Business Adventures: Twelve Classic Tales from the World of Wall Street

by John Brooks

“It will fluctuate,”

in 1611, of the world’s first important stock exchange—a roofless courtyard in Amsterdam—and the degree to which it persists (with variations, it is true) on the New York Stock Exchange in the nineteen-sixties.

The first stock exchange was, inadvertently, a laboratory in which new human reactions were revealed.

Evidence that people are selling stocks at a time when they ought to be eating lunch is always regarded as a serious matter.

“Never give anyone the advice to buy or sell shares, because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.”

The expectation of an event creates a much deeper impression … than the event itself.”—de la Vega.) The fact that most of these rumors later proved false was no help at the time. Word of the crisis had spread overnight to every town in the land, and the stock market had become the national preoccupation.

“Telephone is kind of like the sea,” La Branche said later. “Generally, it is calm and kindly. Then all of a sudden a great wind comes and whips up a giant wave. The wave sweeps over and deluges everybody; then it sucks back again. You have to give with it. You can’t fight it, any more than King Canute could.”

I think that people may be more careful for a year or two, and then we may see another speculative buildup followed by another crash, and so on until God makes people less greedy.”

“It is foolish to think that you can withdraw from the Exchange after you have tasted the sweetness of the honey.”

IN the calendar of American economic life, 1955 was the Year of the Automobile.

“Once you get a general theme, you begin narrowing down,” he says. “You keep modifying, and then modifying your modifications. Finally, you have to settle on something, because there isn’t any more time. If it weren’t for the deadline you’d probably go on modifying indefinitely.”

ONE of the most persuasive and most frequently cited explanations of the Edsel’s failure is that it was a victim of the time lag between the decision to produce it and the act of putting it on the market.

We concluded that cars are the means to a sort of dream fulfillment. There’s some irrational factor in people that makes them want one kind of car rather than another—something that has nothing to do with the mechanism at all but with the car’s personality, as the customer imagines it.

“Capitalize on imagery weakness of competition,”

“We hope that no one will ever ask, ‘Say, did you see that Edsel ad?’ in any newspaper or magazine or on television, but, instead, that hundreds of thousands of people will say, and say again, ‘Man, did you read about that Edsel?’ or ‘Did you see that car?’ This is the difference between advertising and selling.”

‘When they find out it’s got four wheels and one engine, just like the next car, they’re liable to be disappointed.’” It was agreed that the safest way to tread the tightrope between overplaying and underplaying the Edsel would be to say nothing about the car as a whole but to reveal its individual charms a little at a time—a sort of automotive strip tease

The final fiscal box score on the Edsel fiasco will probably never be known, because the Ford Motor Company’s public reports do not include breakdowns of gains and losses within the individual divisions. Financial buffs estimate, however, that the company lost something like $200 million on the Edsel after it appeared; add to this the officially announced expenditure of $250 million before it appeared, subtract about a hundred million invested in plant and equipment that were salvageable for other uses, and the net loss is $350 million. If these estimates are right, every Edsel the company manufactured cost it in lost money about $3,200, or about the price of another one. In other, harsher words, the company would have saved itself money if, back in 1955, it had decided not to produce the Edsel at all but simply to give away 110,810 specimens of its comparably priced car, the Mercury.

Time declared, “The Edsel was a classic case of the wrong car for the wrong market at the wrong time.

Weddings between persons with very high incomes and persons with not so high incomes have tended to take place most often near the end of December and least often during January.

David T. Bazelon has suggested that the economic effect of the tax has been so sweeping as to create two quite separate kinds of United States currency—before-tax money and after-tax money.

In the United States it is comparatively easy to raise tax rates and to introduce tax-avoidance devices, and it is comparatively hard to lower tax rates and to eliminate tax-avoidance devices.

Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth.

Britain enacted an income tax in 1798 to help finance her participation in the French revolutionary wars, and this was, in several respects, the first modern income tax;

Opposition is always at its most reckless and strident at the very outset; with every year that passes, the tax tends to become stronger and the voices of its enemies more muted.

The American idea of very high rates on high incomes eventually caught on in Britain, though, and by the middle 1960’s the top British bracket was over 90 per cent.

