who gets the money?

University of Northern Iowa

Who Gets the Money?Author(s): Lewis H. HaneySource: The North American Review, Vol. 229, No. 1 (Jan., 1930), pp. 59-64Published by: University of Northern IowaStable URL: http://www.jstor.org/stable/25110924 .

Accessed: 16/06/2014 13:44

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

University of Northern Iowa is collaborating with JSTOR to digitize, preserve and extend access to The NorthAmerican Review.

http://www.jstor.org

This content downloaded from 91.229.229.129 on Mon, 16 Jun 2014 13:44:13 PMAll use subject to JSTOR Terms and Conditions

http://www.jstor.org/action/showPublisher?publisherCode=uni

http://www.jstor.org/stable/25110924?origin=JSTOR-pdf

http://www.jstor.org/page/info/about/policies/terms.jsp


Who Gets the Money? By Lewis H. Haney

An economist's answer to the question asked by non-professional

speculators when the crash of the bull market con

verted big profits into losses

As stock market "values"

Z=\ crumble during the process ? -?*- of a great liquidation, the

question always arises in the ob

server's mind, "Where does the

money go?" What becomes of the "values" that are built up during

a

bull market, and who gets the billions of dollars that have been poured into the market by speculators and in

vestors?

During the great cycles that char

acterize the course of the stock

market during the years, the total

value of listed stocks rises and falls.

This is due partly to the rise and fall of price quotations for the originally listed stocks, and partly to new list

ings, both of additional shares issued

by the original companies and of the shares of new companies. For ex

ample, at the bottom of the abortive

stock market recession of 1926, an

index of the prices of over 400 listed shares stood at 100. At the top of

the bull market in August, 1929, this index had increased to 245, a rise of

145 per cent. During the same period of over three years, the number of

shares listed on the New York Stock

Exchange increased from 513,000,

ooo, to 1,006,000,000, an increase of

94 per cent. The total market value

of all stocks listed on the New York Stock Exchange at the beginning of the period was approximately $32, 270,000,000. In August, 1929, this

total "value" had risen to $89,668, 000,000, which represents a gain of

178 per cent.

It

is thus apparent that in this, as

in all other cycles, the enormous

swelling of "paper value" that oc

curs lies chiefly in the prices at which stocks are bought and sold, although a considerable part of it is due to the increased number of

shares listed.

By November 11, 1929, the index

of stock prices had fallen back about

40 per cent, and in number of

"points" was more than half way down to the level from which it started in 1926. The total value of

listed shares had decreased during September and October by more than

$20,000,000,000. Incidentally, the

number of shares listed had then become stationary, and probably will be somewhat reduced through failures and reorganizations.



6o THE NORTH AMERICAN REVIEW

What has become of the increase in total market value that amounted to over $57,000,000,000?

If one could conceive of a situa

tion in which a single person of enormous means were to hold all the

stock, and in which there were no

new shares issued, the result of the

process would be clear. This would be

particularly true if we were to leave

the stock brokers and the army of Wall Street retainers out of consider

ation. Under such circumstances, the

mythical holder of stocks would see values rise and then fall, leaving his holdings worth much the same at the end as they were at the

beginning.

But the foregoing is far from being

a true picture. Instead of there

being but one great investor or spec ulator, there are, in fact, many thou sands. Instead of maintaining an

unchanged position throughout the

stock market cycle, these thousands of persons commonly pyramid their

holdings as the market rises, "rein

vesting" their paper profits in in

creased holdings. Moreover, the num

ber of persons involved in the stock

market varies widely during the

progress of the cycle, always increas

ing greatly near the top and falling to a minimum at the end, when prices are low. Finally, we must make al

lowance for the whole stock market

mechanism. "Wall Street," with its

army of brokers and financial middle

men, must be maintained. No incon

siderable part of the billions poured into the stock market is required for

this purpose. Let us consider each one of these factors.

The hundreds of thousands of per sons who buy and sell stocks consist

of investors and speculators, "in

siders" and "the public," bulls and bears

? the wise and the foolish.

Inevitably in the course of the ac

tions and reactions that occur, there

is a great process of redistribution of

wealth. In the ascending phase of the

market A sells to B, B to C, and C to D, each one either retiring with a

realized profit, or reinvesting his

winnings in the hope of further gains. At the same time, X and Y, who are

"bears," sell short and generally lose. Now the market cycle enters its

downward phase. D sells to E, E to

F, and F to G, each liquidating his

holdings at a loss. X, Y, and Z, the

bears, sell short and win, perhaps more than they lost earlier in the

game. (Probably we would be sur

prised if we knew how much of the

profits of the bears is offset by their losses due to going short too soon ?

"feeling for the top" ? or staying

short too long; and I am reliably informed of one trader, in October,

who took a profit of $5,000,000 on

the short side only to lose almost

exactly the same amount by turning around and buying for an advance

that did not come.)

