special circular was sent out to answer the constant inquiries as to whether purchases or sales of securities were in any way permissible during the period of closing. It contained the following:

"When the Governing Committee ordered the Exchange closed it was
their intention that all dealings in securities should cease,
pending the adjustment of the financial situation and the
reopening of the Exchange.

"It is possible that cases may occur where an exception would be
warranted provided such dealings were for the benefit of the
situation, and in no sense of a speculative character, or
conducted in public. Any member, however, taking part in such
transactions must have in mind, his loyalty to the Exchange,
whether or not he is living up to the spirit of the laws, and
that he is not committing an act detrimental to the public
welfare."

On August 7th the question of the reopening of the Exchange again came to the front. A letter from Baltimore was received urging that the Exchange reopen for dealings in bonds only, and the newspapers were so urgent for some statement on the subject that the Committee authorized the following:

"The Special Committee of Five will not recommend to the
Governing Committee the reopening of the Exchange until in their
judgment the financial situation warrants it, and as before
stated, ample notice will be given of the proposed opening."

The question of borrowed and loaned stocks came up at this time in two aspects, one the interest rate to be charged, and the other the determination of the market price at which such loans should stand. With regard to the former the Committee ruled on August 5th that "until further notice, from and after this date, the interest rate on all borrowed and loaned stocks shall be 6%." In the latter case they ruled (August 10th) that "borrowed and loaned stocks must be marked to the closing prices on Thursday, July 30th, 1914, at the request of either party to the loan."

The effect of this second ruling was to establish the policy of regarding the closing prices of July 30th, as the market for securities, so that all loans, whether cash loans or stock loans, should be figured at this level. The making of any prices below those of July 30th was to be resisted by every available means, and the money-lending institutions were to be urged to coöperate by recognizing them as a basis for exacting margins. As long as this policy could be successfully carried out the danger of financial collapse would be averted.

It having been ruled that a lender of stock, by notifying the borrower of his willingness to take the stock back, could stop the interest charge on the contract, a considerable demand arose for new stock loans to replace those in which this privilege had been exercised. The matter of facilitating these new stock loans was taken up by the Stock Exchange Clearing House, and this together with the negotiations for voluntary settlement of back contracts now brought upon the Clearing House Committee that great volume of work which increased steadily until the reopening of the Exchange.

One step tending to increase this work was taken on August 11th, when the Committee ruled as follows:

"Whenever a loaner of stocks gives one day's notice of
willingness to have the same returned and the borrower fails to
so return, the interest thereon shall cease. The Clearing House
of the Exchange is prepared to advise and assist in making new
stock loans and inquiries should be made in person there."

The effect of this ruling was to create a borrowing demand for stocks at current interest rates and the Clearing House Committee became the agency through which these stock loans were negotiated.

A further ruling, on August 11th, relative to the interest rate was to this effect:

"That on all loans of stock made between members after this date
the rate of interest is subject to agreement between the parties
to the transactions, but should not exceed 6 per cent."

By the eleventh of August the question of the growth of an outside unregulated market began to force itself upon the attention of the Committee. All the organized Stock Exchanges of the country were closed, the auctioneers had loyally agreed to abstain from making sales, the "Curb" or recognized outside market was faithfully coöperating to prevent dealing, the unaffiliated bankers and money institutions were refraining even from the private sale of bonds in which they were interested, so that for a brief period there was a practically complete embargo on the marketing of securities. Naturally enough, so absolute a restraint brought on a pressure which was bound to force a vent somewhere. At first an occasional group of mysterious individuals were seen loitering in New Street behind the Exchange. A member of the Committee of Five, who was prone to see the humorous side of things even in those dark days, remarked as he observed them late one afternoon "the outside market seems to consist of four boys and a dog."

Before long, however, this furtive little group developed into a good sized crowd of men who assembled at ten o'clock in the morning and continued in session until three in the afternoon. At first they met immediately outside of the Exchange, but later they took up a position south of Exchange Place and close to the office of the Stock Exchange Clearing House. Their dealings increased gradually as time went on and never ceased entirely until the Exchange reopened. In all probability the existence of this market was a safeguard as long as its dimensions could be kept restricted. An absolute prohibition of the sale of securities, if continued too long, might have brought on some kind of an explosion and defeated the very end which it was sought to achieve.

