Every Man a Capitalist

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The president of the New York Stock Exchange, the citadel of American capitalism, is a happily extraverted man in a grey (or sometimes blue) flannel suit who seems little different from the hundreds of other commuters who ride the 8:09 (or sometimes the 8:17) from Greenwich, Con., to Manhattan every weekday. But George Keith Funston is a man with a mission; he wants to make every American a capitalist. His method: persuade every American who can afford it to buy stock in: corporations, thus share in the amazing yet steady growth of the American economy.

President Funston seems preordained for his evangelist's job. He is in the prime of life (45), tall (6 ft. 3 in.), ruggedly built (200 Ibs.), and he has a boyish smile and an easy friendliness that make him at ease with Kansas dirt farmers, Milwaukee matrons or millionaire Texans. He is not interested in who sells the stock--or in what companies--so long as the stock is sound. Says he: "A very small amount of personal savings goes into direct stock ownership. I'm not interested in how we split the pie. I want a bigger pie."

Last week Wall Street was baking a pie much suited to Funston's taste; it was getting ready to float the first public stock issue of the Ford Motor Co. (TIME, Nov. 14). To Funston, this was a "landmark in the history of the ownership" of American business. To brokers, it was the biggest stock pie they had ever seen ($400 million). And everyone seemed to want to buy a bite. Orders flooded in by mail and phone; thousands of people who had never ventured inside a broker's office got ready to shell out their savings at the magic name of Ford. Even the U.A.W.-C.I.O., which had flatly turned down an offer from Ford last May to permit members to buy stock at half price, now begged for a stock-buying plan.

Gold-Plated Group. To float the new issue, the Ford Foundation, which will get the proceeds, chose a collection of gold-plated co-managers to head the biggest syndicate ever formed in Wall Street. The names sounded like a roll call of the financial world's leaders.

Manager of the group is San Francisco's Blyth & Co., which was founded by Charles R. Blyth in 1914 with money borrowed on his Simplex car, is now one of the West Coast's biggest financial houses. As top manager, Blyth picked its Vice President Lee Limbert, 58, who has supervised the raising of billions in cash for such giants as Pacific Gas & Electric and Bank of America. Other co-managers: P:Goldman, Sachs & Co., headed by Investment Banker Sidney Weinberg, 64, who knows Washington (where he has served for 22 years in half a dozen big jobs) as well as he knows Wall Street, and who has had a guiding hand in Keith Funston's career.

P:Kuhn, Loeb & Co., headed by John M. Schiff, which originally specialized in railroad financing, and helped raise the cash to build the Pennsylvania and Baltimore & Ohio railroads.

P:Lehman Bros., bossed by Robert Lehman and one of the top utilities underwriters.

P:White, Weld & Co., presided over by Alexander White and a leading dealer in oil and gas securities.

P:First Boston Corp., run by James Coggeshall, the second biggest U.S. underwriter (first: Halsey, Stuart & Co.). P:Merrill Lynch, Pierce, Fenner & Beane, which was started in 1914 by Charles Merrill, has grown under Managing Partner Winthrop Smith into the biggest of all U.S. brokerage houses.

The group is now signing up 550 securities dealers around the U.S. to help distribute the Ford stock, or rather, to ration out the 7,000,000 shares. The foundation wants the stock sold in small lots, and the dealers may parcel out as few as ten shares to a customer. The selling group hopes to work out all sales details so that the foundation can file a registration statement with the Securities & Exchange Commission by Jan. 1. With quick approval, the stock will go on sale Jan. 20. The price is still not set. But, on the basis of Ford's book value of $38 a share and estimated profits this year (about $6 a share), Wall Streeters guess that the price will be around $60 a share and will quickly soar when trading begins.

Cardiac Recovery. The Ford stock could hardly be floated at a better time. The bull market, staggered by the "cardiac break" when President Eisenhower was stricken, has recovered its health. The Dow-Jones industrial average rose 21.69 points in a fortnight; in two days alone last week it went up 12.43 points in the fastest rise since November 1954, closed the week at 476.54, only 10.91 points below the peak reached just before Ike's attack. Railroads and utilities moved up also. By week's end the composite average of 65 industrial, railroad and utility stocks stood at 169.53, a level only 3.98 points short of the bull-market peak.