Avague

idea seems to prevail that . some reassurance as to stock

market losses may be derived from

the fact that every sale of stock means a purchase. We are told that

for every seller there must be a buyer, as if that were a comforting fact. But

is this fact comforting to the buyer in a declining market? Sellers and buy ers of stocks are not distinct groups.

Most speculators buy to sell, and

sell to buy. In a declining market

each buyer confronts paper losses

and a final losing cash transaction.



WHO GETS THE MONEY? 61

We can not assume that buyers all

make profits. From all this jumble of trans

actions, one fact emerges, namely, that at least as much money is lost as is won, and that the shrewd and

experienced traders, who are almost

certainly in the minority, get a large part of the money advanced by those who are not shrewd and experienced. Thus, even if the total rise and fall in value are about equal and total

winnings equal total losses, there is none the less a great shifting of

wealth from one set of individuals to another.

The process of "pyramiding" em

phasizes this fact. Whether it be due to greed or the gambling instinct, it is a fact that as a speculative boom

gains momentum the practice of

"reinvesting" paper profits grows. As soon as the speculator sees a con

siderable increase in his equities at the broker's, he increases his holdings.

As his stocks rise in price he borrows more money. This adds greatly to the momentum of the market. Also it

increases the holdings of the rasher

speculative element.

In

the recent bull market, this

tendency was emphasized by the

practice of the trading companies, too often called "investment trusts,"

which constantly increased their

purchases as paper profits developed. Another phase of pyramiding is

found in the large issues of new stocks made by corporations in the later

stages of a bull market, when they can be sold at high prices. The funds secured by such new issues are to no

small extent put into the call loan

market. They thus pass into the

borrowings of brokers and are used

to finance margin speculators in

the purchase of securities ?

perhaps the very stocks that were issued to

raise the funds so used. Without

further discussion, it is obvious that

speculators become more deeply in

volved as the market approaches its

peak.

This suggests the fact that the

number of persons who buy stocks grows larger as the market

rises, which is a well-known phenom enon.

Corporation statistics show

that the number of stockholders rises

and falls during the cycle, reaching a

maximum near the top of the bull

market. Common observation tells us that office boys, chauffeurs, and, in short, the mass of the people are

drawn into the market near the top. The number of accounts in brokers'

offices shows the same thing. One

brokerage house a month ago had

1,400 trading accounts; it now has 100. The enormous rise in volume of

trading is further evidence, and

the fact that the stock market be comes front page news in the tab

loids is proof. The significance of this increase

in the number of speculators is

great. It means that more people buy stocks at high prices than at low

prices. In a word, it means that the

majority lose. There is evidence to the effect that more than 95 per cent

of the accounts of some brokerage houses are wiped out in the course of a

three-year period.

Finally, there is the machinery of

the stock market. Many millions of

dollars go to brokers as commissions.

Call loans to brokers and dealers

have amounted to over $8,000,000, 000, and interest rates to 15 per cent,



62 THE NORTH AMERICAN REVIEW

which means that enormous sums go to banks and others who lend money to finance the game. Then there are

promoters, underwriters, and dis

tributors of securities, no one of

whom is operating for his health. The advertising bill is enormous.

In short, the speculators' carrying

charges and the overhead burden of

the financial mechanism absorb an

unknown but large fraction of the

money. Here, too, we might mention the

waste, errors, and frauds that attend

the process.

hat is the result? Obviously, a few gain; many lose. As I

visualize the situation, the money

put into the stock market largely goes to the following:

(i) Wise investors who buy cheap and sell dear.

(2) The few speculators, both bulls and bears, who cash in their win

nings and retire from the market.

(3) Corporations which issue new

stock, split-ups, rights, etc. (generally near the top of bull markets) ; either (a) new enterprises or (b) established

companies. (4) Banks and others who lend

money to brokers and dealers, getting

high rates of interest.

(5) Profits, salaries, and interest

for the Wall Street army with its thousands of brokerage and financial

houses.

Of course, a part of the process involves no actual transfer of money,

namely, the rise and fall of paper values. For example, many specula tors see large paper profits appear and then vanish. Doubtless the total

fluctuations in such paper values amount to billions of dollars. To the

w

extent that the liquidation process consists of a washing out of such val

ues, no direct injury results; but un

fortunately the paper gains and

losses are but the foam of the specu lative wave, and are connected in

many ways with gains and losses of

actual funds. If it were not for the cost of operat

ing Wall Street, it would probably be fair to conclude that, if the total

value of listed stock were to fall at the end of a cycle to the same level

that existed at the beginning, the total gains and losses would be ap

proximately equal. If the declining phase of the cycle did not carry to as

low a level as that from which it

began, the total loss would probably be less than the total gain; while if the cycle ended lower than at the

beginning the opposite would be true. In view of the fact, however, that the enormous overhead burden

of maintaining the whole financial

mechanism centring in the stock

market must be borne by the money

put in by speculators and investors, it seems clear that on the average the

total of the gains to be made must be

less than the total of the losses. In

short, a considerable part of the

funds utilized are lost to the speculat

ing public through the friction of the

machinery.

