nation are used to the best possible advantage in the promotion of its economic interests. This is a great work, as important and essential to the well-being of the nation as that which commercial banks or institutions of any other kind perform.

131. THE SERVICES OF BOND HOUSES

The purchasing function.-If a municipal loan is offered, the purchase is a comparatively simple matter, provided the municipality is well known to the fraternity. Then no preliminary investigation is required; a bid is made for the loan at the current market rates and acceptance on award is subject to the approval of the bidder's attorney in all respects affecting the validity of the obligation.

If the municipality is not well known to the bidder, a qualified representative will, or should, be sent to learn at first hand the physical and financial condition of the city and to form an estimate of its probable future willingness and ability to meet its present and future obligations.

If a corporation loan is offered, it will probably be submitted at the offices of the bankers by a representative of the company or by a promoter. If the applicant is of a social turn of mind, he will probably not lack company of his kind in the anteroom. Competition, fortunately, is keen.

If the house is satisfied by interview and correspondence and if a suitable price can be agreed upon, then engineers and accountants may be sent to the plant and offices to make a thorough examination; and the members of the firm, with counsel, meet officers of the company and their attorneys to settle the matters of form. On acceptance of an issue a careful banking house may demand representation on the directorate of the company until such time as the company shall have discharged its bonded obligation.

The advisory function.-This advisory and directive function is more prominently operative in bond selling than in bond buying. It has its source in the statistical departments which every house of quality must maintain. It finds its chief expression, as already stated, in tabloid investment lessons, printed in the advertising columns of newspapers and periodicals, or with somewhat greater fulness in pamphlets and monographs. If a prospective client has an investment policy that is apparently not suited to his particular needs,

'Adapted by permission from Lawrence Chamberlain, Principles of Bond Investment, pp. 516-22. (Henry Holt & Co., 1911).

the home office may tactfully direct his attention by letter or through their representative in his territory to a means by which he may better his position. Some bond houses maintain a daily news sheet for the benefit of their salesmen in which are printed, not only pertinent items of current interest, but timely discussions of different problems.

The banking function.-Illustrative of the relation between house and client, there has arisen the demand that banking departments be established for the safe-keeping of funds destined, upon enlargement, to go into investment, and also to accommodate those who wish to purchase securities before they have sufficient funds to pay in full for them. From the necessities for these two situations it is only a short step to the conduct on a small scale of a bank deposit subject to check. But properly and ordinarily the banking department of a bond house is conducted as a matter of accommodation to its customers and not primarily to do a general banking business.

The bond houses as fiscal agents.—Because of purchasing, advisory, and banking functions bond houses are called upon to act as fiscal agents for corporations, municipalities, and even states.

The selling function.—American banking houses are not eleemosynary. Whatever may be their usefulness in the community, it is the result of that enlightened self-interest which used to be expressed in the phrase, "Honesty is the best policy." Their reason for being is to make money by selling bonds, and the competition is getting keener every day. Many of the ordinary effects of competition are noticeable in the bond business. There is a standardization of wares and policies, there is diminution in ratios of profits. But two ordinary effects of competition are conspicuously absent. There is no deterioration of the product and no tendency toward consolidation among the vendors.

The protective function.-There is a radical difference in the attitude of bond houses in this matter of repurchasing securities of clients to whom they have sold them. Some take the stand that a sale is a sale, and the responsibility of a house that has acted in good faith ceases upon delivery of the bond and the receipt of payment. This position is logical and just, but again competition steps in to benefit the customer. Other houses say: "We shall put out our issues as nearly as possible on a plane of marketability with active listed securities. We make no promises, but, except in times of panic, when it may be impossible to raise money to satisfy everybody, we hope and expect to be so situated as to buy back at the fair market price the securities we have sold.”

But the protective function of the bond house is most important in respect to the moral responsibility of "seeing the clients through" default, reorganization, and rehabilitation in the extremely rare cases in which trouble arises. In some instances losses amounting to hundreds of thousands of dollars have been made good; in many instances the firms have volunteered to pay interest which has been suspended; in every case a reputable bond house will feel called upon to take the active leadership, at its own expense, in upholding the mortgage rights or other legal claims of the bondholders.

See also 330. The Underwriter.

