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THEPRESENTAGITATIONOVERSHORTSELLINGfo th© careful student of financet against short selling appears only as a discouraging evidence the economic education remains decidedly limited* 1?he bursting of erery speculative bubble In recent history has produced similar outcriest and it is a sad commentary on human nature that mankind seldom admits guilt and through raticmalii^tion always discovers a scapegoat, ?uaiaiaantally, the present excitement Is the age-long story of speculation, and of the moth that went too close to the fire* llasay Intelligent* though uninformed people, fail to di3c£$*r this basic factor and permit their vision to be obscured by personal losses and an anthropomorphic conception of so-called bears• And this failure to grasp the real issue has been farther aggravated by placing undue emphasis on the much publicised activities of the lew York Stock Exchange• 3aent in order to think clearly on this mtter 9 let us recognize at the outsat that the Hew York Stock Sxch&aga 1© only one of the capital ssartets of the world* Historically it has arisen as a necessary adjunct to the industrial revolution• Capital markets became essential to finance big corporationst and as America became the leader in corporate development it followed as a natural secpa&noe that in the Hew Tork Itock Exchange America evolved the outstanding share market of the wrld* low there is more glamour in capital markets than in otherst just as there is more appeal to the casual observer in the great rolling rooms of the Itoited States Steel Corporation than there is in the storing of i$ieat or the planting of rice. It was through this brain "befogging fascination that General Dawes, in his picturesque xmxme?t was attempting to penetrate, whan he recentJLycharacterised Wall Street as a ^peanut stand". The Hew York Stock Exchange la even sore raysterious to the average man than is electricity, but whereas he perceives quickly the dangers adhering to electricity, he falls utterly to sense the perils lurking "beneath the babbling dictations on the Sschange. Many people are benefited by electricity, bat these people do not play with the wires nor do they experiment with the current* Technician®» protected by robber gloves and scientific knowledge and experience, are constantly working to further develop electrical m®tg?i and yet despite their precautions mxp x^erish in the laboratory, lad if a specialist often cosies to grief it Is small wonder that the layman is Invariably injured. The same ap¬ plies to operations on tfaa Sow York Stock Exdbaag** On© of the most marvelous mechanisrns of the machine age, it has made It possible for the small man to participate in corporate development through purchases of shares in leading equities. And as long as ha biays with savings and for the prlmry purpose of acquiring Income fa® ig similar to the consumer of electricity and we believe will in time derive as ssuch benefit but as soon a© he uses credit and buys on mrgln, he is like the mm with electricity without ru&ber g&ows» who plays Th& first man is an investor and if short selling works to his detrtesnt w® desire to abolish it* The second man Is a speculator, and while we nay urge him to exercise caution, if he fails to do so» we cannot feel any great responsibility for hlm« Because of his inexperience he struggles under the illusion that he la m investor and Invariably purchases stocks • If the market •2- rises his equity increases aad his worries over m r g t n calls diminish, Ha was short money so he borrowed to go long stocks • His rallying cry was nerer to sail th© United States short. Bt^f itf mm if you can't pay for It* The short who has gone long money and short stocks has his margin cut dora and must either bt^ in his stock or raise more money* The stock has proved mere raluable than the money and he is forced out to the great delight of our eager Vail* When the shoe Is an the oth$r foot and the stock goes & o m cur ball spoeul&ter feels hurt and Incensed to think that anyone should he taking adjutage of his rtsfortme* He cries lordly about destroying the country and menacos to civilisation, little realising