The law failed of its purpose. Few persons reg istered. The small fry evaded it. Foreign brokers flocked to Berlin and established agencies for the pur chase and sale of stocks in London, Paris, Amsterdam and New York. This resulted in the transfer of Ger man capital to foreign markets, the passing into in significance of the Berlin Exchange, and a general impairment of the financial standing of Germany.
Another defect in the law was found in the pro vision which required bankers and brokers to register, but which did not compel their customers to do so. As a result, the latter, thru different brokers, could speculate on both sides of the market, pocketing profits and "welshing" on losses. Men who had previously borne good reputations in numerous instances fell a prey to this temptation.
Still another defect in the law resulted in turning over to large banks much of the business previously done by independent houses. Persons wishing to make speculative investments in home securities ap plied directly to the banks, depositing satisfactory se curities for their purchases. The banks, being largely promoters of new enterprises, could sell the securities to their depositors and thus finance enterprises with the deposits. In good times this business was profit able and safe, but since the claims of depositors were payable on demand, the practice in times of stringency was dangerous. As in the previous instance the law tended to encourage fraudulent practices since custo mers whose names were not on public register, could, if their speculation turned out badly, reclaim the col lateral or cash which they deposited as security.
In 1908, the law was partially repealed by another law which gave the government discretionary power to authorize speculative transactions in industrial and mining securities of companies capitalized at not under $5,000,000. The law also abolished the Stock Ex change Register and declared that all persons whose names were in the "Handelsregister" (commercial di rectory) , as well as all persons who dealt in securities, were legally bound by contracts made by them upon the Exchange. Furthermore, thy' law provided that while other persons were not bound by such contracts, yet on making deposits of cash or collateral security for speculative contracts, they could not reclaim them on the plea that the contract was illegal.
Germany still prohibits short selling in grain and flour. The effect, however, was different from what the supporters of this prohibition had anticipated. Without open markets and .without continuous quo tations, both buyers and sellers are placed at a disad vantage while prices fluctuate more than before the passage of the law.
17. Why the German law failed.—Dr. Henry C. Emery commented on the repeal of the law before the Senate Committee on Banking and Currency, February 11, and explained why it was inef fectual in carrying out its intended purpose. In his testimony he introduced the following quotation from an earlier statement on his part: (1) Fluctuations in prices have been increased rather than diminished. The corrective influence of the bear side
of the market having been restricted, the tendency to an in flated bull movement 'was increased in times of prosperity. This in turn made the danger of radical collapse all the greater in proportion as the, bull movement was abnormal. The greater funds needed to carry stocks on a cash basis further increased the-danger when collapse was threatened. The result was an increased incentive to reckless speculation and manipulation. Says the report of 1907: "The dan gers of speculation have been increased, the power of the market to resist one-sided movements has been weakened, and the possibilities of missing inside information have been en larged." (2) The money market has been increasingly demoralized thru the greater fluctuations in demand for funds to carry speculative cash accounts. The New York method is held in abhorrence by German financiers, who attribute to it in large part the wild fluctuations in New York call rates, the frequent "money panics," and the tendency to reckless "job bery." In proportion as the new Berlin methods ap proached the cash delivery system of New York, these evils have appeared there.
(3) The business of the great banks has been increased at the expense of their smaller rivals. The prohibition of trading for the account made it difficult for the latter to carry out customers' orders, because the new methods re quired large supplies of both cash and securities. Further more, an increasing share of the business of the large banks came to be settled by offsets among their customers, and the actual exchange transactions became a proportionately small part of the total transfers.
(4) This has a twofold effect. Business within the banks is done on the basis of exchange prices, but these became more fluctuating and subject to manipulation as the quantity of exchange dealings were diminished and were concentrated in a few hands. The advantages of a broad open market were lost. The object of the act had been to lessen the spec ulative influence over industrial undertakings. Its effect was to increase it.
(5) Finally, the effect of interference, increased cost, and legal uncertainty was to drive business to foreign exchanges and diminish the power of the Berlin Exchange in the field of international finance. The number of agencies, of foreign houses increased four or five fold, and much German capital flowed to other centers, especially London, for investment or speculation. This in turn weakened the power of the Berlin money market, so that even the Reichsbank has at times felt its serious effects.' 18. is apparent that thus far laws to suppress speculation have been failures. The Cotton Futures Act of 1915, the most recent law to regulate speculation, as explained in Chapter XVI is in no sense prohibitive, but it is designed to abolish certain purely technical abuses. Further legislation is more likely to take a similar form than to at tempt any general suppression of speculation as a whole.