132. TRUST COMPANIES

The trust company has been called the omnibus of financial institutions. Originating in the early part of the nineteenth century, it specialized at first in the management of estates, acting as trustee under wills. Hence the name, trust company. The scope of its business has broadened as time has gone on until now almost every variety of financial operation is conducted by it. It is, in fact, many. institutions in one: (1) it is a commercial bank, operating upon principles identical with those of our national and state commercial banks; (2) it is a savings bank; (3) it is a bond house; (4) it is an insurance company. Life insurance, once an important function, is now fast disappearing, but title and fidelity insurance retain their importance; (5) it is a trust company performing the following services: trustee for corporations and individuals; fiscal agent for corporations and individuals in making interest payments, collections, etc.; registrar for corporate issues; transfer agent in buying and selling of bonds and stock; financial agent of committees engaged in railroad and other reorganizations; assignee and receiver in individual and corporate insolvency or bankruptcy.

The great variety of business conducted by trust companies is due in part to an imperative need for a well-equipped and responsible company to take charge of the many minor forms of financial operation which characterize modern industrial society, especially those not adequately handled by private individuals and not provided for by other financial institutions, and in part-where it invades the field of the commercial bank, savings bank, bond house, and insurance company to the process of integration which is coming to characterize modern industry in general.

From an unpublished article by H. G. Moulton.

133. THE FUNCTIONS OF THE STOCK EXCHANGE1

The fundamental function of the exchanges is to give mobility to capital. Without them the stocks and bonds of the share company could not be placed to advantage. No one would know what their value was on a given day, because the transactions in them would be private and unrecorded. The opportunities for fraud would be multiplied a hundred fold. The mobility for capital afforded by the corporation would be meager and inadequate if the holder of its bonds and shares did not know that at any moment he could take them to the exchanges and sell them. The publicity prevailing in stockexchange quotations gives the holder of a security not only the direct benefit of publicity, but the opinion of the most competent financiers of Europe and America. If they were dealing with him privately they might withhold the information. But the quoted price stands as a guide to even the most ignorant holder of securities.

The second benefit is in affording a test of the utility to the community of the enterprises which solicit the support of investors. The judgment of experts is there expressed, through the medium of price, on the utility of the object dealt in. If an unprofitable railroad is built in the wilderness of Manitoba, the investor does not have to hunt up information on the freight and passengers carried; he has only to look at the quotations on the New York Stock Exchange to know at once the judgment of experts on it as a commercial venture. If the investor finds that the stocks of cotton mills are declining, he makes up his mind that there are no further demands for cotton mills. If stocks are exceptionally high, he knows that the public demands more cotton mills, and that an investment in them will prove profitable. All this information is put before the investor in a single table of figures. It would be practically unattainable in any other form. Thus there is afforded to capital throughout the world an almost unfailing index of the course in which new production should be directed.

Suppose for a moment that the stock markets of the world were closed, that it was no longer possible to learn what concerns were paying dividends, what their stocks were worth, how industrial establishments were faring. How would the average man determine how new capital should be invested? He would have no guide except the most isolated facts gathered here and there at great expense and trouble. 'Adapted by permission from C. A. Conant, Wall Street and the Country, (G. P. Putnam's Sons. Copyright by the author, 1904.)

pp. 88-116.

A great misdirection of capital and energy would result. The stock market is the great governor of values-the guide which points the finger to where capital is needed and where it is not needed.

The very sensitiveness of the stock market is one of its safeguards. Again and again it is declared in the market reports that certain events have been discounted. As a consequence, when the event actually happens it results in no such great disturbance to values as was expected. Is it not better that this discounting of future possibilities should occur? Is it desirable that capital and production should march blindly to the edge of a precipice and then leap off instead of descending a gradual decline?

Another important influence of the stock exchange is that which it exerts upon the money market. The possession by any country of a large mass of salable securities affords a powerful guarantee against the effects of a severe money panic. If in New York there arises a sudden pressure for money, the banks call in loans and begin to husband their cash. If they hold large quantities of securities salable on the London or Paris or Berlin market, a cable order will effect the sale of these in an hour, and the gold proceeds will soon be available. These securities prevent sudden contraction and expansion in the rate of loans. This influence of the stock market has much the effect of a buffer upon the impact of two solid bodies. Crises are prevented when they can be prevented, and when they cannot they are anticipated and their force is broken.

See also 99. Stock Exchanges.

134. A FAVORABLE VIEW OF WALL STREET

New York is the gateway of the nation's commerce, and Wall Street has been likened to a toll-gate, to pass which every product of the country must pay tribute. As no one likes to pay toll, this would account for much of the animosity so often manifested against the financial center. Yet someone must make, maintain, and operate the various agencies by which the products of the country reach the markets, and it is right that the service should be paid for.

Wall Street is the directing head of the great system of transportation, using that term in its broadest significance, as including, not

I

Adapted by permission from S. S. Pratt, The Work of Wall Street, pp. 45-48. (D. Appleton & Co., 1912.)