that his ratajfcant entlmsiasm may haTe h e m as miforttaaate for the 001mtry as too violent exercise often is for the irdiTidtial* lowf every intelligent mm *&& womoi knows that eoimtrlee are nelttor matte nor broken on stock exchangee* foo laonypeople ha^3 ac¬ quired the fantastic notion that p&trletim oentws oa the floor of stock exchanges and that CJeorgo ^ashinstoa, were ha to return in the flesh, would becotaD the landing operator of the present day* What utter nonse&sejf !Rie great hulk of t&e people» eiren today* despite stories of chorus girls* bellhops* etc* in the market * do not h^re the faintest conception of what the lew York Stock S^haaage is and mw® placidly about the factory or the farm, it© their calling may he* Tim Stock Sxcfcaage is a ^flsible reflection of their efforts* not they a reflection of Its energy. The sooner we rea¬ lise this the better off all of us will be* High wages do not produee prosperity9 as president Hoover has endeavored to make us bell ere; on the contrary! progK&fey Is the only thing that caaa make for high wages. Jm&$ similarly, It la putting the cart ahead of the horse to talk about higher stock prices leading to good huslnets* One of the great trouble* with -3- the present depression i s that too many business man and bankers are looking at the reflection in the mirror rather than at the fa&e itself* We talk and think in terns of reflections and i l l u s i o n s , rather than actualities and p o s s i b i l i t i e s . Blither the bull nor the bear can a l t e r basic values over a period of time* 2h®se fundamental mrteat ^ml^as® are produced by long bisying and long Milling, mmmting principally from business men who know thoro-aghly th&ir oum cospanies. Both bull and bear attempt to ®mM® the "buying or selling, and intimately their sa&cess or failure dapsB&s 12pm ths rapidity of their sdjusteamts to thaat noras* -tod i t i s on aeoomt of t h i s ©leiBTOiary factor that short selling s t a t i s t i c s becom worthless &o& 2s«xf]sy thinking ewlves* I f one a&bares to the view that 8hsrt selling stab! 11 aM the siark:8t* m& i t doe a in the roi&tiTe senae that i t wraXd "be swaa less stable without i t , 33t0^arth©le3s, ho^ oaa w da^lain the faat that there are iaTariitoly less ^*orts a t the top and moro a t the botteai of the isarket than a t any otlior tl^o? 7et the answer i s goite sinrplej it i s that way factor *hi<& deterKdaes a tcp or a bottom* Vheaerrer there are a great m&oy sh®rts in the iaarket f look tor a* boti&a, aM whene^aa? there are a great aany lo&gs, look for a top, Tni^ i s because despite popular ideas oa the gml^ect, sp^cmlator© aare f o l l o m n , not l a s e r s • ffiiey do not i n i t i a t e trfmda, ^ssopt in the san&e that thsy laad tha^ after their base hat been laid* i&& rooogalsing this i t taSset l i t t l e raflectifta to perceive that short selling is far xaora beneficial to iCTmtl&at than i t long o&rgtaal l^t?ylagf aaA that if we pereslt the l a t t e r while aboii^htag tha former, we hare iafliotad a &erero pQKaalt/ on the iswt^tor* If <»s desires to abolish both ahort selliag asd lomg marginal bt^ying, we caimot J*- quarrel with his logic, except on the grounds of economic retrogression* "but to eliminate one without touching the other is to deliberately ux&alanoe the scales. We fully admit that short selling is neither the constructive influence in the marfcst its proponents hold (because i# practice it does not work as In theory) nor is it the destructive force its ctitics suppose• In some cases It serves as a market stabilizer, while in others It unques¬ tionably is a demoralising influence, Kc^aver, in both Instances these are particular situations and quite aside flrom the general rule. The functional purpose of short selling is to facilitate trusi&eas in much the saz&a way as checks do. It is simply stated the keystone in the arch of liquidity and as such protects the investor by furnishing him with one of his most necessary requisites* We hear a great deal about bear raids and the demoralisation of the market by unscrupultrua operators* We do not deny that such existt any more than we deny that there are murderers and kidnappers still In existence* despite