The doomsayers, whose voices had risen with the cardiac break, were conspicuously silent last week, and the ranks of bulls were growing again. The market's biggest worry right now is the 1956 presidential election. But fear that the election may have a profound effect on the market seems to have little basis. In the last 40 years, the market has shown a surprising impartiality in its readings of the election returns. It has gone up five times and gone down five times. It has gone up after both Democratic and Republican victories, just as it has gone down after them. Thus, while there was some difference of opinion on the immediate future of the market, there was a surprising unanimity of opinion on the state of U.S. business--and its future. In the long run, it is the state of the economy that will determine the course of the market.

A Bet on the Future. The economy shows no sign of weakening. The gross national product is now running at the rate of $392 billion a year, some $24 billion above last year. Disposable personal income is up to $272 billion v. $255 billion a year ago. The total amount of disposable income and savings--the cash that investors could put into stocks--is also up. So are dividends: more than $7 billion was paid out in the first nine months of this year, 9.5% more than in 1954.

Last week two more industrial giants announced their future plans. Chrysler President Lester Lum ("Tex") Colbert said his company will spend more than $1 billion over the next five years for new plants and automated equipment. To express "our confidence in the economic outlook," Standard Oil (N.J.), the world's biggest oil company, announced that in 1956 it will spend a record $1.1 billion on expansion: 50% on searching for new oil, 25% on refineries, and the rest for new transportation and marketing facilities to get its products to consumers. Little Man Beware. In Wall Street there are still some experts who distrust the supposedly uninformed small investors; they like to quote the old saw that "when the little man comes in, it is time for the professional to get out." Actually, thanks to President Funston and the vigorous campaigning of brokerage houses that conduct stock-market classes all over the U.S., the small investor is an increasingly well-informed buyer. He has done about 19% of all the buying and selling in recent years, as judged by trading in odd lots (less than 100 shares).

The total amount invested in mutual funds, which are designed for small investors, has passed $7 billion, and the funds are growing at the rate of $1 billion annually. Some 50,000 small investors have joined the Stock Exchange's Monthly Investment Plan, the favorite stock-selling device of President Funston, and they now own 600,000 shares worth $24 million. Another 2,000,000 are investing in stock-purchase plans set up by 350 companies in almost every industry.

Inevitably, with the market some 25% above the 1929 peak on the Dow-Jones industrial average, there are comparisons to '29--and the disaster that overtook small (as well as big) investors. But there is as little resemblance between the '55 and '29 markets as there is between the dynamic expansion of the American economy in 1955 and the static economy of 1929, when more and more stocks were floated on the same productive base. Furthermore, most of the rules of the game are different.

Changing the Rule. In 1929's wide-open trading, brokers had wide latitude, could set margin requirements as low as 20%. Stock pools, and a hundred other maneuvers to manipulate the market, were part of the game. Even companies themselves helped pyramid the shaky market, dumping in funds for margin buying. When the funds were pulled out, it helped bring on the collapse.

In today's market, the Federal Reserve Board sets all margin requirements. Now fixed at 70%, they have discouraged excess speculation. Customers' margin-buying debt was $2.9 billion last week, only 1.4% of the value of all listed stocks. The SEC and the exchange itself keep a sharp eye out for any market manipulation. Exchange members (and their firms) who break the rules can be hauled up before the New York Stock Exchange's board of governors, where they get a stern grilling, and punishment if found guilty. Last year 20 or 30 brokers were disciplined; in extreme cases, they can be drummed out altogether.

This is only one important change in the New York Stock Exchange and the men who run it. No longer is the exchange a private club, run by its president for the benefit of insiders. The modern Stock Exchange has turned itself into a quasi-public institution, well aware of its responsibility to investors. The changes did not come without protest and bitter fighting. During the 1933 congressional investigation of the market, Exchange President Richard Whitney rumbled: "The exchange is a perfect institution." He was hopelessly out of date. Congress rammed through the Securities Act of 1933 and Securities Exchange Act of 1934; the reforms were put through with the help of Broker William McChesney Martin Jr., now chairman of the FRB. By 1938, Old Guardsman Whitney was in Sing Sing, guilty of embezzling his customers' funds. In came the Young Turks, with Martin as president, to help the exchange police itself. In 1941 Emil Schram, onetime head of the Reconstruction Finance Corp., assumed the presidency and laid the groundwork for the new policy, which was summed up by a top broker: "If capitalism is to be maintained, the Stock Exchange has to be accepted by the public, a place where we can raise the capital we need. We have to get people out of the idea that the exchange is just a big gambling den."

