Tape 87 - The martin report on the New York Stock Exchange

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-	Welcome once again as MIT Professor Paul Samuelson	0:02
	discusses the current economic scene.	0:05
	This biweekly series is produced	0:07
	by Instructional Dynamics Incorporated	0:09
	and was recorded October 18th, 1971.	0:11
-	I have a question that has been addressed to me	0:16
	by one of our subscribers,	0:18
	which I should have answered or tried to answer	0:20
	a long time ago, but the economic news	0:22
	has been coming in so fast and furiously	0:25
	that I haven't had a chance to sit back	0:27
	and contemplate some of the longer run issues	0:31
	that do confront the American economy.	0:34
	The specific question that I've been asked is	0:37
	what is my opinion about the Martin Report	0:42
	concerning the future of the New York Stock Exchange	0:49
	and markets in America generally?	0:52
	William McChesney Martin, Jr. is, of course,	0:57
	a very distinguished man.	1:02
	He's the retired chairman of the Board of Governors	1:03
	of the Federal Reserve System.	1:06
	He was appointed to that board by President Truman	1:09
	but Mr. Martin has always been known	1:15
	as a non-partisan person who enjoys a great deal of prestige	1:19
	in this country and abroad.	1:25
	His father, as I recall,	1:27
	was president of the Federal Reserve Bank	1:30
	of St. Louis at one time.	1:32
	Mr. Martin went to Yale	1:35
	and gathered great fame for himself	1:39
	as the first paid chairman of the New York Stock Exchange,	1:41
	as I recall, at an extraordinarily young age.	1:47
	Indeed, the newspapers carried pictures showing him	1:51
	going into the Army in World War II	1:56
	indicating how young a man he was for being head	2:00
	of the New York Stock Exchange.	2:04
	He did a great job at the New York Stock Exchange	2:06
	at a time when it needed new blood	2:09
	and when it needed to reform itself in some measure	2:12
	because of the bad repute that the New York Stock Exchange	2:16
	had fallen into as a result of the Great Depression.	2:21
	I won't rehash the Richard Whitney peccadilloes	2:25
	and the mere fact that so many American people	2:28
	lost so much money in common stocks	2:31
	during the Great Depression	2:34
	made Wall Street an object of suspicion	2:35
	to the American people.	2:40
	At the Board of Governors of the Federal Reserve	2:46
	Mr. Martin proved to be a very pragmatic person.	2:49
	Very rarely did the Board vote by majority vote	2:55
	in a way different from the vote of Mr. Martin.	3:00
	Perhaps there was never a case.	3:04
	This is not because of the fact that as chairman	3:06
	he is able to swing a whip	3:10
	and make the rest of the members	3:13
	of the open market committee swing into line	3:15
	but it's because he is a very compromising,	3:18
	pragmatic person who can listen to all the arguments,	3:22
	outwait all the opposition it is sometimes said.	3:27
	And furthermore, he generally discerns	3:32
	where the consensus lies	3:37
	and where the consensus lies	3:38
	is where Mr. Martin can ordinarily be found to be.	3:40
	When he retired from the Board of Governors	3:45
	of the Federal Reserve System,	3:48
	I wrote a congratulatory column in Newsweek	3:50
	mentioning how much the country owes to Mr. Martin.	3:58
	This despite the fact that I like many other	4:04
	American economists have found a great deal	4:09
	to criticize over the years	4:11
	in the policies of the Federal Reserve,	4:13
	particularly in the policies in the late 1950s	4:16
	when Chairman Martin was most in dominance	4:20
	within the Federal Reserve System.	4:26
	Let it be said for objectivity that many of the things	4:30
	for which I have criticized Chairman Martin	4:35
	are exactly the opposite of the criticisms	4:39
	that he's been getting from some people elsewhere	4:42
	and he may be very well content	4:45
	as a pragmatic, compromising man	4:47
	to have a barrage of criticism from both sides.	4:50
	In any case, full in years but by no means an old man.	4:53
	He's a very vigorous tennis player.	4:58
	He has a passion for the theater.	5:01
	Chairman Martin retired.	5:05
	He has I believe served on a number of	5:08
	boards of directorships.	5:12
	He is a man of independence.	5:15
	He doesn't have to sell his soul to any interest.	5:20
	Consequently, we all hailed the choice	5:26
	of William McChesney Martin, Jr.	5:31
	by the Stock Exchange to make an investigation	5:34
	and an informal report.	5:39
	I think the report is to the Stock Exchange itself,	5:41
	if I recall correctly.	5:43
	Mr. Martin accepted no remuneration	5:46
	for performing this important public service.	5:51
	He did not have the power of law	5:56
	to subpoena any witnesses or documents	5:59