The first man to propose a federal income tax was President Madison’s Secretary of the Treasury, Alexander J. Dallas; he did so in 1814,

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late.

“the professors with their books, the socialists with their schemes … [and] the anarchists with their bombs,”

An income tax! A tax so odious that no administration ever dared to impose it except in time of war.…

In 1909, by what a tax authority named Jerome Hellerstein has called “one of the most ironic twists of political events in American history,” the Constitutional amendment (the sixteenth) that eventually gave Congress the power to levy taxes without apportionment among the states was put forward by the implacable opponents of the income tax, the Republicans, who took the step as a political move, confidently believing that the amendment would never be ratified by the states.

it was during the twenties that special-interest provisions began to appear, stimulated into being by the complex of political forces that has accounted for their increase at intervals ever since. The first important one, adopted in 1922, established the principle of favored treatment for capital gains; this meant that money acquired through a rise in the value of investments was, for the first time, taxed at a lower rate than money earned in wages or for services—as, of course, it still is today.

Whether or not the twenties were a golden age for the American people in general, they were assuredly a golden age for the American taxpayer.

Paradoxical as it may seem, the evolution of our income tax has been from a low-rate tax relying for revenue on the high income group to a high-rate tax relying on the middle and lower-middle income groups.

as 1955 he could rattle off the names of two dozen countries, large and small, that did not tax the individual, but that in 1965 the only names he could rattle off were those of a couple of British colonies, Bermuda and the Bahamas; a couple of tiny republics, San Marino and Andorra; three oil-rich Middle Eastern countries, the Sultanate of Muscat and Oman, Kuwait, and Qatar; and two rather inhospitable countries, Monaco and Saudi Arabia, which taxed the incomes of resident foreigners but not those of nationals.

Even Communist countries have income taxes, though they count on them for only a small percentage of their total revenue; Russia applies different rates to different occupations, shopkeepers and ecclesiastics being in the high tax bracket, artists and writers near the middle, and laborers and artisans at the bottom.) Evidence of the superior efficiency of tax collecting in the United States is plentiful; for instance, our costs for administration and enforcement come to only about forty-four cents for every hundred dollars collected, as against a rate more than twice as high in Canada, more than three times as high in England, France, and Belgium, and many times as high in other places. This kind of American efficiency is the despair of foreign tax collectors.

“In most countries, it’s impossible to engage in a serious discussion of income taxes, because they aren’t taken seriously.” They are taken seriously here, and part of the reason is the power and skill of our income-tax police force, the Internal Revenue Service.

(Since government publications are not copyrighted, this is perfectly legal.)

“Here is the exciting story of the largest and most efficient tax collecting organization the world has ever known—the United States Internal Revenue Service!”

Probably the most important special-interest provision in the Code is the one that concerns capital gains. The staff of the Joint Economic Committee of Congress wrote in a report issued in 1961, “Capital gains treatment has become one of the most impressive loopholes in the federal revenue structure.” What the provision says, in essence, is that a taxpayer who makes a capital investment (in real estate, a corporation, a block of stock, or whatever), holds on to it for at least six months, and then sells it at a profit is entitled to be taxed on the profit at a rate much lower than the rate on ordinary income; to be specific, the rate is half of that taxpayer’s ordinary top tax rate or twenty-five per cent whichever is less. What this means to anyone whose income would normally put him in a very high tax bracket is obvious: he must find a way of getting as much as possible of that income in the form of capital gains. Consequently, the game of finding ways of converting ordinary income into capital gains has become very popular in the past decade or two.

By favoring capital gains over ordinary income, the Code seems to be putting forward two very dubious notions—that one form of unearned income is more deserving than any form of earned income, and that people with money to invest are more deserving than people without it. Hardly anyone contends that the favored treatment of capital gains can be justified on the ground of fairness;

For one, there is a respectable economic theory that supports a complete exemption of capital gains from income tax, the argument being that whereas wages and dividends or interest from investments are fruits of the capital tree, and are therefore taxable income, capital gains represent the growth of the tree itself, and are therefore not income at all. This distinction is actually embedded in the tax laws of some countries—most notably in the tax law of Britain, which in principle did not tax capital gains until 1964. Another argument—this one purely pragmatic—has it that the capital-gains provision is necessary to encourage people to take risks with their capital. (Similarly, the advocates of stock options say that corporations need them to attract and hold executive talent.) Finally, nearly all tax authorities are agreed that taxing capital gains on exactly the same basis as other income, which is what most reformers say ought to be done, would involve formidable technical difficulties.

