A closing-up of the market, the refusal of investors to purchase, is a common, periodic phenomenon, which becomes particularly acute in London. It takes place whenever investors generally think the present is not a good time to buy. If an investment mer chant fails to foresee its coming, he has to carry a heavy burden of securities that he cannot sell. Security selling differs from other selling in that purchasers are under less pressure to buy. People must eat — must buy from the grocer. Clothes wear out and the tailor must be seen. No such necessities help the seller of securities. Capital can linger in the bank for months, until enticed by lower prices or driven out by fear of higher.
Any one not familiar with the facts would infer that an investment merchant's great est difficulty is in finding securities to buy. That is not the case. Goods are pressed on him as on any other merchant. Day after day promoters, new and old, cool their heels in his anteroom. Out of the many things offered him, which is the best for his clients? Which is most likely from subsequent suc cess to enlarge his reputation as a merchant and further that confidence forming the very life of his business? A corporation manager without an established connection with some security-selling house is likely to have a weary time when he wants to place an issue. His securities may be good and in every way merit confidence. But the pressure to get access to the capital supply is enormous. A given merchant may much desire to take on the business, but he is already so largely committed that he could not sell any more securities if he should buy them. The cor poration manager may have to visit many merchants and wait a long time before he can find a buyer. This situation does not arise through any unfair discrimination. The capital supply is a very limited one. The capital demand exceeds it and absorbs it as the sand of the desert absorbs rain.
Contrary to the general idea, the busi ness of investment banking is highly com petitive. This results from the comparative ease with which the investment banker may borrow a large part of his capital for certain kinds of transactions. Probably he does not stand in any better position in this respect than does the merchant in fairly standard commodities, who can do business from rented offices and salesrooms and borrow money with which to carry his merchandise. He does occupy a better position than most manufacturers, who, to be sure, may be able to finance their commodity in the case of production readily enough, but who must usually have a large capital invested in plant, on which they can borrow, and that with difficulty, perhaps one third.
As we have seen, a capital of $50,000 used in the purchase and sale of securities fulfills the capital requirement for membership in the national organization of the Investment Bankers' Association. Though so small a
capital will limit the classes of business a new organization can engage in, it will enable men with the necessary professional experi ence to enter the business on their own ac count. Constantly men who have acquired the training in one of the older houses organ ize their own houses and start in for them selves. If a man has demonstrated his abil ity to place securities, — that is, to induce investors to commit their capital to the par titular enterprises whose securities he has to sell, and has proved himself a success in this branch of the business, — even though he has no capital himself, he may be able to persuade some one with capital to join him in organizing a new banking house. He has established a clientele. Some of his clients have dealt with him mainly because of the house he represented, but many, and very likely the much larger number, have dealt with him because of personal liking or be cause of personal confidence in him. Such a connection is a valuable asset for the new house and the nucleus for the most valuable asset of any house, — a well-established cli entele, a list of capitalists who do most and perhaps all of their investing through the house.
Some of the older banking houses have become parents in this way of several new banking houses, in one case of possibly a score. The general process is no different from the process in other kinds of business, but easier than in some, and the relative ease of the starting of new organizations makes the competition for the good-will of capitalists very keen and extends the num ber of organizations to which a corporation may appeal when in need of new funds for the capital account.
Referring especially to the relationship between the banking houses and the corpora tions, accusations have been made in recent years of a money trust. In these charges it has been said that corporations could pro cure funds only through the good-will of cer tain financial interests and, if these interests were not well disposed, the corporation could not get help anywhere. It is true that the cap ital requirements of some of our largest cor porations are so great that probably only one or two banking houses, or groups of finan cial interests, have the financial strength to handle them, and the corporation there fore cannot be financed without the assist ance of one of these financial groups. A concentration of control over capital has been necessary to meet the magnitude of the requirements of modern business. If any smaller enterprise were likely to be a thorn in the flesh of one of these big business under takings, the banking connections of these undertakings perhaps might make it diffi cult for the smaller enterprise to get finan cial backing. Business is competitive and the methods of competition extend into the financial as well as into other business fields.