	but I think it's fair to say that any help which he wanted	6:03
	from people in the street was tendered to him	6:09
	and he took his time about writing the report	6:15
	so this is an important document.	6:19
	Now, the reason that my subscriber	6:24
	has addressed a question to me	6:27
	was that in one of my earlier recordings some time ago	6:29
	I may have taken casual notice of the Martin Report	6:34
	and said something like,	6:40
	well, actually it's an anticlimactic report	6:40
	after all this fuss, a very distinguished man.	6:44
	We've got here a fairly innocuous report.	6:47
	And the subscriber asked do I really still think that?	6:51
	And the answer is I certainly do not.	6:55
	I was obtuse in my first reading of the report	7:00
	because I said to myself	7:03
	who outside of Wall Street itself much cares	7:07
	what the exact composition of the governing boards	7:13
	of the New York Stock Exchange are.	7:16
	It has been argued,	7:19
	and I will not disagree,	7:20
	that the insider trading that the people on the floor	7:21
	who were very important perhaps historically	7:29
	but who are the least important	7:31
	in a nation of over 200,000,000	7:34
	with great institutions investing large amounts of money	7:36
	for millions of people	7:40
	and with I suppose more than 30,000,000 people	7:41
	owning common stocks in their own right now	7:44
	or indirectly through mutual funds,	7:47
	the particular gentlemen who belong	7:50
	to the club of 1360-odd members,	7:52
	whatever that unround number is,	7:58
	how they conduct their affairs as specialists on the floor	8:01
	as investors for their own account is quite unimportant	8:06
	except for protecting the public interest.	8:11
	And so maybe the Martin recommendations	8:15
	are a good thing that the governing boards	8:18
	of the New York Stock Exchange	8:21
	have fuller representation from outside of those	8:23
	who each day at nine in the morning	8:26
	assemble in a particular place in lower Manhattan	8:30
	and who leave at the end of the day,	8:34
	having been, as I would say,	8:37
	the errand boys of the Exchange.	8:40
	The market is not in a particular place.	8:43
	The market is a network of communications	8:48
	and access to that network of communications	8:51
	which you get by the privilege of having bought a seat	8:54
	on the New York Stock Exchange	8:59
	and having been approved as not a felon	9:00
	and not a drug addict, with a pretty good reputation.	9:03
	That is the important access to the market,	9:08
	whether you stay all your life in Oshkosh, Wisconsin	9:10
	or in San Francisco or in New York itself.	9:15
	Now, it's no accident that Mr. Martin	9:19
	was asked to make a report.	9:22
	The New York Stock Exchange has been under severe attack	9:24
	from many quarters over many issues.	9:29
	And a close reading of the Martin Report	9:32
	suggests to me that it is very much subject to criticism	9:36
	on its handling of the important issues.	9:43
	Let me mention the single most important issue.	9:46
	The single most important issue in connection	9:51
	with securities trading has been the commission structure.	9:53
	For many, many years there was a minimum rate structure	9:59
	which no Stock Exchange member could cut below.	10:06
	This minimum rate structure, as all my listeners will know,	10:12
	involved no economies of scale.	10:16
	When you bought a General Motors share	10:19
	for 100 shares of General Motors,	10:22
	you paid a certain commission on that round lot.	10:26
	When you bought 200 you paid twice that commission.	10:28
	When you bought 2000 you paid 20 times as much	10:31
	and on very large transactions the charges to you	10:36
	which the member firm was required	10:42
	by rule of the Exchange to make was proportional	10:45
	to the number of round lots made.	10:49
	Well, now that's what man constructed	10:52
	but nature and technology constructed the hard fact	10:55
	that it doesn't take 20 times the costs,	11:00
	the effort, the bookkeeping,	11:03
	whatever constitutes the costs of making transactions,	11:06
	to do 20 round lots in comparison with one round lot.	11:10
	Nature will always fight back at man's restrictions	11:14
	and once this was widely appreciated,	11:18
	there began to be adjustments to it,	11:22
	which strictly speaking from the standpoint	11:25
	of the spirit of the Stock Exchange rules	11:28
	could be said to be alien, if not illegal.	11:32
	There was this delightful custom	11:37
	which simply pointed up the existence of the phenomenon	11:39
	of the give up.	11:43
	A mutual fund which asked a brokerage concern	11:46
	to make a large transaction on its behalf	11:51
	and, of course, all the large brokerage firms	11:54
	that cater to institutional customers of this sort	11:57
