Front Page Titles (by Subject) CHAPTER VI.: THE BOURSE. - A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
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CHAPTER VI.: THE BOURSE. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 2 A History of Banking in Great Britain, the Russian Empire, and Savings-Banks in the U.S.
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Its Small Beginnings and Rapid Development—Wholesome Influence of the Finance Minister—An Imperial Warning Against Speculative Excesses—Conservative Counsels from the “Journal de St. Petersbourg”—A Lesson from the Minister of Finance.
IN 1856, the dealings upon the St. Petersburg Bourse comprised only the following items: Exchange on London, Hamburg, Amsterdam, and Paris; under the heading of public funds, one six per cent. and two five per cent. loans; the securities of sixteen corporations, including: The Russo-American Company (dissolved in 1868 as a result of the sale of Alaska to the United States); three fire insurance companies; three maritime insurance companies; one mineral-water company; one cotton-spinning corporation; one Volga navigation company; one company accepting goods on storage and in pledge; and the St. Petersburg-Zarskoe-Selo Railroad Company, with a line 16⅔ miles in length. This was not an extensive showing. By April, 1862, however, there were upon the official list eleven public loans; the bonds of the Crédit Foncier of St. Petersburg; the 5½ per cent. bills of the State Bank and various 4½ per cent. railroad bonds; the stocks of five fire insurance companies; twelve shipping companies, four railroad companies, etc.; in all, thirty-seven different issues. To emphasize the unimportance of the Bourse of those days, we have but to recall the fact that, in 1860, the “Gazette de la Bourse” suspended publication during eighteen consecutive days; for throughout all of Holy Week and Easter Week, and up to the following Tuesday, the Bourse was closed. Ordinarily, it was open only on two days of the week, Tuesday and Friday, and then only from four to five o’clock; for the prices of merchandise and securities dependence was placed mainly on advices from Amsterdam, London, Hamburg, and especially from Berlin. It is so no longer. Since 1872, the Bourse has been open six days in the week, every day; that is to say, except Saturday. It must not be inferred from this that the Jewish element is predominant on the St. Petersburg Bourse; on the contrary, the Jews have always been less prominent there than in other money markets. Moreover, during the last few years, the Bourse has been open on Saturdays, as it is elsewhere. On December 30, 1878, the Bourse dealings represented four issues of five per cent. bank bills; sixteen classes of public securities, including guaranteed railroad bonds; fifty-nine series of mortgage bonds (issued by cities and provinces); the shares of twenty-five commercial and ten foncier banks; the shares of about twenty manufacturing and fifteen insurance companies; the stock of twenty-one and the bonds of five navigation companies; the shares of thirty-six railroads, and the bonds of twenty-four.
At the close of 1890, there were in all Russia:
The important transactions looking to the reduction of interest on Government loans, the purchase of railroads by the State and its refunding of their obligations, which went on from 1889 to 1894, gave to the St. Petersburg Bourse a wholly new bearing, and brought to it business of an importance previously unknown. It is a well-established fact that a country which has need of foreign capital is not in a position to hold a commanding place among either the money or security markets of the world. Nevertheless, there have been several instances in recent years in which countries thus situated have persuaded themselves that they were able to declare their independence of the real money markets of London, Paris, Amsterdam, Berlin, and Frankfort. Between the close of 1893 and the close of 1894, this emancipation on Russia’s part was specially pronounced. Even the death of the Czar Alexander III. did not arrest it. One circumstance peculiar to Russia has greatly aided the emancipation. Ever since M. de Witte has been at the head of the Finance Department he has exerted himself to put an end to speculation in exchange, and on several occasions he has made special efforts in this direction. The speculators have finally taken him at his word and have devoted themselves with the greater ardor to stocks and securities paying a fixed rate of interest. As proof of this may be cited the prices of the shares of a few banking and other corporations as they were quoted on December 31, 1893, and December 31, 1894, respectively:
