scribed it here, all over the world and all the time.

But in practice it brings evils in its train. It makes it possible for men who cannot afford to lose to enter upon speculations in which there is a considerable chance that they will lose. It encourages men with small resources to undertake large ventures, a proceeding dangerous to the individual undertaking it, in any sphere of life.

The evils which it produces spring from three sources. Many men speculate who ought not to speculate, or with money which ought to be kept safe, not risked. Some brokers do not insist that their customers keep the margin on which they are operating amply large. Many men trade on margin without adequate knowledge of what they are entering upon; and, on the other side, some promoters of financial undertakings supply the public with glittering misinformation which may easily mislead any but the expert and the initiated. It puts a premium on the putting of prices up and down by big operators, for the speculator trading with small resources and on narrow margins is easily "shaken out," to his own discomfiture and-sometimes-the big operator's profit.

Since trading on margin is essentially a perfectly legitimate process, to prohibit it would be to do more harm than good, even

if it could be prohibited without violating the constitutional privileges of the individual, which is extremely doubtful. But it should be surrounded with every possible safety device like any other piece of useful but dangerous machinery-to keep out of this particularly attractive form of speculation any man who cannot afford to lose his stake, to require amply sufficient margins of every speculator, and to restrain the immoral practices of some large market operators and dishonest promoters, most of whom are not members of the Exchange.

THE MONEY CROWD

This little discussion of margin trading has interrupted Mr. X's telephone call, but perhaps it will help to explain it. The call is from the bank which he represents in the Money crowd on the Floor. It tells him that the bank has a million dollars which it wishes to put into call loans to-day. So off goes Mr. X to the Money post to wait for borrowers. Every broker who yesterday bought more stocks for customers trading on margin than he sold for customers must be a borrower to-day. Between eleven and two-thirty he must go to the Money crowd to make his loans.

When Mr. X's money is all loaned or twothirty has come, he is through till three o'clock

except for keeping an eye on the market and watching for calls to his telephone. So the day wears on.

THREE O'CLOCK

-THE EXCHANGE IS CLOSED At a half-minute before three the chairman rises in his place. At fifteen seconds before the hour the big gong begins to hum, and as it ceases, precisely on the hour the gavel falls. The Exchange is closed. Another day has become yesterday.

Members pour out of the room through the different doorways and make off to their offices to finish up the day's work before going "uptown" or under or over the river to New Jersey or Long Island. Around the Money post is now gathering a new group. It is the "loan crowd," and thither Mr. X betakes himself. He has sold to-day 100 St. Paul and needs the stock for delivery tomorrow. It might have been, of course, that the customer who gave the order was "long" of the stock, and therefore had the hundred shares ready for delivery. But not this time. This was a "short" sale, and the stock must be borrowed for delivery to-morrow. In the loan crowd Mr. X approaches a fellow-member who he has reason to believe is long of St. Paul. But his belief is unfounded, and he must seek a lender in the crowd by the stereotyped Floor method of howling out his wants. In a moment he has found his man and made a note of the transaction. For the loan of the stock he is to put up the full market price.

THE CLEARING-HOUSE

When he has sent a report of this last transaction to the office, his day on the floor is done. Off he goes to his office. Before we follow him let us watch for a moment this quiet man who, with pencil and paper, is going the round of the posts and jotting down figures. The list that he carries contains the names of eighty-five of the most active stocks, and opposite each stock he puts down a figure after looking at the sheet at the post where that stock is traded in. On the sheet some member-probably a specialist in that particular stock-has written down as the gong sounds the price at which the final sale was made. In St. Paul, for instance, the price may have been 1084. The man with the list in his hand reads this figure and sets down opposite the name St. Paul the figure 108. If it had been 108%, he would have put down 109.

This is the " Clearing-House price," the purpose of which we shall see presently. The man with the list is one of the managers of the Clearing-House. As his list is completed he hands it for a moment to a reporter, who quickly sends the figures out on the tape.

Back in his office Mr. X finds that all the orders which he has given to specialists and $2 men during the day have been executed. The clerks are already making out the Clearing-House sheet, which contains the record of the entire day's operations of the House in any of the eighty-five Clearing House stocks and which must get to the Clearing-House before seven o'clock. On a light day like this this is very easy. The boy will push the sheet through the window at the ClearingHouse soon after four. But there have been days when, as seven o'clock came, the office has had to apply at the Clearing-House and ask for an extension of time.

The Clearing-House acts as the agent of its members in facilitating the business of delivering the securities that have been sold by the members during the day and of making the payments for them. It is a labor-saving device, just as the bank ClearingHouse is. Its action is in principle and indeed in practice simple, but to attempt to make it clear by description would require more space than I have at my disposai here. In brief, if A sells to B, B to C, and C to D the same number of shares of the same stock at different prices during the day, A does not send a stock certificate to B and receive a check at the sale price, B to C, and C to D. Instead A sends a certificate to D and receives a check at the Clearing-House price already described.