our laws* Against this rare contingency ew^ry stock exchange has legislated from the beginning and. the Hew York Stock ix changet under Article X¥II, section H t has provided for expulsion of m& member deemed guilty of attempting to do this* If we were to destroy all the instruments that can occasionally be misused there would ba little of our machine age retraining • And m & l e *ro hear a groat deal about fea&r raids we quietly acquiesce in bull raids and bull pools* ThBj, of course* ar© patriotic* Put prices up to the sky and never a word of warning* And yet we maintain that if legislation honestly desires to protect the American investor it must begin here for this brings us to the root of the entire matter • -5- Whan one inveighs against short selling ome cries out against market speeul&tio&u There has been an intelligent outcry a^&lnsi this from time iraaafiEiGrialt and from a theoretical standpoint, j u s t l y so* Millions of dollars are lost ©very year by s ^ e o l a t i o a and over a long period of time tb® mother of speculators who have mad® big money and kept i t can be l i s t e d on the fingers of one hand* lot from a practical st&mlfoint, a l l sana economists hw@ bean forced to recognise the l e g i t i m t e place of such speculators* Sieir losses have been the insurance preiadiawi irliioh l i t t l e axd M s investor® notild tiaYe fceen otherwiw foroed to pay for that eleiaent m necessary to stacaessftai isvettins in a world of varying v i o i a s i tt5des» namely, li*raid|rty« We do not condone this l o s s , "but urn reoognlsst i t as a definite factor in nsodarn economy, Just m ws r^sognise the physical loss so oftaa incidental to imman achierwient* Howeverf vm most pasxse hare for a mci^Hat to ®ssphasi«e the thin but none tba less taasglble line dividing spemdLation from ^s&line* ^She speculator frays or sells for the jmrpose of tmteXzig a p r o f i t , gambler neither buys nor s e l l s . fhe He stagily bets that prices will go up or down* low i t i s QV& contention that credit becait^ so abundant in 192S*-1929 that great herds of people were usurping tha place of tpaeola* tors and so taea^re was their actual insrahasing power they were v i r t u a l l y tacket shop gsasblers* One proisin^nt and iwll informed floor trm&er* in raootffiiting 1929 experiences apologized to the writer for being caught Ion? in the mrkat when i t broto» as follows* "flhat could I dot* he said •brat follow the band wagon when I discovered to w& sorrow that to sell short several thous$pi shares of a medium priced i s SUB was like throwing fish to a sea lion t a&& that while I worried about having such a large -6- possession, some obaxsitmxp or gaafde&w probably bought ay entire line aad slept somdly dreaseitig of the money ha*d sa*s& his folks i& deasr old Ireland •** Such a regr©tt&Ma state of affair* mm not ca&sed by the absence of short selling any sore than the preseoat decline has been eau$$d by i t s presence f but "by a failure to control c r e d i t . Credit i s the "b&ae of thia whole structtire^ l a t uu not than mst® our aaergles attacking i^io&ts swh as short s©ll$rs t tmtoo^i iBdiTidtaals which assize superstitious r>ropor«# tions a» foodoo i d o l s . ^Biey*1? How maay ticiat hara we heard about th© Iteyi&lairelliaa ^Th^y11 are going to push isp Oopi>er or Can. bullish* 11 nl%my are selling Telephone«" *5!bajr are 'beaarilsh or ^^xay are about to r^ld tha imrket.^ I^t us educate otirselTes Tb$yon& this stage of "tho goblins ^ i l l get you if you don f t wateh out f n and casting aside this personal!Mi intangible ^thsy® perceive the impersonal teagible •they11 that i s ocmnoted by the word credit, Literally f billions of dollars h&v$ be^« u t t e r l y dastroyad and uatold hwiaa misery aad tragody eaixs#d by #xaessi^# and oin^arranted grants of credit. X$et us than faoe the problem gijmrely and recogalso that i $ m we are able to darrise a w&m® of controlliBg credit within roasonabl® limits we will not worry aboutrnxxfix9tamer tmn as ^iort sellers and the world will have a sorader prosperity than i t has ®mx had before* April 30# 1932. (Member Hew York Stoek Ixchaaige)
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