	vie tremendously to get this business	11:59
	because it is so juicy,	12:02
	a source of gravy over actual cost.	12:04
	Well, everybody knows that so the lucky firm	12:09
	which was given the order would do anything	12:13
	to please the person who had the decision	12:16
	as to which lucky firm to give it to.	12:21
	There was, and this is unimportant, bribery,	12:25
	commercial venality which actually transcends the law.	12:30
	And there was the case of a mutual fund operation	12:35
	in St. Louis which got into trouble with the SEC,	12:39
	that tries to police some of this,	12:41
	for actually giving money	12:44
	to particular individuals from this gravy.	12:47
	I don't want to go into the story	12:52
	of the Geneva shenanigans of Mr. Cornfeld	12:53
	in connection with the international overseas investors	12:59
	but you all know the story of some woman in the West Indies	13:02
	who was given I guess it was in the tens of millions	13:07
	of dollars, perhaps I exaggerate, of this gravy	13:10
	because overseas the SEC has very little power	13:14
	to police things	13:19
	and you can get away with a lot	13:20
	that you couldn't get away with here.	13:22
	Well, leaving out legal venality,	13:23
	there was the well-known fact that this mutual fund	13:28
	which has given the juicy order to a brokerage firm	13:31
	wants to get something in return for it.	13:33
	It therefore would ask the brokerage firm	13:36
	to give up part of the commission to some other firm.	13:40
	The other firm might be another member firm	13:46
	which had been doing a lot of selling	13:49
	of the securities of the mutual fund.	13:51
	Or it might be a non-member firm.	13:56
	Very often a small, little brokerage outfit	13:59
	let's say in Beaver Dam, Wisconsin.	14:02
	It has no access to the Exchange.	14:06
	It would be given up via the regional exchange	14:08
	some of this commission.	14:13
	These give ups were big money.	14:16
	They were known to everybody.	14:17
	They were the visible peak	14:21
	of a much larger iceberg of uneconomical costing.	14:23
	Many economists like myself testified against this practice,	14:28
	we spoke against it,	14:32
	and the people within the industry began to realize	14:33
	that the give ups simply were too flagrant	14:36
	and they gave away the whole show.	14:41
	Well, a few years ago, of course, the authorities acted	14:44
	and the give up as such was abolished.	14:47
	Nature will still always try to fight back	14:50
	and so there are many, many substitutes for the give up	14:52
	which accomplish almost the same purpose.	14:56
	And it would not be the best use of my time	14:59
	to elaborate upon these.	15:01
	But let's consider the various regional exchanges,	15:03
	the Boston Exchange, the Midwest Exchange,	15:06
	the Exchange out on the West Coast,	15:09
	the Philadelphia-Baltimore Exchange.	15:12
	Ideally according to the story books,	15:16
	these exchanges exist because there are certain small	15:19
	companies in each region which emerge above the surface.	15:21
	Local entrepreneurs invest their money in them.	15:25
	Local banking people know about them,	15:29
	local trust departments, people invest in them.	15:31
	They're not large enough in the beginning	15:35
	to be quoted on the New York Stock Exchange	15:36
	and so you find Illinois companies	15:39
	quoted on the Midwest Exchange or Michigan companies.	15:44
	Then when they have become more seasoned,	15:48
	when they are acquiring more of an international reputation,	15:51
	that particular company may apply	15:55
	to the American Stock Exchange, which used to be the Curb	15:57
	and which is a junior member of the New York Stock Exchange.	16:00
	I'm going into this because the Martin Report	16:04
	encourages these ancient fictions	16:08
	that that is the principal function	16:11
	of the regional exchanges	16:13
	and they ought to be reduced down to that function.	16:14
	That's a very lean function because, of course,	16:18
	as soon as the company becomes really visible,	16:20
	the regional exchange loses that company	16:23
	or loses the exclusive listing of that company.	16:25
	Then as the tale goes,	16:29
	you go from the American Stock Exchange	16:30
	to the New York Stock Exchange.	16:32
	Well, the reality is that an awful lot of the business	16:34
	of the regional exchanges in recent years	16:38
	and the reason why people pay	16:40
	tens of thousands of dollars for seats	16:42
	on these regional exchanges is that in the absence	16:44
	of a legal give up they provide the opportunity	16:48
	for the equivalent without being illegal.	16:52
	Ultimately what happened	16:59
	was that some large institutional investors,	17:01
	for example, Investors Diversified Services, Incorporated,	17:04
	finally applied for membership on a regional exchange.	17:09