This irregular dealing, as long as it remained within narrow limits and was not advertised in the press, furnished a safety valve by permitting very urgent liquidation. It was, however, continually accompanied by the great danger that it might grow to large and threatening proportions. If, in consequence of the facilities which these unattached brokers were offering, responsible interests should begin to take part in and help to create an open air market, the very disasters which the closed Exchange was intended to prevent might be brought about.

It was necessary, therefore, that the Stock Exchange authorities should do all in their power to hold the development of this market in check. With this end in view they not only prohibited their own members from resorting to it, but they exerted what influence they could upon others not to lend it their support. The banks and money lenders were urged not to recognize the declining prices which were established there as a basis for margining loans, as such recognition might tend to increase the dealings. One or two large institutions which, at first, were disposed to finance the operations conducted in the Street were persuaded to refrain from continuing to do so, and the press, while giving publicity now and then to the very low figures at which some leading stocks were quoted, was induced to avoid the practice of regularly tabulating these prices.

It having become apparent that some members of the Exchange, while obeying the mandate to do no trading in New Street, were indirectly helping the practice along by clearing stocks for the parties who were making the market there, the Committee ruled (August 11th) "that members of the Exchange are prohibited from furnishing the facilities of their offices to clear transactions made by non-members while the Exchange remains closed."

The final outcome was that the New Street market did more good than harm. It relieved the situation by facilitating some absolutely necessary liquidation, and never grew to such proportions as to precipitate disaster, but during the long suspense and uncertainty of the closing of the Exchange it was a constant and keen source of anxiety to the Committee of Five.

* * * * *

Toward the end of the first fortnight after the closing of the Exchange, the communications received by the Committee made it plain that there were quite a large number of purchasers, attracted by the low figures reached in the last day's trading, who were ready and anxious to buy securities at or above the closing prices. Obviously purchases of this kind by investors who happened to be in a position to take securities out of the market, promised to bring relief to interests whose position was critical and thus to fortify the general situation. This facility could not be extended in the form of a general permission to the members of the Exchange to make transactions privately at or above closing prices. To have permitted as far reaching a relaxation of restraint as this in so critical a time would have entailed too great a risk. If any one of the eleven hundred members had proved disloyal in the exercise of so dangerous a privilege and privately negotiated sales at prices below those of the closing, the whole plan of sustaining values might have been jeopardized.

After considering the matter very carefully the Committee concluded that the machinery and clerical force of the Stock Exchange Clearing House could be advantageously used to supervise and control transactions of this character, and, on August 12th, they issued the following ruling:

"Members of the Exchange desiring to buy securities for cash may
send a list of same to the Committee on Clearing House, 55 New
Street, giving the amounts of securities wanted and the prices
they are willing to pay.

"No offer to buy at less than the closing prices of Thursday,
July 30, 1914, will be considered.

"Members of the Exchange desiring to sell securities, but only in
order to relieve the necessities of themselves or their
customers, may send a list of same to the Committee on Clearing
House, giving the amounts of securities for sale.

"No prices less than the closing prices of Thursday, July 30th,
1914, will be considered."

Thus was established a market in the Stock Exchange Clearing House which was kept in operation until the complete reopening of the Exchange. Immense labor and difficulty were brought upon the Clearing House Committee in order to handle and supervise this unusual method of trading, and the extraordinary success with which it was carried through has entitled them to the lasting gratitude of their fellow members. The business was conducted by having a large clerical force tabulate the orders received and bring purchasers and sellers together who were willing to trade in similar amounts and at similar prices. In order to consummate a trade the Clearing House would notify both parties, leaving it to them to carry out the delivery and payment, and requiring them to inform the Clearing House when the transaction had been completed.

* * * * *

The first effect of furnishing this means for establishing a restricted market was very encouraging. A very considerable amount of business began at once to be entered into. Many people with ready money, who felt that securities had fallen to bargain prices, appeared as purchasers and relieved the necessities of those who had been embarrassed by the war crisis. A little later, however, when the progress of the war took on a more discouraging aspect, this "Clearing House Market" fell to the arbitrary minimum of the closing prices with a large excess of selling as compared to buying orders, and the "New Street Market" grew in proportion. During the darkest days of depression the prices of a few leading stocks such as U. S. Steel and Amalgamated Copper dropped in the Street ten points or more below their July 30th closings, and business in the Clearing House almost ceased, but in the later Autumn, when the rapid rise in the volume of American exports began to foreshadow a readjustment in foreign exchange, the New Street prices rose again to the Clearing House level and a relatively small business in the "outlaw" market was transformed into a relatively large business conducted under the supervision of the Exchange.

