Henry Noble was the President of the NYSE in 1914. His book details the events that led to the longest closure of the exchange in its history, how they dealt with problems that arose, and the decision to reopen.
The Notes
- “Time, however, is quick to dim even acute memories, and Wall Street, of all places, is the land of forgetfulness. The new happenings of all the World crowd upon each other so fast in the financial district that even the greatest and most far-reaching of them are soon driven out of sight.”
- The NYSE had only closed twice prior to the book’s publish date (1915):
- The Great Panic of 1873 – suspended trading for 10 days, was local, and did not involve the rest of the world.
- Outbreak of WWI – July 1914, was global, and the NYSE was the last major exchange to close.
- “It is in the nature of panics to be unforeseen, but the statement may be truly made that some of them can be more unforeseen than others.”
- “The conditions produced were absolutely without precedent. Experience, the chart on which we rely to guide ourselves through troubled waters, did not exist. No world war had ever been fought under the complex conditions of modern industry and finance, and no one could, for the moment, form any reliable idea of what would happen or of what immediate action should be taken. These circumstances should be kept clearly in mind by all who wish to form a clear conception of this great emergency, and to estimate fairly the conduct of the financial community in its efforts to save the day.”
- “To close the Exchange is manifestly to inflict far-reaching hardship upon vast numbers of people. It is also sure to be productive of much injustice… It becomes clear that duty dictates a policy of hands off as long as a continuous market persists and purchasers continue to buy as the decline proceeds.”
- “It is a fact of profound importance, and one that never should be forgotten by stock brokers or by the public, that the Exchange closed itself on its own responsibility and without either assistance or compulsion from any outside influence.”
- “In all previous American panics the foreign world markets were counted upon to come to the rescue and break the fall. Imports of gold, foreign loans, and foreign buying were safeguards which in past crises had been counted upon to prevent utter disaster. On this occasion our market stood by itself unaided; an unthinkable convulsion had seized the world; panic had spread; even the bargain hunter was chilled by the unprecedented conditions; there were practically no buyers. A half hour’s session of the Exchange that morning would have brought on a complete collapse in prices; a general insolvency of brokerage houses would have forced the suspension of all business; the banks, holding millions of unsaleable collaterals would have become involved; many big institutions would have failed and a run on savings banks would have begun. It is idle to speculate upon what the final outcome might have been.”
- “Any decisive step whether right or wrong always finds its critics.”
- During the Civil War, when the NYSE couldn’t handle the volume of speculation, a separate continuous market developed outside the exchange on the street and in the basement — called the “Coal Hole” — during the day, and in the evening, it continued in the Fifth Avenue Hotel lobby.
- “From the moment of the closing of the Exchange a growing pressure arose to determine just when and how it should be reopened. The desire for information on this point was widespread, and when the gravity of the situation became clearer to the community, a great anxiety developed that the reopening should, above all, not be premature.”
- Unemployment Issues
- “When the Exchange suddenly closed its doors, an immense number of people, consisting of employees of the Exchange itself and the clerical forces of all the many brokerage houses, were rendered idle. As soon as it became evident that the suspension of business was going to be indefinitely prolonged, the grave question arose as to the extent to which these people would be thrown out of employment.”
- The NYSE retained its entire workforce at full pay over the duration of the closure. A handful of brokerages did the same.
- Most brokerage houses were forced to either cut wages or staff or both to stay in business.
- “It is an interesting fact, bearing on the popular superstition that Wall Street is peopled by unprincipled worshippers of the dollar who are incapable of those finer qualities of character which are confined exclusively to other walks of life, that there is no region in which a quicker response to the call of the needy can be obtained than on the floor of the Stock Exchange. Even though the brokers were facing an indefinite period of starvation themselves, with expenses running on one side and receipts cut off on the other, the moment it became clear that severe suffering had come upon the clerical forces of the Street a movement was at once set on foot to start measures of relief and assistance.”
- The Wall Street Employees’ Relief Committee was created to find jobs for any unemployed worker and provide financial relief as needed.
- A fund was created from donations from NYSE members and other firms for financial assistance.
- Newspapers offered special rates for job notices.
- Free medical assistance and hospital visits were covered for those that qualified.
- “Such satisfactory results were attained, that up to date of this writing, (May 15, 1915), of over seventeen hundred applications received, permanent positions were secured for about seven hundred at rates of compensation that were distinctly gratifying, all conditions considered. Two hundred and thirty were placed in temporary jobs for periods ranging from a few days to several weeks, a number of them being re-employed two or three times. Four hundred and ninety, having been taken back by their former employers, withdrew their applications.”