This upward tendency became so much more pronounced in January, 1895, that the Government, in its solicitude for the public welfare, felt constrained to warn its subjects of the dangerous path they were treading, declaring at the same time that it could afford them no assistance, but relied upon their own wisdom and foresight. The effect of that appeal was only temporary. Those who deal upon the Bourse are always confident that the storm will not reach them or that they will be under cover when it breaks; so the ministerial admonition was little heeded. On August 1, 1895, the majority of shares were much higher than they had been eight months earlier, as will appear from the following comparative quotations:
The months of July and August were signalized by a remarkable advance in prices; a very decided reaction followed during the second half of the latter month; and yet on August 31st (September 12th) the quotations were as follows: The private bank, 595 to 600; Discount Bank, 875 to 868; the International, 712 to 719; Bank of Foreign Commerce, 537 to 533; Volga-Kama, 1320 to 1300; Azof-Don, 720 to 728; Warsaw, 536 to 537; the foncier bank Bessarabia-Taurida, 680; Vilna, 655; Kharkov, 530 to 535; the Insurance Company of 1827, 1600; the Second Insurance Company, 370; Rossia, 440 to 450; the Rybinsk-Bologoë Railway, 179; the Southeastern, 190 to 191. Three days later, on September 2d (14th), at the date of the last quotation, we have seen as we bring this chapter to a close, the Discount Bank had gone down still more, to 840; the International, to 703 to 685; the Volga-Kama, to 1285, etc. Nevertheless, in its monthly bulletin of the Bourse, published on September 3d (15th), the “Journal de St. Petersbourg,” which has always been very conservative, stated that the downward tendency had been brought about partly by the scarcity of money, but more especially by undue speculation in the shares of new concerns having as yet no actual existence; and it added:
“After numerous fluctuations in both directions, the majority of speculative shares are still considerably above par. After the great advance they have enjoyed, a retrograde movement was inevitable. Nevertheless, the downward tendency of these shares, all things considered, is of slight importance; for, the great public, which, for the last two years, has been the dominant factor upon the Bourse, always favors a rising market, and it will probably not fail to return to the charge at the first favorable opportunity.”
Dealing upon the Bourse in Russia is greatly facilitated by certain practices to which the independent banks lend themselves. Elsewhere (in Austria, for example) it has been made a reproach to these institutions that they carry accounts for dealers and allow speculators for a rise to deposit in their hands those shares whose prices they wish to put up or sustain. In Russia that practice is disguised under the name of “call loans.” This is a transaction to which reference has been made in our chapter on banks. Calls loans, as the term is understood in Russia, are loans in the form of accounts current guaranteed by securities or other valuables (including even real estate and mere personal security), which loans may be called in at any moment after six hours’ notice, or a notice of three or four or five days, as the case may be. The minimum interest on call loans is generally above that paid by the State. Thus, during the latter half of 1888 it varied between 6 and 8 per cent.; in 1889, between 4½ and 8; in 1890, between 4½ and 7; in 1891, between 4 and 8; the same in 1892, and in 1893, between 4 and 7 per cent., whereas during those same years the interest paid by the State Bank on accounts current subject to cheque was only once as high as 3.6 per cent. (from September 3, 1888, to March 30, 1889), and for the remainder of the time it was between 1½ and 3 per cent. The “Bulletin Russe de Statistique,” which we have previously mentioned, in speaking of this subject calls attention to the fact that in Russia money loaned for a short term brings in a larger return than that invested in funded securities, which is precisely the opposite of the rule elsewhere. It adds that the banks find call loans to be very profitable, and that they often employ in this way nearly all the money they hold subject to cheque.