Each party to this quadrangular transaction also receives from or pays to the ClearingHouse the difference between the price at which it bought or sold the stock and the Clearing-House price. The final result is exactly the same as if there had been no Clearing-House, and each house had completed each transaction with every other to which it had sold or from which it had bought. The only difference is that a great proportion of the clerical labor, of the running to and fro of messengers, of the certification of checks, of, in fact, the useless labor, has been done away with. The Clearing-House does not in the slightest degree alter the responsibility incurred in any transaction or change the essential facts of it. The Clearing-House alters nothing,

INVESTMENT AND SPECULATION

A certain proportion of the transactions. on the Stock Exchange are purely investment transactions. They consist of purchases of securities outright by individuals with money which they do not need for current expenses and which they wish both to put in a safe place and to have yield them an income. Such persons buy stocks and bonds as they would put money in a savings bank. By using it to buy stocks and bonds, however, they can get a larger return on their money.

This class of transactions includes also, of course, sales by the same persons of securities which they have bought for investment. They may sell because they wish to invest elsewhere or because they have other uses for the money. Investment transactions form but a small proportion of the business done on the floor of the Exchange. The rest is speculation. But to make that statement is not by any means to condemn it or to write down the Exchange as an institution in which the bad far outweighs the good.

I hope successfully, that trading on margin is essentially neither illegitimate nor wicked.

Another class of speculative transactions is "short selling." To sell a stock short is to sell shares of it which you do not possess, in the hope that at some time in the future you can buy the shares at a lower price than that which you now receive.

"SELLING WHAT ONE HAS NOT GOT "

A common view of this kind of trading is expressed by Miss Ida M. Tarbell in an article on "The Stock Market "in the "American Magazine" for June. She is quoting the testimony of Mr. Morgan before the Pujo Committee on this point:

"I do not like it, not that I wish to criticise it at all, but I do not see how you can get along without it."

"Why," Mr. Untermyer asked, "can you not get along without a man's selling something that he has.not got in the way of stocks."

"That," said Mr. Morgan, "is a principle of life, I think."

What Mr. Morgan meant by a "principle of life" was undoubtedly the “gambling instinct." It would find a way. But why should the "greatest financial institution in the world" provide the way? Moreover, the same reasoning would forbid the curbing of the "principle of life" which bids us take whatever we can put our hands on. Is there a more truly "acquired taste" than what we call respect for propertyor honesty!

Apparently Miss Tarbell classes short selling with stealing. She intimates that "selling something that one has not got" is incompatible with honesty.

SELLING SHORT IN MAGAZINE PUBLISHING

Let us transfer this "6 selling something that one has not got" from the heated atmosphere of controversy that surrounds Wall Street in these days to the calm air in which is carried on a business whose legitimacy and high character Miss Tarbell would not, I am sure, asperse-magazine publishing. The magazine publisher "sells something that he has not got" every day of his life. The magazine subscriber pays for his subscription a year in advance. When the publisher of The Outlook accepts the subscriber's $3 in December in payment for fifty-two issues of The Outlook to be delivered at weekly intervals during the year, he is selling short with a vengeance. He is selling something that he has not got." Not only has he not got the completed product which he is to deliver, he in all

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probability has only a very small part of the raw material out of which the completed product is to be made. When he accepts the subscriber's $3 he could no more deliver, within any reasonably short time, the property which he has sold, than he could fly to the moon. He has neither the per nor the ink, the articles nor the illus.ations, nor the news on which it almost all depends, which he is to deliver. He is selling short with a vengeance.

It is true there is one difference between the short selling of the magazine publisher and the short selling of the stockbroker. The publisher will not make the final delivery of the property which he has sold until twelve months have elapsed, while he has accepted payment in advance. The stockbroker makes delivery the next day, and receives not a cent of money until he has made delivery.1

TO CLASS SHORT SELLING WITH STEALING IS ABSURD

If Miss Tarbell's implication is right and "a man's selling what he has not got belongs in the category with stealing and other forms of dishonesty which involve lack of "respect for property," the magazine publisher is in a parlous way. But the suggestion is absurd. Neither the publisher who contracts to deliver magazines which are not yet written, nor the tailor who agrees to sell a suit made out of cloth of which he has only

a sample, nor the builder who pledges himself to build a house for which he possesess neither a stone nor a brick nor a shingle, nor the broker who agrees to deliver stock which he does not possess, is violating any statute or economic or moral law. Publisher and tailor and builder are performing a service to the community. Why assume that the broker is not performing a service as well? It is not wicked to "sell short" a magazine or a suit of clothes or a house when there is a market in which you can get the material out of which and the labor by which they are to be made, and when your resources are such that you have reasonable certainty of being able to complete your contract. It is no

more wicked to sell one hundred shares of stock short when there is a market where the stock can be obtained at a moment's

Of course this is not true of dealings in commodities like wheat and cotton, on other exchanges. Nor is it true of the London Stock Exchange, where settling day comes twice a month. But it is true on the New York Stock Exchange, where practically all trades are made regular way," for delivery and payment next day.

notice and when your resources are sufficient to insure your putting through the transaction. Brokers, like other men, have plenty of sins of their own to bear. Let us not ascribe to them as sins acts which in other men we hail as virtues.