(One way to cure all income-tax evasion would be to repeal the income tax.)

IT has been maintained that the Code discriminates against intellectual work, the principal evidence being that while depreciation may be claimed on all kinds of exhaustible physical property and depletion may be claimed on natural resources, no such deductions are allowed in the case of exhaustion of the mental or imaginative capacities of creative artists and inventors—even though the effects of brain fag are sometimes all too apparent in the later work and incomes of such persons. (It has also been argued that professional athletes are discriminated against, in that the Code does not allow for depreciation of their bodies.)

A man with a top bracket of 20 per cent who gives away $1,000 in cash incurs a net cost of $800. A man with a top bracket of 60 per cent who gives away the same sum in cash incurs a net cost of $400. If, instead, this same high-bracket man gives $1,000 in the form of stock that he originally bought for $200, he incurs a net cost of only $200. It is the Code’s enthusiastic encouragement of large-scale charity that has led to most of the cases of million-dollar-a-year men who pay no tax at all;

it is a virtual necessity for many taxpayers to seek professional help if they want to minimize their taxes legally, and since first-rate advice is expensive and in short supply, the rich are thereby given still another advantage over the poor, and the Code becomes more undemocratic in its action than it is in its provisions. (And the fact that fees for tax advice are themselves deductible means that tax advice is one more item on the long list of things that cost less and less to those who have more and more.) All the free projects of taxpayer education and taxpayer assistance offered by the Internal Revenue Service—and they are extensive and well meant—cannot begin to compete with the paid services of a good independent tax expert, if only because the I.R.S., whose first duty is to collect revenue, is involved in an obvious conflict of interest when it sets about explaining to people how to avoid taxes. The fact that about half of all the revenue derived from individual returns for 1960 came from adjusted gross incomes of $9,000 or less is not attributable entirely to provisions of the Code; in part, it results from the fact that low-income taxpayers cannot afford to be shown how to pay less.

The brains that go into tax avoidance, which are generally recognized as including some of the best legal brains extant, constitute a wasted national resource, it is widely contended—and this contention is cheerfully upheld by some leading tax lawyers, who seem only too glad to affirm, first, that their mental capacities are indeed exceptional, and, second, that these capacities are indeed being squandered on trivia.

A special favorite of theoreticians, but of hardly anyone else, is something called the expenditure tax—the taxing of individuals on the basis of their total annual expenditures rather than on their income. The proponents of this tax—diehard adherents of the economics of scarcity—argue that it would have the primary virtue of simplicity; that it would have the beneficial effect of encouraging savings; that it would be fairer than the income tax, because it would tax what people took out of the economy rather than what they put into it; and that it would give the government a particularly handy control instrument with which to keep the national economy on an even keel. Its opponents contend that it wouldn’t really be simple at all, and would be ridiculously easy to evade; that it would cause the rich to become richer, and doubtless stingier as well; and, finally, that by putting a penalty on spending it would promote depression.

“The expenditure tax is a beautiful thing to contemplate,” one of its admirers said recently. “It would avoid almost all the pitfalls of the income tax. But it’s a dream.”

PRIVATE INFORMATION, whether of distant public events, impending business developments, or even the health of political figures, has always been a valuable commodity to traders in securities—so valuable that some commentators have suggested that stock exchanges are markets for such information just as much as for stocks. The money value that a market puts on information is often precisely measurable in terms of the change in stock prices that it brings about, and the information is almost as readily convertible into money as any other commodity; indeed, to the extent that it is used for barter between traders, it is a kind of money.

it has been widely argued that the privilege of cashing in on their corporate secrets is a necessary incentive to business executives to goad them to their best efforts,