The downward tendency that had begun in August was even more pronounced in September. The Government felt called upon to set itself right upon the subject. In a country where the granting of credit is entirely a State function, and where everything centers in the State, it was altogether natural that speculation should demand of it aid and succor in the shape of new issues of paper money. The Minister of Finance had the courage to refuse such aid and to leave speculation to its own devices, holding that the well-being of the State or of the community was in nowise dependent upon a high quotation for banking shares and for the stocks of a few industrial concerns. He explained his position in an official note, inspired by sound principles, which shows that the guardianship assumed by an absolute government sometimes appears to it extremely onerous. As a declaration of sound canons of finance the document may merit reproduction here.
“SPECULATION AND THE SCARCITY OF MONEY.
“The further sudden decline in the security market toward the middle of last week was not unexpected. On several different occasions the ‘Journal du Ministère des Finances’ has pointed out the probable consequences of the stock exchange game which has grown to such dimensions in the last year and a half, and has called attention to the abnormal inflation of prices in a series of securities listed upon the Bourse. This is not the first time facts have confirmed its predictions. Unfortunately, neither warnings nor the sad experience of heavy losses is sufficient to deter speculative amateurs, lured by the irresistible bait of prompt and easy gain, from intrusting their means, often very limited, to the hands of skillful players.
“Everybody knows that there is no game at which all can win; it is always the rule that some win, while others inevitably lose. The stock exchange game is managed by those who know all the sinuosities, while the inexperienced public, allured by the hope of gain, furnishes the means necessary to keep the game going. Evidently in such a game the winners will be invariably those who direct it—men who thoroughly understand the game and know how to take advantage of the people’s ignorance of it—while the unsophisticated, trusting public always loses in the end and so finds itself punished for its unwise desire to gain wealth quickly, easily, and without labor. Yet, in spite of the absolute certainty of the truth of these statements, in spite of the constant teaching of experience and repeated warnings, there are always persons seeking to make their fortune at the game and intrusting their savings to agents for this purpose.
“Some there are who think that industrial progress bears a steady relation to speculative activity; that while some of the new enterprises which spring up during such activity come to grief afterward, others, more substantial, live and grow, and the net result is a national gain though some investors must inevitably lose. Admitting that this is true, and that we are now in the midst of an industrial revival such as is always accompanied by failures which it is not to the national interest to prevent, still we cannot refrain from declaring that the speculation now rampant upon our Bourse, against which we have continually warned the confiding, inexperienced public, and which, as a matter of conscience, we always shall oppose, has not the slightest connection with the upbuilding of any new enterprise. This speculation is concerned chiefly with a certain small class of securities, to which new additions are made from time to time. The prices of these securities fluctuate violently and often reach a height out of all proportion to the income produced by the shares. The fact is, that it is a pure game of chance, played, too, by some who have very small stakes invested through the agency of banks or other intermediaries, and that no account is taken of the real situation of the enterprises whose stocks are speculative favorites. All kinds of false reports are circulated to put up the price of these securities, and the establishments accept orders at a loss in order to give color to their claims of growth and activity; then, when the shares have found their market among the public, the owners of the enterprise, whether it has been long in existence or has newly sprung up, abandon it. For them its usefulness is over, and they go in search of a new enterprise of like kind. What is there about all this that savors of a renewal of industrial activity? Certainly it is desirable that small savings seek investment in industrial undertakings, but transactions of this kind keep them out of such investments by encouraging a passion for foolish gambling, for which amateurs always pay dearly in the end. The facts prove the truth of these assertions.
“This is the third time recently that securities, especially those in which speculation is most active, have suffered a sharp decline. The fall was especially severe on September 22d and October 4th. Some attribute this to the scarcity of money. Let us see what foundation there is for that claim. It is true that in the fall, when the greater part of our agricultural products come to market, the demand for money increases and the cash in the banks generally decreases for a while. But it should be noted: (1) That the crops of all kinds this year, according to preliminary forecasts, are less abundant than last year; and (2) that the ruling price of grain is generally supposed to be too low, in view of the probable demand, and sales have been very limited; farmers have sold only so much of their cereals as was necessary to provide them with money for their actual needs. Moreover, the exports this fall have not only been less than those of last fall, but less even than those of the summer.
