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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'être, 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.