	Financial people are of two minds.	17:17
	Let's not let the customer in	17:19
	and avoid the commission.	17:22
	Imagine how real estate brokers feel	17:23
	when they contemplate transactions between private persons	17:25
	avoiding a real estate brokerage commission.	17:28
	On the other hand,	17:32
	the regional exchanges had everything to gain	17:32
	because the value of their seats would go up	17:35
	and the amount of trading on their exchanges would go up	17:37
	if the institutional investors were allowed in.	17:39
	I don't know how the battle would have been resolved	17:43
	on the basis of votes alone	17:45
	but courts came into the picture	17:47
	and it began to look as if some regional exchange	17:49
	might be sued if it did not admit an institutional member.	17:51
	And IDS and some others became members	17:57
	and they saved a great deal of money for their customers	18:00
	because they were able to pass along the savings	18:05
	that came from economies of scale.	18:08
	Now the situation was still at this unsatisfactory	18:15
	state of affairs when something new came into the picture,	18:18
	namely the Department of Commerce.	18:21
	It's very evident that the SEC cannot be counted upon	18:25
	in a militant way to police a smelly situation like this.	18:28
	I'm afraid it's all too true	18:34
	that so often we set up a regulatory agency	18:37
	to control an industry, to regulate an industry,	18:40
	we think to be tough on that industry	18:43
	and to protect the public against that industry.	18:45
	But with the passage of time,	18:48
	and we've seen this in connection	18:49
	with the Interstate Commerce Commission,	18:51
	we see it the most flagrantly of course	18:53
	in connection with the Texas Railway Commission	18:55
	which, in fact, is a monopoly device	18:57
	for holding up the price of oil.	19:00
	With the passage of time,	19:02
	these regulatory commissions seem to become prisoners	19:04
	of the ideology of the industry itself	19:07
	and they are the instrument of exploitation	19:09
	of that public by the industry.	19:13
	This is not always the case	19:16
	and I can say many good things about the SEC.	19:17
	And I will say them in future recordings	19:20
	because one only has to look at what happened in Geneva	19:22
	to realize how much in certain directions	19:25
	the SEC is accomplishing all the time.	19:28
	Well, the Department of Justice got into this act	19:30
	to the surprise of everybody in the financial industry.	19:34
	Everybody in the financial industry somehow thought	19:37
	that with the SEC having been created	19:40
	by Roosevelt's New Deal	19:42
	that the financial industries were like baseball,	19:44
	they were somewhat immune to the ordinary antitrust actions.	19:48
	Well, the Antitrust Division looked into the situation,	19:52
	found this smelly situation,	19:55
	and said that it had a legitimate interest.	19:57
	And it came before the SEC itself to get rid	19:59
	of all minimum commissions,	20:04
	instead put competitively arrived at commissions.	20:06
	These are called negotiated commissions	20:12
	but that's not the best word	20:14
	unless you think of negotiation	20:15
	as the equivalent for competition.	20:17
	The industry was scared to death	20:22
	and the Department of Justice was really getting somewhere	20:25
	and this made the SEC a little bit frightened	20:30
	on its own behalf	20:33
	and also as the protector of the industry.	20:34
	The result was that a reform was made.	20:36
	Over $500,000 of commissions of transactions	20:40
	were to be arrived at by negotiated rates.	20:46
	But under that you still had the minimum rates.	20:50
	There was some alteration	20:54
	so the schedule was no longer completely proportional	20:55
	to the number of round lots.	20:59
	However, the amount of nonproportionality	21:01
	of tapering down was extremely modest.	21:05
	How has the competitive part of the rate structure worked?	21:09
	The SEC appointed a commission, a study group,	21:15
	to study the whole industry.	21:20
	This is the Ferar Commission	21:22
	and they had reported	21:24
	and it's turned out that most of the claims	21:25
	made for competition as against minimum pegged rates	21:28
	have stood up under experience.	21:32
	The real politic issue now is how soon do we move	21:35
	competition down to below the top level?	21:40
	And here is where the Martin Report has turned out	21:44
	to be extremely reactionary,	21:48
	extremely ill-advised from the standpoint	21:52
	of the public interest in my judgment,	21:56
	and from the standpoint in my judgment	21:58
	of the long run self-interest of the community itself.	22:00
	Because Mr. Martin has reverted to the fiction	22:04
	of regional exchanges as the minor leagues,	22:07