“On the other hand, all needful steps looking to an increase of the circulation were taken in due time. One-rouble silver pieces previously held in reserve have been put in circulation, and the Bank has been authorized to issue the gold belonging to its reserve fund. Thus, every provision has been made to meet an increased demand for money. If in spite of these precautions money is found to be so scarce that some have been compelled to sell their securities in order to obtain it, this scarcity has not arisen out of any commercial demand for money, which, on the contrary, is less than it usually is at this time of year; the scarcity is due to the speculation which has had such an extraordinary development recently upon our public bourses and upon clandestine bourses as well, drawing into the game not only the citizens of the capitals, but also, and to even a greater extent, the inhabitants of the provinces.
“We have merely to place side by side various quotations of those securities on which speculation thrives in order to show the remarkable and absolutely senseless advance scored by many of them in a comparatively short space of time. Let us look at a few of those securities. The shares of the Mills of Briansk (quoted at R. 130 in January, 1894, these shares gradually rose to R. 550 in August, 1895, and then went down to R. 450 on October 5th); the shares of the Mills of Poutivl (R. 75 in January, 1894, R. 180 in September, 1895, R. 130 on October 4th); those of Sormovo (R. 175, R. 370, R. 310, on October 4th); the shares of the Société des Mines d’Or (R. 100, R. 420, R. 400, on October 4th). As to this last company, nobody knows as yet what kind of showing its first balance-sheet will make, nor is anything known with any degree of certainty concerning the extent of the company’s operations. This, then, is simply a case of betting on a rise, with no guide to go by.
“The shares of the Russian Bank of Foreign Commerce, quoted at R. 330 on January 3, 1894, went to R. 534 on August 1, 1895, only to fall sharply to R. 500 by October 4th. Shares of the Discount Bank advanced during the same time from R. 490 to R. 880, and fell back to R. 800 on October 4th. The shares of the International Bank of St. Petersburg and of the Volga-Kama Bank of Commerce have likewise been subject to considerable fluctuations; the former went from (R. 498 to R. 725, and then back to R. 680, while the latter went from R. 905 to R. 1375, and fell suddenly to R. 1290.
“Glancing over the balance-sheets of these banks, we notice that accounts current ‘on call’ and credits opened with correspondents of the banks, which are mainly secured by collaterals not guaranteed by the State, make up the main part of their business. In one of the large banks of St. Petersburg credits of this kind constitute sixty per cent. of the total business, while commercial transactions constitute barely ten per cent. If we add the fact that banking institutions engage largely in rehypothecation, we may form some idea of the extent to which speculation is carried on. In comparison with the enormous sums necessary to keep this speculation alive, the amount of money demanded for commercial needs is absolutely insignificant. Here, then, is the real cause of the scarcity of money. Last year, though the demand for money on the part of exporters was greater than now, it was not necessary to have recourse to a supplementary issue of bills of credit; but speculation at that time was far less active than it is at present.
“But people do not confine themselves to declaring that money is scarce (that scarcity, if it existed, would be due to speculation on the Bourse, as we have shown above); some advise a new issue of bills of credit in order to lessen the damage caused by speculation. This advice seems to us as ill-founded as the notion of the artless public that it is possible to deal upon the Bourse with no risk of loss.
“What is the meaning of the term ‘scarcity of money’? Money becomes scarce in the market whenever too large a part of our available resources have been invested in merchandise so that they are locked up until the merchandise can be sold. When such a state of affairs arises in a country with a proper form of circulation, the demand for money causes an influx from neighboring countries having a greater abundance. In this manner money is secured with more or less difficulty, and the temporary embarrassment is promptly ended. On the contrary, countries that have a fiduciary circulation not current elsewhere, and which are in this respect cut off from other countries, experience in such cases monetary disturbances which are hard to quell. A new issue of bills of credit, by satisfying the temporary demand for money, appears for a time to ameliorate the situation, but as soon as specie is once more plentiful new difficulties arise, producing on the one hand an increase in the price of goods, and on the other a decrease in the purchasing power of money.