No. Short selling is neither unsound in principle, nor, within bounds, undesirable in practice.

SHORT SELLING PERFORMS A USEFUL SERVICE

On the other hand, short selling performs a well-nigh indispensable service. The primary function of the Stock Exchange is to provide a free, open, and broad market for the purchase and sale of securities. Such a market must be responsive to the law of supply and demand, but it must be protected, as far as possible, from rapid fluctuations and wide price movements. The best market would be tha. in which the swings of the price pendulum were short but deliberate.

Short selling is a brake upon the market. It narrows the limits of fluctuation and retards their speed. Curiously enough, the fact that short selling is possible has the same effect whether the market is going up or going down. It checks both booms and panics, is a drag on both breaks and bulges.

Let us take the case of a boom. The "bulls," those members who want to see prices go up or believe they will go up, are buying right and left. Prices are advancing rapidly. The only thing which can stop such a movement is for the bulls to find in the market a plentiful supply of the stocks they wish to buy. Now, in such a rising market, the bulls have not only to buy stocks which others are "long" of, having bought them "for a rise." They must also buy other stocks which traders do not possess but which they are willing to sell short in the belief that the prevailing high prices are only temporary and that a reaction is inevitable. The more shares the bulls have to buy, the harder is their task. Short selling adds to the actual supply of purchasable stock an increasing quantity of stock not now in the possession of the sellers but to be bought later. Short selling, therefore, is a brake upon a bull market, a curb upon a wild boom.

Now of course an advance in prices, when it is healthy and legitimate, is a good thing (unless one happens to be on the bear side of the market, in which case one's normal view of everything is stood upon its head).

Things ought to increase in value. Prices ought to go up. To have them go up is an advantage to the investors.

But advancing prices are good only when they are based upon and reflect advancing values. Unhealthy booms are as bad as unsound declines. If the price of a stock goes up because the earning value of the property it represents is increasing, the resulting boom in the stock is healthy and beneficial. But if the price of a stock goes up because a group of men are trying to put it up for their own purposes, regardless of values, the boom is neither healthy nor beneficial. Prices so raised seldom "stay put."

Anything that will retard such an advance in prices as that is a good thing for the whole of the public which is interested in buying and selling securities. This is precisely the service which short selling renders. It tends to steady price advances, to check their impetuous speed, and to keep them within bounds.

impossible would be a dangerous market for any one to trade in.

THE SERVICE OF SHORT SELLING TO THE SMALL INVESTOR

Another service which short selling renders is to the small investor. The ownership of American corporations is widely distributed. The Steel Corporation has 150,000 stockholders; the Pennsylvania Railroad Company has 80,000. Two hundred and forty-seven of the large corporations of the country are owned by more than a million stockholders. Of these million stockholders many must be owners of small numbers of shares. A considerable part of the people's savings is invested in securities.

It is of vital importance, therefore, that the interests of the small investor in stocks and bonds should be adequately safeguarded. A market in which the small investor can easily and safely invest, and in which he always finds a ready market for any securities he may wish to turn into cash, is, from this point of view, a good market.

On the other side, short selling is a brake upon rapid and excessive declines in price. This is not to say that by selling short a movement of prices downward can be checked. Short selling at such a time would, of course, have exactly the opposite effect. But the presence of "shorts" in a market-of men, that is, who have already sold stocks short in anticipation of a downward movement-is a check upon the decline. The "short" is a compulsory buyer. He has sold something he has not got, and at some time he must buy it. As prices go down the shorts begin to "cover." They buy stocks to replace those they have already sold. Their buying checks the decline, steadies the market, sets a limit to the fall of prices.

If there were no short selling, booms would tend to be wild and unrestrained, with inevi

table disaster when the

break finally came; declines would be sudden, rapid, and extensive, with equally disastrous consequences. Short selling is the governor on the engine. It steadies, equalizes, restrains. A market in which short selling was

The New York Stock Exchange provides such a market. During the past forty years special facilities have been created and developed to handle the business of the small investor and the small speculator as well, though it is probably true that the man who goes into the stock market with a small amount of money is in a majority of cases an investor. On the Stock Exchange special facilities are necessary for handling this kind of business, for the unit in which trades are made on the Exchange is the block of one hundred shares. All sales on the floor are made in "hundreds." To have such a unit of trading is obviously necessary, and the advisability of making it a fairly large unit has been shown by the experiences of all Exchanges. Since the unit is one hundred shares, the small investor who wishes to buy, say, seventeen shares of Pennsylvania cannot have his order executed by his broker dealing with another broker on the floor in just the same way that it would be executed if