- “Financial assistance was extended to about one hundred individuals and families; rent was paid for thirty-nine; food purchased for forty-six; clothing was furnished in seven instances; five persons were placed in hospitals; there were a considerable number of cases where the Committee in whole or in part took care of funeral expenses; old debts for medical attendance and drugs; agency fees and surety bonds; life insurance premiums, board and lodging, etc., etc. Many applicants for assistance proved to be merely temporarily embarrassed, they were willing and anxious to be helped but did not want charity, so to meet that emergency a form of voucher was used, which acknowledged the receipt of a ‘loan’ without interest, to be repaid at the convenience of the ‘borrower.’”
- The exchange was closed out of fear of widespread foreign selling, that would then convert those dollars to gold and set off “an unexpected run on Uncle Sam’s bank.” The task, which began immediately after closing the exchange, was how to reopen without widespread foreign selling creating a panic.
- Numerous suggestions and schemes were submitted on how best to reopen the exchange including:
- Limited trading hours from 10 am to 1 pm. Cash only transactions, delivered and paid the same day.
- A “Buy a share of stock” marketing campaign.
- Open the exchange strictly for foreign stock sellers to ensure bargains for American buyers.
- “Could not a plan be formulated between the Stock Exchanges, investment bankers and Federal Reserve Banks, by which the securities could be valued on their intrinsic and market values at such prices that would be considered reasonable to be obtained in the next two or three years; that the lenders be guaranteed against any losses from recession below the stipulated point at which the securities might later be liquidated, say sometime during the year 1917, if it had not been voluntarily liquidated without loss before.”
- Open trading only in securities not held by foreigners.
- Open trading but not settle trades until 30 or 60 days.
- All trades be done on a 10% basis. 10% of a transaction paid at purchase, with an agreement to buy an additional 10% in 6 months, 9 months, 12 months etc. at the agreed upon price. For example, on a 100-share transaction, 10 shares paid for immediately, with additional 10 shares paid for in 6 months, again in 9 months, etc. until the full lot is bought/sold.
- One proposal was to not reopen trading until the balance of trade swung in the favor of the U.S. When U.S. exports exceeded foreign debts, the impact on reopening the market should be negligible.
- “There is a possibility (even a probability) that when ordinary crises arise in times to come, people who find themselves financially embarrassed will bring enormous pressure upon the authorities of the Exchange to renew the drastic expedients of the famous thirty-first of July. It is to be sincerely hoped that there will always be firmness enough in the Governing Committee to resist this pressure. The great world war coming, as it did, without warning was a rare and epoch-making event that warranted unheard of action and to indulge in such action for any lesser cause would be utterly disastrous.”
- Timeline (1914 – 1915)
- Prior to July 1914, market speculation was low, valuations were low, short interest was higher than normal due to new legislation, and the market avoided a collapse the week before its closure.
- July 28, 1914 – Exchanges in Montreal, Toronto, and Madrid closed.
- July 29 – Exchanges in Vienna, Budapest, Brussels, Antwerp, Berlin, and Rome closed.
- July 30 – Exchanges in Paris, St. Petersburg, and all of South America closed.
- July 30 (afternoon) – NYSE officers and prominent bankers met that afternoon to discuss closing the exchange. The market was not in a panic. Bankers were hesitant to close and unanimous in waiting. Several members of the NYSE Governing Committee believed closure was inevitable, so urged to close immediately.
- “The crisis had developed so suddenly, and the conditions were so utterly without historic parallel, that the best informed men found themselves at a loss for guidance.”
- July 30 (evening) – The NYSE president received messages and telegrams from large brokerage houses urging immediate action.
- July 31 – London’s Exchange closed. Within 24 hours, the Bank of England marked its discount rate at 10%, was hit by gold withdrawals in one week of $52.5 million, saw the bank’s reserve ratio drop from 40% to 14.625%.
- July 31 (9 am) – NYSE Governing Committee met at 9 am. Messages from brokerage firms delivered news of massive sell orders that would lead to a panic. Bankers wanted the committee to hold off on a decision until they had made their own. The exchange usually opened at 10 am, but the committee ordered the bell not to be wrung until the Exchange President authorized it.
- July 31 (9:45 am) – No word from the bankers. The Governing Committee called roll. Ernest Groesbeck moved to close the exchange, and the motion carried with a large majority (not unanimous). A motion to suspend security deliveries was passed unanimously. A motion to create a special committee of four Governing Committee members and the President to consider all questions related to security deliveries. No government officials were reached before the decisions was made.
- July 31 (9:56 am) – NYSE closed. News of the closure was sent over the ticker. The bankers saw the closure as a missed opportunity to make New York the financial center of the world. Exchanges around the U.S. agreed to follow suit.
- August 1 – The Special Committee dealt with the first of many issues that arose from a closed exchange. Arbitrageurs had sold stock in New York and bought stock in London two weeks prior and could not close the short with delivery of stock bought in London because of the suspension. The solution was presented 3 days later. Call money was limited but loans at 8% were given to the firms to cover delivery.