Barefoot Boy. In pursuit of this policy, Funston took over as president in 1951 at $100,000 a year. A business-trained educator whose most important job had been president of Trinity College in Hartford, Conn, (student pop. 900), he seemed like a kind of barefoot boy in Wall Street. He knew little about the intricacies of speculative finance, still shocks brokers by gaps in his financial knowledge. But he did have a lot of ideas on how the Stock Exchange could better sell itself to the public, and he went right to work.

Among his first moves was a long-range, nationwide investment campaign: "Own your share of American business." He has doubled the exchange's advertising budget to $1,100,000 a year, still thinks it is "only a drop in the bucket, but we hope ripples will go out from it." He has set up a dozen displays around the nation, plugging share ownership, pepped up the organization's monthly magazine to a net paid circulation of 100,000, made three movies including a color film entitled What Makes Us Tick to be shown to schoolchildren, clubwomen and anyone else interested.

Out from the exchange offices have gone 12 million pamphlets, explaining how the exchange works and how to buy stocks. They caution that stock buying entails a risk, that shares can go down as well as up, that stock should be bought only after an investor has insurance, ready cash for emergencies. But again and again, the point is emphasized that a sound investment is a stake in the U.S. future. Shares should be bought for the long term, and buyers should not be scared out at a drop in the market. One result: interest in the exchange has increased so much that it is one of New York City's big tourist attractions, with more than 300,000 visitors touring it annually.

Funston also worked hard on the exchange's internal and industry problems. He bolstered the exchange's research and statistical department, is now encouraging smaller member firms to pool resources to lease I.B.M machines and wire services, revamp their procedures in dozens of ways to help both themselves and their customers. When a fight flared up over extending trading hours past the usual 3 p.m. close, Funston characteristically ran a survey to find out what members wanted, finally pushed through a half-hour extension in 1952. But he made up for the extra work hours by closing the exchange on Saturday. With SEC approval, Funston also campaigned hard to boost commission rates for brokers, eventually convinced them by proving that many had been losing money on much of their business for years without knowing it; he started work on a $6,500,000 program to renovate and add to the 52-year-old exchange building at n Wall Street, give everyone a more comfortable, more efficient place to work.

His special pride and joy is his Monthly Investment Plan for small stockholders, the first exchange plan to permit people to buy stock on a pay-as-you-go basis. Like many of the other things Funston has done, the plan is the center of a controversy, and Funston is the first to admit that M.I.P. has gone slower than he expected. Some brokers feel that the market is high for small investors, that they would be wiser buying into a mutual plan with its diversified holdings, instead of concentrating on a single company. In defense, Funston points out that M.I.P.'s risks are minimized by dollar averaging, i.e., by putting the same amount into a stock at regular intervals, the buying prices average out in the market's ups and downs. Says he: "When we started the plan in 1954, industrial averages were at 290, and everyone said it was too high. Now the averages are at around 470."

To plug M.I.P. and the exchange, Funston made ten major speeches this year, traveled 9,000 miles across the U.S. and to Europe. His weekends are often booked solid months in advance, and during the week, the nights he gets home to his wife Betty and three children--Peggy, 13, Gail, 10, Keith Jr., 6--in time for 7 o'clock dinner are rare family occasions. Only then can he relax, have a few friends in for an evening's talk, read history, or pop corn with the family.

Despite his never-ending work, which President Roosevelt once described as "the worst job in the world next to mine," Funston usually seems calm and relaxed, gives no hint of the driving force that keeps him constantly on the move. A friend said: "Funston was a guy who had success on his mind, right from the start. I think he was thoroughly devoted to the idea that an awfully good place to start business was at the top."

The Man from Iowa. Young Funston had good reason to think so. He was born on Oct. 12, 1910, in Waterloo, Iowa, into a moderately well-to-do family. Later the family moved to Sioux Falls, S. Dak., where his father, George Edwin Funston, owned the International Savings Bank. Funston. an honor student in school and an ardent Boy Scout, seemed to have an assured future until everything changed in 1924. In a bank panic that year, the family wealth was swept away, and Funston, in his freshman year at high school, had to earn money to go to college. He candled eggs in a grocery store, became a messenger boy for a bank, a cashier's assistant in the local Morrell packing plant, finally got a scholarship to Trinity College.