It is an interesting detail, worth mentioning, that the ruling of the Committee quoted above, which established a market in the Clearing House, used the permissive word "may" in stating that orders to buy and sell might be sent to that institution. This was soon taken advantage of by a few individuals who proceeded to conduct private transactions among themselves. Their excuse was that if transactions were merely permitted in the Clearing House it became optional as to whether they should take place there or elsewhere. Within a few days thereafter the Committee amended the ruling by substituting the word "must" for the word "may." The great responsibility attached to promulgating rulings, which were to be the law during this critical period, is made more apparent when it is realized that the ill considered use of a single word might bring on unforeseen and perhaps dangerous consequences.

During the month of August a constantly increasing pressure from every conceivable direction was exerted to break down the dam with which the Committee was striving to hold back the natural flow of dealings in securities. By letter and by personal appearance before the Committee individuals, in and out of the Exchange, strove to induce them to countenance transactions at prices below the arbitrary level of the closing. In addition to this agitation among individuals and firms, restlessness began to show itself in some of the other Exchanges. At one time the Stock Exchange of a great neighboring city, which had permitted restricted dealings exactly similar to those carried on in New York, wished to have those dealings regularly quoted in the newspapers; at another time a movement developed on the Consolidated Stock Exchange to establish some kind of restricted public dealing on their floor. The Committee of Five were obliged to labor hard and assiduously to hold this pressure back and keep the dam intact, and its efforts were ably and loyally seconded by the Committee of the Bank Clearing House whose great influence was unremittingly exerted to prevent the danger of premature action of any kind.

On September 1st the Clearing House banks were anxious to determine what was the amount, measured in money, of securities sold in New York by Europe and not yet received. The object of obtaining this information was to know what demand would be made upon the loan market if, at any time, these securities should be shipped. At the suggestions of the bankers the Committee of Five summoned before them representatives of all the houses doing a foreign business and requested them to send answers, as promptly as possible, to the following two questions:

_First:_ "Amount due Europe for securities received to date and
not yet paid."

_Second:_ "Amount due Europe for securities already sold but not
received from Europe."

On the following morning answers were handed in showing that the amount received and not yet paid for was $699,576.11, and that the amount due Europe on securities sold but not yet received was $18,236,614.15. The rapidity and accuracy with which this important information was obtained, without any publicity or disturbance of confidence, is interesting as showing the efficiency of the intimate coöperation between the banks and the Stock Exchange.

* * * * *

Among the many agencies for dealing in securities, whose activities were suddenly cut off on July 31st, the first in importance next to the Stock Exchanges themselves were the so-called bond houses. These firms, which included in their number many prominent private bankers, were dealers on a great scale in investment bonds, and when the thunderbolt of war struck they were carrying large lines of those bonds on borrowed money which, in the ordinary course of events, would have been placed among their numerous clients. When the crisis of early August had developed, all these houses (some of them not being members of the Stock Exchange) loyally coöperated in closing up the market, and abstained from negotiating their securities even in the most private manner. By the middle of August, however, a number of them began to show decided restlessness over the embargo upon their business. The cutting off of their accustomed income, while expenses continued as usual, was not what influenced them, for this hardship was shared by all Wall Street, but the enforced carrying of securities in bank loans at so critical a time when they felt that these securities might be disposed of became a grievance.

It was urged by many of them that the careful placing of these securities would be a great aid to the situation because every investor who made a purchase would facilitate the liquidation of their loans, ease the strain on the money market, and diminish the volume of securities for sale. There was undoubtedly much to be said in favor of this view when looked at from the standpoint of the effect upon the bond houses themselves or upon the loan market, but there was another aspect of the question which was less reassuring. If these houses started, at this terribly critical time, to place their securities among their clients at declining prices, and if these prices became known, which they certainly would, no one could foretell what the consequences might be. Many large institutions, such as Insurance Companies and Savings Banks, had funds invested in bonds, and many money lenders held loans upon bonds as security; what would be the effect upon these interests if a declining market even in unlisted bonds should be publicly quoted?

