For the Defense

It is one thing when country editors yammer about the iniquities of Wall Street. It is quite another thing when, with bond prices following stocks down the long declivity of Depression,* such influential people as the Republican leader of the U. S. Senate publicly play with the idea of regulating the New York Stock Exchange by law (TIME, Oct. 12).

Last week the Exchange's official voice, which nowadays comes out of the mouth of tall, plump, slick-black-haired President Richard Whitney, was heard in formal defense of that Exchange practice which has fired hottest current criticism: Short Selling.

During the long bull market, the New York Stock Exchange became a focus of interest to tens of thousands of new small investors and speculators all over the land. Since taking over the presidency from Edward Henry Harriman Simmons in 1930, Mr. Whitney has not had time to travel so far & wide through the land making speeches as did his predecessor (only eight formal speeches in 16 months). But had he spoken last week in Houston or Minneapolis, Atlanta or Detroit, Denver, Seattle or San Francisco, he would have had thoroughly attentive audiences. The place where he did speak was in rock-ribbed Hartford, Conn., rich and conservative insurance and banking city. The gentlemen of the Chamber of Commerce who sat before him in the auditorium of the Hartford Club represented a body of investors upon whose good opinion the welfare of New York stockbrokers depends heavily.

Stockbroker Whitney began carefully, quietly with the fundamentals and definitions of his subject. ("A short sale is nothing but a contract to deliver stock in the future.") He quoted the historic decision of the Supreme Court of the U. S., written by Liberal Associate Justice Oliver Wendell Holmes in 1905: "People will endeavor to forecast the future and to make agreements according to their prophecy. Speculation of this kind by competent men is the self-adjustment of society to the probable. . . . This court has upheld sales of stock for future delivery."

Then Broker Whitney rehearsed the practical value of short selling: it was a cushion under any market, since every short seller was a potential buyer. "This is especially true in times of crisis when other people hesitate to buy and the short sellers represent the purchasing power which prevents the market from becoming demoralized."

Then came some news. Taking up the situation of the Stock Exchange in the past few months. President Whitney produced Exchange figures never before made public, gave the actual size of the short interest. On May 25 it amounted to 5,589,000 shares, declined abruptly after the Hoover debt moratorium, rose to 4,480,000 shares on Sept. 11, stood at only 4,241,000 on Sept. 18. At its peak in May the short interest was .4% of the 1,305,516,000 shares listed on the Exchange. The long account carried by brokers on the same date was estimated at 59,000,000 shares or 10^ times the short account. These long accounts were the immediate selling threat in the market, the short account the only compulsory buying power.

This was the situation on Sept. 21 when the Governing Committee of the Exchange met at 9:15 a. m. to consider what steps to take. England had abandoned the gold standard, every Exchange in Europe had closed except the Paris Bourse (TIME, Sept. 28). Two tried courses were open to the Governors: i) to close the Exchange (as was done for a few days in 1873, again for several months in 1914), or 2) to establish minimum prices--a course which had worked well on the reopening of the Exchange in the autumn of the War year. Neither suited the emergency of last month. The Governors decided on a third expedient never before tried in the history of the Exchange. Short-selling was forbidden.

This immediately had the expected effect of bringing into play the 4,241,000-share short interest which rushed in to cover its commitments. Prices rebounded. But in the following days the Governors watched the exhaustion of the short interest with alarm. In two days it decreased 1.079,000 shares. On Sept. 23 it was deemed essential to remove the restrictions, again permit short-selling, create a source of buying power. Although this was done the short interest did not increase rapidly enough to offset real liquidation. Prices declined sharply until Oct. 5 but the Exchange held its ground, made no further move.

President Whitney closed his speech with some remarks on the unpopular "bear raider.'' He denned this species as one who sells stock "not because he believes the stock is too high, but because he believes that by selling quickly and in great volume he can force the price to decline." Stung by the accusation that "bear raiders" were responsible for the last decline in the market Mr. Whitney gave figures to disprove it. On Sept. 21 the short interest of 3,697,000 shares was held in 9.369 accounts, averaged 400 shares each. "Transactions of the vast majority of these people," he said, "could not by any stretch of the imagination be called 'bear raiding.' . . . The exchange is absolutely opposed to 'bear raiding' and has used and will continue to use all of its power to stop this practice."

* Suspended from the New York Stock Exchange last week for insolvency was Kountze Bros. 61-year-old conservative stock & bond firm. Of 1.3 Exchange members to fail in the past two years, Kountze Bros, was first to place the blame squarely on the declining bond market.

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