- August 3 (morning) – The Special Committee was given the power “to decide all questions relating the business of the Exchange and its members.”
- August 3 (afternoon) – Special Committee ruling: “It was the intention in closing the Stock Exchange that trading should be stopped and it is the duty of loyal members to comply. If cases come into your office where it is absolutely necessary to trade, do so as quietly as possible and prevent the quotation from being published.”
- August – At the outset, the Special Committee implored the press not to publish security price quotes on sales. A few prices slipped through that were made on New Street, but the majority of publications cooperated.
- August 4 – The Special Committee requested exact figures on open balances at the Stock Exchange Clearing House due to the suspension of deliveries. About $100 million in sales on July 30th were unsettled. The Committee announced that the Clearing House would assist anyone in settling those accounts. The bulk was settled by September 22.
- August 4 – The Special Committee set call loans at 6% on unsettled contracts starting August 5th.
- August 5 – “It is possible that cases may occur where an exception would be warranted provided such dealings were for the benefit of the situation, and in no sense of a speculative character, or conducted in public. Any member, however, taking part in such transactions must have in mind, his loyalty to the Exchange, whether or not he is living up to the spirit of the laws, and that he is not committing an act detrimental to the public welfare.”
- August 10 – Special Committee ruled that borrowed and loaned stock would be marked at the closing price on July 30th. The ruling set July 30th as the going price and only prices below those should be avoided.
- August 11 – Special Committee rules that interest on loans of stock between members should not exceed 6%.
- August 11 – The first signs of an unregulated market appeared on New Street behind the exchange (later known as the New Street market). It gradually grew in size. The Special Committee prohibited its members from dealing there and exerted influence to prevent banks and lenders from recognizing the declining prices as a basis for margin loans.
- “In all probability the existence of this market was a safeguard as long as its dimensions could be kept restricted. An absolute prohibition of the sale of securities, if continued too long, might have brought on some kind of an explosion and defeated the very end which it was sought to achieve… The final outcome was that the New Street market did more good than harm. It relieved the situation by facilitating some absolutely necessary liquidation, and never grew to such proportions as to precipitate disaster.”
- August 12 – The Special Committee received a growing number of messages about a desire to buy stocks at or above the July 30 closing prices. A market was created, with stipulations, in the Clearing House. It operated until the NYSE reopened:
- “Members of the Exchange desiring to buy securities for cash may send a list of same to the Committee on Clearing House, 55 New Street, giving the amounts of securities wanted and the prices they are willing to pay. No offer to buy at less than the closing prices of Thursday, July 30, 1914, will be considered. Members of the Exchange desiring to sell securities, but only in order to relieve the necessities of themselves or their customers, may send a list of same to the Committee on Clearing House, giving the amounts of securities for sale. No prices less than the closing prices of Thursday, July 30th, 1914, will be considered.”
- “During the darkest days of depression the prices of a few leading stocks such as U. S. Steel and Amalgamated Copper dropped in the Street ten points or more below their July 30th closings, and business in the Clearing House almost ceased, but in the later Autumn, when the rapid rise in the volume of American exports began to foreshadow a readjustment in foreign exchange, the New Street prices rose again to the Clearing House level and a relatively small business in the ‘outlaw’ market was transformed into a relatively large business conducted under the supervision of the Exchange.”
- August – “During the month of August a constantly increasing pressure from every conceivable direction was exerted to break down the dam with which the Committee was striving to hold back the natural flow of dealings in securities. By letter and by personal appearance before the Committee individuals, in and out of the Exchange, strove to induce them to countenance transactions at prices below the arbitrary level of the closing.”
- September 8 – Strain on bond brokers and banks grew through August as they were forced to hold bank loans that normally would have been sold in the money market. The tipping point was when corporate and municipal loans were about to come due. New short-term loans or bonds needed to be issued to cover these obligations. The bond dealers formed a “Committee of Seven” to come up with a plan to deal with it in a supervised way.
- “The Committee is therefore of the opinion that the placing of securities owned by dealers with their private customers should be approved where the securities can be sold without disturbing the collateral loan situation and your Committee will be glad to continue to advise whenever such opportunities arise. Anything tending toward public quotations or the creating of the impression of an active or even semi-active market would unquestionably seriously disturb the loan situation… The Committee has considered questions of maturing obligations of cities and corporations and believes that the present situation does not warrant any attempt to issue long time bonds, but that such refunding should be accomplished through short time financing.”
- The plan allowed bond brokers to sell securities to clients at prices approved by the Committee of Seven. Brokers were required to file purchase and sell orders of unlisted bonds with the Committee, and listed bonds with the Clearing House. The Clearing House and the Committee had the power to determine the minimum prices sales could be made.