Influenced by this grave uncertainty the Committee of Five resisted the pressure brought upon them by certain representatives of the bond dealers who raised this question first on the nineteenth of August. Several of these gentlemen represented important firms and institutions which were not members of the Exchange, and their freedom from any obligation to be controlled by the Committee created a situation which threatened to become strained. In all cases of this kind, where an independent outsider and the Committee could not come to an understanding, the practice had become established of appealing to the Clearing House Bankers to act as a court of last resort. The banks, with their power to call loans, exerted an influence which could reach every nook and corner of the business world, and, at the same time, their immense facilities for feeling the financial pulse made them the best judges of what risks it was as yet safe to take. A series of meetings consequently took place between the Bank Clearing House Committee, the representatives of the bond houses, and the Committee of Five. At the first of these meetings the bank Presidents leaned very decidedly to the views of the Stock Exchange, and it was decided to postpone any consideration of a departure from the status quo for at least a fortnight.

The general situation remaining very critical all through August, no further steps were taken until September 8th. By that date a new factor had intruded itself into the situation. Certain corporate obligations were about to come due and the refunding of these obligations, whether in fresh issues of bonds or in short term notes, was going to make it necessary to withdraw the prohibition against placing investment securities upon the market. When this necessity became clear it was decided that some strict supervision and safeguarding of the sale of bonds and notes was necessary and the so-called "Committee of Seven," appointed by the bond dealers, were requested to formulate a plan for this purpose. This Committee of Seven consisted of members of the firms of: Brown Brothers & Co.; Guaranty Trust Co.; Harris, Forbes & Co.; Kissel, Kinnicutt & Co.; Wm. A. Read & Co.; Remick, Hodges & Co., and White, Weld & Co.

On September 9th, this Committee issued the following notice to bond dealers:

"Your Committee is pleased to report that New York City's
financial needs have been taken care of satisfactorily, thereby
considerably clearing the foreign exchange situation which
existed when our communication of September 3d was sent out.

"The Committee is therefore of the opinion that the placing of
securities owned by dealers with their private customers should
be approved where the securities can be sold without disturbing
the collateral loan situation and your Committee will be glad to
continue to advise whenever such opportunities arise. Anything
tending toward public quotations or the creating of the
impression of an active or even semi-active market would
unquestionably seriously disturb the loan situation.

"Transactions with bargain hunters should not be countenanced and
your Committee will not approve the closing of transactions
coming under this head. Prices should conform to the spirit which
has prevailed during the past few weeks.

"Recognizing the support which banks and other lenders of money
have given to dealers in securities, it should be the policy of
such dealers when securities are sold to apply the proceeds
toward the liquidation of loans.

"The Committee has considered questions of maturing obligations
of cities and corporations and believes that the present
situation does not warrant any attempt to issue long time bonds,
but that such refunding should be accomplished through short time
financing.

"The Clearing House Committee and the Stock Exchange Committee
have expressed appreciation of the coöperation shown by the
dealers in listed and unlisted securities and if all will
endeavor to live up to the spirit of the policy thus far adhered
to we are sure there will be no cause for criticisms on the part
of the banks or the Stock Exchange Committee.

"Your Committee of Seven will continue to meet in the Directors'
Room of the Chase National Bank daily, from 11 A.M. to 12 M., for
advice on any cases where we can be of any assistance whatever."

The practical plan adopted was as follows:

Bond houses having securities of their own for sale could place them with their clients at prices approved by the Committee of Seven. All purchasers and sellers of bonds, acting as brokers only, were required to file their orders with the Committee of Seven when dealing in unlisted bonds, and with the Stock Exchange Clearing House when dealing in listed bonds, and these two agencies were empowered to determine minimum prices below which sales could not be made.

It will be seen that a very important step in the direction of relaxation of restraints was here taken. Not only was the prohibition of all dealings which had marked the beginning of the crisis withdrawn, but prices below the closing sales of July 30th were to be permitted subject to the supervision of a Committee.

* * * * *

As has already been stated, the Committee on Clearing House had their hands full from the time the Exchange closed, first with bringing about the settlement of the contracts of July 30th, and secondly with carrying on the business of making new contracts for members wishing to trade in securities at or above the closing prices. It was impossible, therefore, for the members of that Committee to give personal attention to the difficult problem of determining the prices below which listed bonds should not be sold. To meet this difficulty it was decided that a small additional Committee of men known to be thoroughly familiar with the bond business should be organized, and that it should be their duty to control the liquidation of listed bonds.