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personal responsibility which they now feel. They would be in a position analogous to that of the wholesale houses at present. Investors would have to accept offerings from those who had no part in the investigation which preceded the original purchase of the issue, and who, presumably, would not have the capital or organization of distribution to "protect the market" for the benefit of those who might wish subsequently to sell their securities.

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 bond holders.

With the enlightened aid of bond houses the creditor class will do well to take as much pains in the investment of its wealth as in the acquisition of it. Buyers of corporation bonds should exercise as much care in the selection of a financial adviser as in the choice of a security. They should seek a bond house with a strong personality, strong convictions on investment matters, and the capital and equipment to back them up.

215. THE BASIS OF BOND VALUES

BY THEO. H. PRICE

In this diagram the basic factors and the technical and mathe-. matical elements are grouped on the longer sides of the triangle. To the psychological division of the problem less space is given, as it deals with influences that will be impermanent if the essentials of security exist. Conversely, it is quite possible for those who understand the psychology of the investment market to take advantage of the public at an adventitious moment and induce them to buy bonds that lack the intrinsic qualities of safety.

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For this reason the reputation of the bankers who are sponsors for the securities is the most important of the psychic or intangible factors, and as such will be considered later on.

The technical and mathematical determinants of bond values can be only partially enumerated and briefly discussed here. They embrace nearly the whole field of human experience and science.

Volumes which carry one well into higher mathematics have been written about sinking funds and amortization. The duties of trustees and the words in which the promise to pay is phrased have been made

I

327-28.

Adapted from an article on "Commerce and Finance," Outlook, CVI (1914),

the subject of much litigation and many law books. There are many other details of the problem that might be mentioned to make plain the need of specialists in coping with it.

But these specialists must include not only lawyers and mathematicians; there must be men of broad sympathy, wide experience in business, acute power of analysis, and well-balanced optimism to pass upon the rights of enterprise to credit through the medium of bonds. The great bankers who control the water gates through which the public's money flows to irrigate the fields of industry have their obligations to the borrower as well as to the lender, to the worker as well as to the capitalist.

If the test of deservedness be made too acid, and the pessimism born of experience is not tempered by the optimism of hope and imagination, the banker will fall short of the full duty which his opportunities impose. It is the gift of imagination and the quality of constructive optimism that differentiate the banker from the money lender, and the greatness and influence of the late Pierpont Morgan lay chiefly in his ability to visualize the picture of the future upon the canvas of the present, and in his helpful belief in his fellow-men and his country.

The instrument of credit that is called a bond provides a means whereby the immobile or undeveloped assets of a deserving enterprise may be pledged to secure the money which should be used to extend still further the field of beneficent activity: So regarded, the bond may be properly utilized by any political entity or business organization that can demonstrate that it is possessed of the requisite and the honorable good faith which is the first essential of credit.

Almost everything that human industry has produced or for which society has need has been or may be made the basis of a bond issue.

It is entirely clear that skill and trained experience of the highest character are necessary to discriminate as between good and bad bonds. It is equally clear that when skill and experience have eliminated the bad bonds and accepted the good bonds money must be provided en bloc to buy them. Next, the machinery of introduction, advertisement, salesmanship, and distribution must be put in motion to pass the bonds along to the ultimate investor, so that a normal level may be maintained in the distributing reservoirs of capital.

XI

THE INTERRELATIONS OF FINANCIAL

OPERATIONS

Introduction

The purpose of this concluding chapter is, first, to indicate the interlacing and ramifications of the various forms of financial operations in the United States and to point out the consequences of the prevalent confusion that has existed with reference to the true functions of the different types of banking institutions; secondly, to show how the Federal Reserve System is designed to correct the weaknesses that have developed in our banking system in connection with the confusion of investment and commercial principles; and, thirdly, to outline the great problem of financial concentration and control, popularly called the "Money Trust."

The material here presented is directly related at many points to the principles developed in preceding chapters. The very first selection, for instance, has already been foreshadowed in chapter iv, in the reading on "Collateral Loans and Stock Exchange Speculation"; but attention is here directed to the manifold relations that exist between commercial banks and the securities' markets and to the problems that arise in connection therewith. Similarly, the use of the funds of "commercial" banks for investment purposes was definitely pointed out in our analysis of the loans of "commercial" banks. Here, however, we are showing the extent of and the reasons for this practice, together with its effects, upon the financial system in general. Again, in our study of the Federal Reserve Act numerous provisions were noted which touched the field of investment; but here we are discussing the provisions that have most conspicuously been designed to differentiate commercial from investment operations. In a word, this chapter is built upon the general analysis of credit and banking that has been made in Part II of this volume and is designed to suggest the constructive reforms that are being discussed at the present time.

The readings under "C. Financial Concentration and Control" reveal the tremendous rôle that the investment banker, or financier, plays in the modern business world and the problems that have

arisen in connection with the use of this enormous power. The development of large-scale business and the uniting of independent concerns into gigantic combinations, which have characterized our transportation and manufacturing industries during the past twenty years, have been paralleled in the banking world. Indeed, the two movements have developed hand in hand, and each has been necessary to the other: large-scale industry required the development of financial institutions commensurate with their needs, and, conversely, the growth of large banking institutions made it possible to accumulate the capital required by modern industries.

The public has been greatly agitated in recent years over what is termed the greatest of all monopolies, the "Money Trust." A government committee has made an investigation into the extent of financial concentration and control in this country, and a very able defense of current practices has been presented by the financiers of Wall Street. While results of the investigation clearly do not substantiate the charges that have been made, most students are agreed that the system that has developed gives to the financial interests an enormous power which, if wielded with sinister intent, or merely with unwisdom, would be fraught with tremendous consequences throughout the entire industrial system. The concluding selection of the volume points out the economic functions that are served by the modern financier and indicates the abuses that arise in connection with the exercise of these legitimate functions. The problem here would seem to be the same as with trusts or large-scale industries in general-to conserve the undoubtedly good features while eliminating the abuses that develop.

A. Investment Operations of "Commercial" Banks

216. THE RELATION OF THE BANKS TO STOCK
EXCHANGE SECURITIES'

BY JACOB H. HOLLANDER

In the United States the money market, in the form of bank loans, may be regarded as impinging upon the stock exchange at five distinct points:

1. Stock-exchange securities are used as collateral to secure mercantile discounts and personal loans in the insufficiency of commercial or personal credit.

Adapted from Bank Loans and Stock Exchange Speculation, pp. 4-26. (National Monetary Commission, 1911.)

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