One thing is absolutely certain,

namely, that regardless of the

relative amount of the total losses

and gains there are many more indi

viduals who lose money than there

are who win. Wealth is redistributed.

Here, it is well to remember that

people of all classes speculate, and

lose money. (Incidentally, too, we

may note that stocks of all classes are



WHO GETS THE MONEY? 63

affected by speculation, and that losses through declines in the prices of American Telephone and Tele

graph, American Can, General Elec

tric, and United States Steel, are

probably as heavy as in the case

of less sound issues.) Among those drawn into the stock market, we find the rich and the poor. Business men,

professional men, and laborers, both men and women, participate. It is

highly probable that the total of the individual losses of wealthy or well to-do persons

? wealthy, in part,

as a result of temporary gains during the rising phase of the market

?

greatly exceed the total losses of the

salaried and wage-earning classes. But the number of persons of moder ate means is so much greater, and their individual injuries so much

more serious, that their plight is

probably the worse. Moreover, the

losses of the poor and moderately well-to-do persons affect the pur

chasing power of the public more than those of the wealthy few. Such

persons spend a larger percentage of

their incomes for food, clothing and

commodities of all kinds, and they constitute the bulk of the market for

merchandise.

One

must reflect that the savings of the many are wiped out or

greatly reduced during stock market

recessions. During the course of the

past year, it became apparent that

the accumulation of savings in sav

ings banks was being retarded. Now we learn that during the year ended in June, 1929, total savings bank

accounts in this country decreased

by the amount of $196,305,000. This

is the first decrease that has occurred in twenty years. It is true that this

decrease represents an average of

only $2 for each individual account, but more significant, perhaps, is the fact that the number of individual

depositors was smaller by 524,221 at the end of the year than it was at

the beginning. There can be no ques tion that half a million savings bank

depositors lost much of their savings,

largely on account of speculation.

As

to society, the appraisal is some

L what different. From the social

point of view, we consider a period

of time that is greater than the life of any individual, and must include in our appraisal other than money

values. From this point of view, we

may put as one of the chief gains the fact that bull markets enable

corporations to increase their capital by selling securities to an aroused

speculative public. New enterprises, too, are more readily financed in such

periods, and it is not improbable that society is thus enabled to raise

funds for conducting business ex

periments that would otherwise be

impossible. Certainly many mergers are facilitated and some of these are

socially desirable. A cold-blooded

philosophy would add that as a result of stock market cycles with their

redistribution of wealth, efficiency is furthered through the process of survival, that is, money accumulates

in the most competent hands.

On the other hand, the social losses are considerable. First, I would

put the wastes and stress of fluctua

tions. The alternate expansions and

contractions of credit involve great costs of adjustment and readjust

ment. The disturbance of business

is great and wasteful. In fact, stock market cycles are partly responsible



64 THE NORTH AMERICAN REVIEW

for business cycles, and business

cycles as we know them now are al

most certainly economically unde

sirable. A great bull market, with its inevitable sequel, does much harm

by diverting the attention and the

time of business men, both the

management and the employees, from their jobs. There is a tendency to run the business with reference to the market. Over-expansion is

encouraged. Uneconomical mergers and controls are stimulated. Unsound

capital structures are built up,

partly through over-capitalization and partly through unwise shifting from bonds to stocks. Business profits become entangled with the market

through the growing practice of investment in securities which alter

nately bring adventitious profits and

losses to corporations from non

operating sources.

Then, too, there is the terrible

burden of worry that afflicts hun

dreds of thousands of homes through out the country, not one millionth

of which is illustrated by the suicides and embezzlements of which we read.

Other intangible losses come through wasteful and luxurious living and

through the stimulus to the gambling instinct. We can not measure it,

but few will deny that a very un

desirable aspect of stock market booms is the encouragement they

give to thousands of people who de

sire to live without work.

All this is merely suggestive. It would take a volume to discuss the

intangible values of speculative cy cles. We can say only that, while the

total money losses in the course of a

stock market cycle may not exceed

the total money gains (including the incomes of brokers, financial middle

men, and their employes), the num

ber of individuals who suffer is so

great and the disturbance to business

is so serious, that it seems probable that society as a whole is more

injured than benefitted by specula tion as now practised in the United

States.

Regardless of gains and losses, the

stock market and speculation of a

sort are both necessary and advan

tageous. Without them, business and

industry and the valuable material

development of the age would be

impossible, and it follows that wages and profits of the Wall Street army are truly earned. The trouble lies not

so much in the machinery as in the

way the machinery is used. It badly needs a

"governor."

r ~c



who gets the money?

Documents