- It was the first time sales below the closing price of July 30th were allowed.
- September 19 – A committee of three was created to help the Committee of Seven determine the prices that listed bonds would not be sold below. By late September, similar methods were set up for handling unlisted bonds and listed stocks.
- September 24 – A committee was created to deal with supervised purchase and sales of unlisted stocks that traded on the “Curb” similar to listed and unlisted bonds. It did not go as smoothly as the other committees.
- November 10 – The committee on unlisted stocks planned to submit a report recommended its discontinuance. The Chairman of the Curb Market Association met with the Special Committee to discuss reopening.
- November 11 – The Special Committee dissolves the committee on unlisted stocks. The reasons given: unlisted stocks were not likely to be held by foreign investors and any idea of panic selling had passed. Restrictions on publishing price quotes of unlisted stocks was removed.
- “The Special Committee of Five being of the opinion that the market for unlisted stocks has arrived at a condition that makes supervision of dealings no longer necessary, hereby approve the act of the Committee on Unlisted Stocks in dissolving their organization.”
- November 13 – “Unrestricted trading in Listed Municipal and State Bonds for domestic account may now be resumed, but that all transactions for future delivery must be submitted for approval, as heretofore, to the Sub-Committee of Three on Bonds at the Clearing House of the New York Stock Exchange.”
- November 16 – New York Curb market officially reopens at 10 am.
- November 16 – Vice President of the Chicago Stock Exchange met with the Special Committee about reopening its exchange on November 23rd. The Committee requested that dealing not be done at prices below those set in New York.
- “Thus one after another came the evidences of a sudden transformation in the financial conditions and of a consequent movement toward the resumption of business, all of which rested fundamentally on an immense increase of our exports and the resulting favorable movement of foreign exchange.”
- November 24 – The Special Committee ruled that restricted bond trading could resume on the floor of the exchange beginning November 28.
- “Such dealings to be under the supervision and regulation of the Committee, and to be for ‘cash’ or ‘regular way’ only and not below the minimum prices as authorized by the Committee from time to time. Transactions at prices other than those allowed by the Committee, or in evasion of the Committee’s rules, are prohibited.”
- November 28 – Restricted bond trading resumes on NYSE floor. Transactions were quoted on the ticker.
- “The restoration of the bond market to the floor was a complete success, and at about the same time a general revival of public confidence showed itself in a rise in prices first in the street market and then in the Stock Exchange Clearing House itself.”
- December 7 – The Special Committee ruled in favor of restricted trading on specific stocks on the Exchange floor. Minimum prices for those stocks were set 2 to 3 points below the price set on July 31st.
- “Beginning on Saturday, December 12, 1914, dealings in certain specified stocks listed on the Exchange will be permitted on the floor of the Exchange between the hours of ten and three o’clock each day except Saturday, when dealings shall cease at twelve o’clock noon.”
- “Dealings in such stocks as shall be specified by, and be under the supervision and regulation of the Committee, shall be for ‘cash’ or ‘regular way’ only and not below the minimum prices authorized by the Committee from time to time. Transactions at prices below those allowed by the Committee, or in evasion of its rules are prohibited.”
- “All stocks quoted on July 30th at or below 15 percent., or $15 per share, may be dealt in without restriction as to price, but are included in the list for your guidance, and will be marked ‘Free’ in the price column.”
- “All stocks admitted to dealings as above, which were being cleared through the Stock Exchange Clearing House at the close of business on July 30, 1914, will be similarly cleared from the opening of business on the 12th day of December, 1914.”
- “The Loan Market for stocks will reopen open at ten o’clock, A.M. on the 12th day of December, 1914, for such stocks only as are admitted to dealings on the Exchange, from and after which date all rules of the Exchange governing the borrowing and loaning of such stocks shall be in force, but the closing of contracts ‘Under the Rule’ shall be subject to the foregoing provisions.”
- December 12 – NYSE opens trading in a select list of stocks.
- December 14 – The Clearing House reported to the Special Commitee that the volume of trading in stocks not permitted to trade on the NYSE floor had risen significantly on December 12. The Commitee ruled to open restricted trading to all stocks on the exchange floor the next day.
- December 15 – NYSE opens restricted trading to all stocks. The minimum prices set for stocks remained and was adjusted as needed as a check on sudden panics and to avoid the possibility of closing the exchange again.
- December 15 – “The Special Committee of Five beg leave to report that in as much as the crisis that existed on July 31st, 1914, has passed, and financial affairs in this country have resumed a practically normal condition, the necessity for the Committee’s continuance no longer exists and hence they request to be discharged. Before being discharged they desire to express their appreciation of the trust and confidence placed in them by the Governing Committee.”
- April 1, 1915 – NYSE opened to unrestricted trading. Minimum price restrictions were lifted.