	the farm teams for the major exchanges.	22:12
	He has come out against institutional members	22:17
	holding seats in the New York Stock Exchange itself	22:22
	and the logic of his position	22:25
	would be that they should be deprived of their seats	22:27
	on the regional exchanges	22:31
	where they already have such seats,	22:32
	using the poetry of the desirability of one big market,	22:36
	which by the way is very desirable.	22:39
	But the one big market that's desirable	22:41
	is the market consisting of competitive entry	22:43
	to anybody in a fair way from anywhere in the country.	22:48
	Whether he's a member of the club	22:52
	of 1300 plus or whether he isn't,	22:53
	he should have competitive entry.	22:57
	Now Mr. Martin says let's put on the back burner	22:59
	and accumulate more experience	23:03
	the question of negotiated rates, comparative rates,	23:05
	and let us not lower the cutoff point	23:13
	at which they take place.	23:16
	Dr. Ferar of the Ferar Commission has looked into this	23:21
	and is very much against this.	23:24
	He shows in his testimony that the weight of the evidence	23:25
	is that this is not in the public interest.	23:30
	The Weiden organization which constitutes the third market	23:33
	and which really has a field day at the expense	23:36
	of these maintained commissions	23:40
	has in its own self-interest	23:42
	testified against the Martin position.	23:44
	But on many, many points Mr. Weiden	23:48
	against his own self-interest	23:50
	has testified in favor of the public interest.	23:52
	Salomon Brothers, which is one of the new big,	23:55
	modern vibrant parts of the street,	23:59
	one of its senior partners or directors	24:02
	has testified that we should move this down to $100,000.	24:06
	It was Mr. Regan I think of Merrill Lynch	24:13
	who has said that if we would really unbundle services	24:15
	so that the person who doesn't want advice from his broker,	24:18
	who doesn't want research in depth	24:20
	but just wants a clerical function performed,	24:22
	Merrill Lynch can perform that function	24:25
	to the public at half the standard commissions.	24:27
	Well, my time is almost up.	24:34
	This is certainly an important matter	24:37
	for the American economy,	24:40
	for the health of our capital formation over time,	24:42
	for the equity of our democracy	24:47
	if we want to come to a time	24:50
	when we have a property-owning democracy.	24:52
	And consequently I think that you're going to hear	24:56
	a scream of testimony before Congress,	25:00
	before congressional committees, before the SEC.	25:05
	You're going to have I hope a reactivation	25:08
	by the Department of Justice.	25:13
	The present administration although it has no desire	25:15
	to be tough upon the financial community,	25:18
	with its present Department of Justice	25:21
	still stands by its earlier position	25:23
	with respect to competitively arrived at commission rates.	25:26
	If competitively arrived at commission rates	25:32
	are permitted all the way down	25:34
	or sensibly all the way down with hopefully unbundling,	25:39
	then it will cease to be of any importance	25:44
	as to whether institutional members have direct access	25:46
	themselves to the New York Stock Exchange.	25:50
	We will get all the good things	25:52
	in the poetry of Mr. Martin's report under this structure.	25:54
	I must therefore sadly conclude in closing	26:01
	that on every essential point	26:04
	where the invested pecuniary interests of the status quo	26:09
	of the financial community are involved,	26:16
	Mr. Martin has been soft	26:19
	and has disappointed those who have had a concern	26:23
	for the public interest.	26:28
	It's not that in the present spectrum of controversy	26:30
	Mr. Martin is a little bit right of center,	26:35
	that old center position which he likes so much,	26:40
	he is way out in right field in connection	26:42
	with the present pressures of American economic society.	26:46
-	If you have any comments	26:53
	or questions for Professor Samuelson,	26:54
	address them to Instructional Dynamics Incorporated,	26:56
	166 East Superior Street, Chicago, Illinois 60611.	26:59

Item Info

Title:

Tape 87 - The martin report on the New York Stock Exchange

Date:

1971

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

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audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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ref2313_7vw
samuelsonpaul
duke:325110
pstau001087
ark:/87924/r4348gz4p
0a9b8a73-059a-48ae-936a-ff8d1e7fd4d3

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Tape 87 - The martin report on the New York Stock Exchange

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