And it was not only the young who were dissatisfied with American life and society. Their disaffection was shared by enough older people so that virtually no socioeconomic group was without its critics of the contemporary American scene and of the government's policies at home and abroad. And since all the angry voices, not only in the United States but throughout the world, held the business system primarily responsible for everything that was wrong, Wall Street-the citadel of capitalism-was a chief target of their attacks. In the 1930s the villains had been called the "merchants of death"; in the 1960s the culprit was the "military-industrial complex". At both times, Wall Street was a chief target.
Though long accustomed to such attacks, the recent wave of anti-Wall Street criticism came at a time when the financial district was on the verge of deep trouble. Not since the long depression of the 1930s had it faced such serious difficulties as it did at the end of the 1960s, when the great bull market of 1968 expired in mid-1969.
Some of Wall Street's worst difficulties stemmed from the prolonged stock market boom of the 1960s. By the end of the decade total annual trades on the New York Stock Exchange alone soared from 1.8 billion shares in 1965 to almost 2.9 billion shares in 1967 before peaking at nearly 3.3 billion shares in 1968. Neither the Exchange nor the brokerage community anticipated such a massive increase in trading volume. Daily transactions on the Big Board in 1967 averaged slightly less than 10.1 million shares, a figure the Exchange had predicted would not be reached until 1975. In 1968 the daily average shot up to 12.4 million shares. That year the old record of 16.4 million shares traded on a single day-on October 24, 1929-was not only repeatedly exceeded but on April 10, for the first time in the Exchange's long history, more than 20 million shares changed hands. Still bigger days were to follow.
Many brokerage houses were unprepared to deal with so high a volume of trades. For some of them booming business and profits proved to be their undoing. The upsurge in stock market transactions generated so much paper work that it exceeded the capacity of many brokerage houses to transfer or deliver stock certificates within the established five-day settlement period. The root cause of the problem stemmed from the outmoded manual bookkeeping procedures still employed in the "cages," the back offices of many brokerage houses. Such firms found themselves unable to tag and move thousands upon thousands of stock certificates. Unlike the spacious, airy, elegantly decorated front offices, the cages of most firms were crowded and disorganized, with securities stacked on tables, counters, or wherever there was a place for them. The back offices of most brokerage firms, according to a study by an independent management and accounting firm, belonged to the "green eyeshade era," places where Charles Dickens' "Scrooge and Bob Cratchitt would still feel at home."
Antiquated back office procedures resulted in millions upon millions of "lost" (misplaced) securities. By the end of 1967 the volume of "fails," the term used to refer to incompleted transactions, assumed crisis proportions, and the worst was still to come. In January, 1968, the Securities and Exchange Commission (SEC) warned brokerage houses to improve their back office practices to achieve "prompt transfer and delivery of securities" and to adjust their net capital figures to reflect their fails. "The long length of time in which amounts due are carried in the failed-to-deliver accounts of the various broker-dealers," the SEC warned, "exposes them to undue risk of market fluctuations in the securities, as well as to the possibility of financial difficulties of the broker on the other side of the transaction."
That same month the New York Stock Exchange also took steps to ease the paper crunch. It shortened trading hours by ninety minutes a day. The restriction accomplished little and was lifted in March. Then in June, when the volume of fails reached almost $3.8 billion, nearly 23 times greater than the generally accepted level, the Exchange decided to stay closed for a full day, which it did through December. But neither a shortened trading week nor the Exchange's efforts to persuade the most troubled firms to curtail "voluntarily" their brokerage business proved useful. By December 1968 the volume of fails reached its peak, $4.1 billion.
Kidder, Peabody survived the fails crisis better than most houses. Unlike some firms which shifted their brokerage and accounting operations to computers only after the onset of the paper work mess, Kidder, Peabody's back office was fully automated and, just as important, staffed with experienced personnel qualified to use the new technology effectively. "We either planned well or guessed right," said William Loverd, the firm's treasurer. Whichever it was, Kidder, Peabody's back office never ran into any severe operational problems. Throughout the worst of the paper crunch it succeeded in sending out daily statements to customers, and it did so without adding scores of untrained clerks as did some houses with less efficient back offices. Most of the firm's staff had been with Kidder, Peabody since the mid-1940s when it first started to experiment with new back office machines and procedures. With great loyalty, the firm's employees worked throughout most of the night to stay abreast of the expanding volume of transactions; during the day other employees and officers stayed after hours, telephoning customers, brokers, banks, and institutions to get them to deliver the certificates they owed the firm.
Efficient back office operations saved Kidder, Peabody from SEC warnings and kept it off the New York Stock Exchange's "watch list," which included at one time or another almost fifty firms. Effective management, however, did not allow Kidder, Peabody-or any other well-managed house-to escape the fails crisis altogether. Firms whose own operations were in reasonably good shape had to deal with brokerage houses with back office snarls. The deficiencies of the latter affected the performance of all firms. Kidder, Peabody's chief concern during the massive paper work mess of 1968 stemmed largely from the failure of other houses to make deliveries on time; their delinquencies, in turn, prevented the firm from settling with its own clients. Late in April 1968, before the worst of the crisis, the value of the firm's fails to receive and deliver, as reported to the New York Stock Exchange, amounted to $33.8 million and $35.6 million, respectively. A year later both figures were down substantially: fails to receive fell to $23.3 million and fails to deliver shrank to $17.5 million.
Kidder, Peabody's drop in fails was not atypical. Almost all houses showed a decline, and not only because of a marked increase in back office efficiency. Nor was the decrease attributable chiefly to the New York Stock Exchange's Central Certificate Service (CCS) set up early in 1969 to reduce the actual movement of certificates by establishing a central depository that, in the words of Big Board president Robert W. Haack, would provide for "securities a fluidity of movement comparable to the way checks move money through the banking system." The principal reason for the decrease in fails, from $4.1 billion in December 1968 to $2.3 billion in April 1969, was the decline in the volume of trades. "The same elements that made the problem have continued to exist," said a prominent Wall Street operations expert, Junius W. Peake of Shields & Co. "I just don't think anything has changed," he continued. "Any time you increase your sales capacity you should increase your operations capacity. The industry has not done that." And the improvements that had been achieved, such as the Exchange's automated central depository system, affected only listed securities, not those traded over-the-counter where the most acute problems had occurred. That market's automated quote system, NASDAQ (National Association of Securities Dealers Automated Quotations), did not go into effect until January 1971.