He went on to Harvard Business School ('34), graduated cum laude, then got a job setting up a sales incentive plan for American Radiator, where he learned "not to talk unless you know what you are talking about." In 1940 Sylvania hired him away as sales-planning director; a year and four months later he was in Washington helping Banker Sidney Weinberg set up the Industry Advisory committees of the War Production Board, became Weinberg's protege, and later an assistant to War Production Board Chief Donald Nelson. Everywhere he went, Funston's personality magically opened doors. Said a colleague: "He never battered them down. Doors opened as if by an electronic eye--the light picked him out, and the door just opened."

The College Door. The most promising door opened for Funston in 1944, when Trinity College, its finances in poor shape, desperately needed a president who was a salesman, educator and administrator rolled into one. At 33, Funston became one of the youngest college presidents in the U.S., immediately took a leave of absence for a year and a half to serve in the Navy as a lieutenant commander working on contract termination. At one of his first faculty meetings on his return, Funston explained his credo: "Gentlemen, in order to be successful, you must look successful." He had the grounds landscaped, the buildings painted and modernized, went out to raise funds from the alumni and educational foundations. Funston would often just walk in, say: I am the president of Trinity College. I hope you will be able to give us some money." All told, he raised $5,000,000 in six years. Funston stopped paying professors on the same level the same salary, put them on a merit basis, boosted salaries 65%. Though Trinity's professors were cool to his businesslike, public-relations approach, those outside the college were not. Within four years, Funston joined the boards of directors of seven companies: General Foods, B. F. Goodrich, Connecticut General Life Insurance, Owen-Corning Fiberglas, Hartford Steam Boiler, Aetna Insurance, First National Bank. On each, Funston, as Weinberg says, "was a good director--independent and willing to do the homework."

Banker Weinberg, who had recommended Funston for two of the boards, proposed him for the Stock Exchange presidency, when ailing Emil Schram was ready to resign. The selection committee hired Funston because, as one member put it, he "represented everything forthright, was a man of such character as to immediately impress the public that the exchange was thinking more in terms of the public welfare than the securities business."

Tickers & Seats. Forthright President Funston's exchange is the world's biggest and most complex marketplace, auctioning off the securities of 1,090 U.S. companies. In a normal day's trading, nearly 2,600,000 shares of stock change hands at the rate of 100 transactions every minute. The exchange has 1,100 employees and officials, 400 of them on the trading floor itself; it has 500,000 miles of telephone and telegraph wires connecting it with 4,810 member and nonmember firms around the U.S. At trading posts, a platoon of 18 "quote clerks" give instant prices on the most active stocks to brokers phoning in over private wires; upstairs, another corps of 70 telephone operators keep track of 1,271 less active stocks. To send the news out to the world, a battery of new high-speed ticker-tape machines prints every transaction at the rate of 500 characters per minute on 800 miles of tape daily. In September's cardiac break, the tape was rarely more than two minutes late.

With the marvels of the electronic age, buying or selling from cities around the U.S. can be carried out instantaneously by the brokers of the exchange who hold seats (current price: $86,000). Only members can buy and sell stock on the exchange floor. Merrill Lynch, with eleven exchange seats and 4,600 employees in the U.S., can take an order in Los Angeles for an active stock such as U.S. Steel, wire it to one of its brokers on the floor of 'the exchange, buy the stock and report-back to the investor in Los Angeles the price he paid--all in an average time of two minutes.

The Chance-Takers. Most of the actual trading is done by some 650 brokers, but the key men on the exchange floor are the comparatively small crew of 350 "specialists." They rank among the last great chance-takers of free enterprise, are probably in the only business where a man can lose a fortune in a few hours. "They're the guys," says Funston, "who insure your always being able to find someone who wants to do exactly the opposite from what you want to do, and at a price very close to the last one quoted."

Acting both as middlemen for other brokers and traders in their own right, the specialists are responsible for maintaining an orderly, liquid market in the stocks they handle. To keep stocks from going up or down too fast, specialists must buy when no one wants to buy, sell when everyone else wants to buy. To do the job right takes millions. Top specialists can lose as much as $200,000 or $300,000 in the space of a few hours--and can make that much. During the cardiac break, the specialists gambled $80 million to put a floor under their stocks. Luckily, the market soon went up again.

Among the top specialists: P:Robert L. Stott, 54, partner in Wagner, Stott & Co. with stocks of 18 different companies (Union Carbide, Gulf Oil, National Steel, J. P. Stevens, etc.). P:William Meehan, 41, head of M. J. Meehan & Co. with 25 stock issues (RCA, National Cash Register, R.K.O., Deere & Co., etc.).