“Besides, each new issue of bills of credit serves, first of all, as fuel for speculation, and speculation is an enemy to the common weal because it leads to stock-jobbing, to the enrichment of a few persons by means for which there is no justification, and to the ruin of most of the other participants. If we take into consideration the further fact that it is generally a very difficult matter to withdraw these temporary issues (witness the fact that for fear of unsettling the money market we have not yet consigned to the fire the R 75,000,000 of bills of credit issued under a gold guaranty), we shall have a clear understanding, both of the uselessness of these issues and of their harmful effects. As a matter of fact, notwithstanding all the issues hitherto made, we still feel the lack of money every time the demand for it becomes a little brisk.
“What, then, in its final analysis, is the advice given by that large class of persons who trace the cause of all our troubles to the lack of new issues of paper money and demand that such issues be made? They act as one who should advise a doctor to administer poison to a patient, as a sedative, during the crisis of his disease, with the result of complicating the malady, when a regular and hygienic course of treatment would have brought the patient back to his normal state and resulted in a complete cure. We are advised, in fact, to stir up further trouble in the money market and to furnish additional supplies to the speculation whose baleful effects have never been more acutely felt than now. Suppose that by supplying this additional means of speculation we should save certain overbold speculators from loss, is it not evident that others, less expert, would meet with reverses rendered all the greater by the very fact that the day of settlement was postponed? Is it advisable, for the sake of results so unsatisfactory, to disarrange our monetary circulation and all legitimate business by further complicating, through a new issue of paper money, a system which even now is highly unsatisfactory? The need of regulating our monetary system by the re-establishment of a metallic circulation is an urgent one. Our Finance Ministers and far-seeing statesmen have long been waiting impatiently for a moment propitious for the change.
“Our Finance Department has just entered upon a series of measures tending to establish among us at last a sound and healthful monetary circulation, the lack of which paralyzes every branch of our domestic economy. It is not to be supposed, then, that that department, after having felt impelled to find some way out of the anomalous situation which has continued so long, and after having actually decided upon the preliminary steps, will turn back again, even temporarily, to the very devices which caused the trouble and which have long been condemned both by experience and by a knowledge of the normal conditions of national life.
“Finally, the real needs of commerce do not demand recourse to a supplementary issue of paper money. By legalizing transactions in gold; by putting into circulation from the large reserves accumulated by the State Bank gold enough to supply the needs of commerce and industry; by issuing metallic receipts for our people, who are accustomed to handling only paper money; by placing in circulation, for convenience in small transactions, silver of standard weight and fineness taken from the Bank’s reserve—by all these various means there have been placed in circulation, not a fixed quantity of monetary signs as was the case when supplementary issues of paper money were made, but precisely that quantity for which there was a real need. Another important advantage of this system is that the withdrawal of this circulating medium will be effected without any difficulty and in the exact proportion in which the demand for money grows less, because specie always flows back into its strong-boxes when money becomes plentiful in the market.
“If we are not yet accustomed to the use of gold money because it has so long been out of circulation among us, that is a defect that time will cure. The value of the credit-rouble has been so stable during the last few years that even in transacting business with foreigners our merchants have ceased to protect themselves by a purchase of credit bills on time, as was formerly their custom, in order to avoid loss in the exchange. There is reason to hope that before long transactions will be concluded directly in Russian gold coin, at a fixed valuation and for long terms. It is certain that confidence in the fixity of the exchange rate, and in the possibility of exchanging at any moment at such fixed rate bills of credit against gold roubles, is not far in the future. And then our first aim will have been attained, that of giving greater elasticity to our monetary circulation.”