New Street attered McAdoo in August 1914 by advertising the absence of a stock market crash. McAdoo allowed New Street to ourish and permitted the New York Stock Exchange to defend itself through the Clearing House.
Did New Street and the Clearing House open the alley door for European access to American gold?
European investors would have preferred to sell their securities at the Clearing House, under the imprimatur of the New York Stock Exchange, but they could not ignore New Street. Potential buyers of stock migrated to New Street when prices in the street fell below the July 30 minimum permitted at the Clearing House. The well-known contemporary Yale economist, Irving Fisher, commented on the mounting pressure from both markets: “The closure of the stock exchange … cannot completely or permanently prevent the transactions which so many people on both sides are anxious to consummate.
Curb markets and limited cash sales on the exchanges themselves are doing some of this business, and sooner or later, much more will be done whether the exchanges are open or not.”470
A comparison of the combined trading volume on New Street and the Clearing House with trading on the New York Stock Exchange prior to July 30 provides a rough estimate of the e ectiveness of McAdoo’s trading ban.
The New York Times Financial Review of 1914 estimated that New Street traded a maximum of 40,000 shares during the busiest days in October.471 The Times also reported that “as many as 30,000 shares were handled on the busiest days” in the Clearing House.472 We know from Henry Noble’s description of the competition between the two trading venues that New Street’s business shriveled when the Clearing House ourished and vice versa.
Thus total trading volume even on the busiest days never exceeded 40,000 shares.
During the entire month of July 1914 the New York Stock Exchange traded an average of 250,000 shares per day.473 Daily volume soared to 894,000 shares during the last week of the month, when war fever agitated investors. How many shares would have traded per day had the New York
Stock Exchange conducted business as usual after July 31? Pent-up trading interest from every stock exchange in the world would have swelled New York Stock Exchange volume. The July average of 250,000 shares per day is a minimum estimate of the trading that would have taken place on the New York Stock Exchange. Thus McAdoo’s closure of the New York Stock Exchange cut trading from a minimum of 250,000 shares to a maximum of 40,000 shares. Trading after July 31 fell to less than one-sixth of what it would have been.
How much gold could have gone abroad if the New York Stock Exchange had remained open? No formal estimates connect stock trading directly with gold out ows, but a suggestive calculation provides an idea of the magnitudes involved. Approximately 20 percent of American railroad securities, the largest category of publicly traded securities, were held by foreign investors in 1914.474 Applying that fraction to the minimum estimate of 250,000 shares of daily trading on the New York Stock Exchange means that at least 50,000 shares would have been traded by foreign investors each day. If all of those foreign transactions after July 31 represented Europeans liquidating their American securities, the sales would have generated dollar proceeds of approximately $3,100,000 per day and $74,400,000 per month.*
These dollars could have all been presented at local New York banks with a polite but firm demand for specie.
How much gold did New Street and the Clearing House actually provide to Europeans? Trading in these makeshift markets was at most onesixth the NYSE gures. If foreign investors sold the same 20 percent of the total volume, the actual proceeds to overseas investors on New Street and the Clearing House amounted to $516,666 per day and $12,400,000 per month.
Thus McAdoo’s policy of shutting the New York Stock Exchange avoided a potential gold out ow of $62 million per month ($74.4 million minus $12.4 million). Between August and October the out ow would have totaled $186 million. New York City banks held $308 million in gold in August 1914.475
Avoiding $62 million in gold out ows per month justi es McAdoo’s decision to close the exchange, but the total could have been even larger.
Sales by foreign investors could have easily surpassed $74 million per month had the exchange remained open and Europeans probably sold fewer than
$12 million on New Street and the Clearing House. Foreign selling would have exceeded $74 million because it would have totaled more than 20 percent of trading volume. The New York Times reported on August 2: “It was estimated by foreign stock exchange houses that from $100 million to $150 million worth of American stocks and bonds were thrown on the market [last week] for whatever they would bring by European investors.”476 The $100 million estimate of stock sales by Europeans translates into 45 percent of total shares traded during the last week of July.477 Actual sales by Europeans on New Street were probably less than $12 million because foreigners accounted for less than 20 percent of the volume. New York Stock Exchange
members that normally handled foreign business were precluded from trading on New Street.
Gold exports did not disappear after the war began. The out ows of $15 million in August and $19 million in September were large by historical standards.478 The $44.4 million drain in October was the largest monthly drain since 1900. McAdoo knew those out ows would have been much greater had he not padlocked the New York Stock Exchange on July 31, 1914.
But closing the exchange did not solve the problem of how American debtors would pay the gold that was coming to British and French investors.
* Noyes (1916, 94) put gold reserves in New York banks at $308 million in August 1914. Five percent of $3 billion is $150 million. The burden of gold out ows would fall primarily on New York banks according to the memo by Benjamin Strong, Albert Wiggin, and James Brown (November 2, 1914, Board of Governors, Central Subject File, 1913–1954, box 1470, National Archives II, College Park, Maryland).
* New Street, in fact, provided economically meaningful liquidity services to investors (see Silber 2005).
* Neither Edward F. Breen nor Beekman Underhill belonged to the New York Stock Exchange. Breen applied for membership at the exchange in 1922 but his meeting before the Committee on Admissions was canceled on June 8, 1922. No explanation was given for the cancellation, but given the “clubby” nature of the exchange, it would not be surprising if Breen’s price quotations for New Street worked against his admission prospects.
* Price movements in the indexes are all relative to the July 30 close. The indexes were constructed from an equally weighted average of the returns on stocks that were traded on New Street. Prices on New Street came from the New York Stock Exchange Archives and the Morning Telegraph. Nine of the twelve industrial stocks and nineteen of the twenty railroad stocks were quoted on New Street.
* The two-day return on the railroad index is minus 1.52 percent. The daily standard deviation of returns on New Street between August 25 and October 28 equals .355 percent, implying a two-day standard deviation of returns equal to .502 percent. The t- statistic of the two-day return equals 3.03. The two-day return on the industrials is minus 1.33 percent. The daily standard deviation is .402 percent and the two-day standard deviation is .5685 percent. The t-statistic of the two-day return is 2.34.
* Shares are translated into dollars using the $62 average price of the seventy securities quoted on New Street. Daily numbers are translated into monthly gures assuming 24 trading days per month (the New York Stock Exchange closed only on Sunday).