P:James Crane Kellogg III, 40, senior partner in Spear, Leeds & Kellogg, Wall Street's biggest specialists firm with 55 stocks (American Airlines, Boeing, General Tire, Union Oil, etc.), who put up $618,000 for 25,000 shares of American Airlines alone to support the market during the cardiac break, at one point was $163,000 in the hole. P:John Coleman, 53, head of Adler, Coleman & Co. (53 stock issues, including American Tobacco, Armour, Motorola). P:Benjamin Einhorn, 48, partner in Astor & Rose, which handles Sperry Rand and 14 other stocks.

Up Dividends. Looking at 1955's stock market, Wall Street's specialists think that it is based, to a large degree, not on speculation but on the present prosperity and the bright future of U.S. business. For the first half of 1955, corporate profits after taxes hit an annual rate of $21 billion, 162% better than 1929. And the forecast for the second half year is even better: profits of $23 billion, well over last year's figure and almost equal to the 1950 record. On the basis of sales and earnings, many stocks are not regarded by Wall Streeters as too high. The price-earning ratio which economists use as a barometer of market health shows Moody's industrials priced at 13.6 times annual earnings v. 17.3 times earnings in 1929. Furthermore, investors are getting the biggest returns ever; dividends will reach an estimated $11 billion by year's end, $1 billion better than 1954, $5.2 billion better than in both 1929 and 1946, when the World War II bull market ended. However, there is little doubt that some stocks are too high in relation to earnings and dividends. Stock-bond yields i.e., the rate of dividends on a stock v. the interest rate on a bond, have been narrowing steadily (see chart), are now only 1% apart. Thus, in a high market with lower stock yields, investors have normally tended to shift away from stocks, buy bonds for added security, and thus start the market down. In the current market, some 100 of the 958 dividend-paying stocks on the Big Board are paying less than high-grade bonds, e.g., I.B.M. (at 399 1/2), Du Pont (at 237), Amerada Petroleum (at 87 1/4).

But many brokers question whether the fact that stock yields are close to bond yields will cause much of a shift into bonds. High income taxes have discouraged buying for dividends alone; many investors are buying more for growth and capital gains, thus are willing to purchase stocks that are selling for 20 and 30 times earnings, although a stock that sold for 10 times earnings was once considered about right.

Actually, the scramble for blue chips, which are the stocks chiefly used in the averages that measure the market, has made the overall market look higher than it is. Many lesser-known stocks have had only a modest rise and many have even fallen. Last week, 38 stocks were at their lows for the year, and others were from 10% to 30% below their bull-market highs.

Nevertheless, so much stock is being salted away for long-term investment that, despite a 212% increase in 25 years in the number of shares listed, there is a growing shortage of stock. Wall Streeters predict that big institutional investors--trust funds, insurance companies, and pension plans--will own $50 billion worth of stock by 1965, or 24% of all stock on the exchange. Assuming that small investors keep buying, the exchange will need a great deal more stock to satisfy the demand. And stock prices, as in any marketplace, are likely to follow demand.

The Cash Flow. As U.S. industry winds up a record-smashing year, economists hold out prospects for still better earnings and dividends to come. The "cashflow' of U.S. industry is enormous-money which does not show up in earnings because it is used for fast tax amortization. General Motors' cash flow in 1954 was $11.72 per share v. $0.08 reported as net profit; U.S. Steel's $8.19 against the net of $6.45. Overall for 1954 cash-flow earnings for the stocks in the Dow-Jones industrial average were more than 50% higher than reported earnings.

Thus, as new plants and facilities are paid off, more and more of industry's cash flow will show up as net profit. Even if business levels off or turns down slightly, dividends may rise. By 1959 economists predict that dividends may well increase by 50% to a total $16 billion annually.

Historically, the stock market has often been out of tune with the rest of the U. S., largely because investors represented a comparatively small part of the population. But as the base of stock ownership has been broadened, the market has

proved itself well able to withstand the shocks of the cold war and the Korean war, just as the economy has continued to grow through all the troubles. Stock Exchange President Funston thinks that the more small investors who buy sto'ck not for speculation, but for the long pull, the stronger the market will beand the better it will reflect the state of the nation Says he: "Never has a business had a better opportunity to do something good for the country and at the same time for itself. It's a natural."

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