200 THE WORK OF THE STOCK EXCHANGE
due to new and untried legislation had fostered a heavy short interest
n the market, thereby furnishing the best safeguard against a sudden
and disastrous drop. This short interest was a leading factor in pro-
ducing the extraordinary resistance of prices in New York which
caused so much favorable comment during the few days before the
closing (of the Stock Exchange). It were well if ill-informed people
who deprecate short selling would note this fact.
On the other hand, the violence of the 1929 stock panic
san be largely attributed to the remarkably small short interest
in the stock market.'®
Stabilization of Security Prices.—In conclusion, there-
fore, it may be said that the effect of margin purchases and
short sales is really to stabilize prices, that this result is bene-
ficial to both buyers and sellers, and that in an economic sense
the undue inflation of prices above values is just as dangerous
to everyone concerned as their undue depression below values.
If, therefore, short selling were prevented, an effective check
would be removed from an upward trend of prices which in the
long run would be bound to fall again with a crash, while the
support to prices which a short interest provides in just such a
declining market would also be removed.*
Legislation Against the Short Sale—The popular mis-
snderstanding and prejudice against short selling of securities
s not new. As long as the stock exchanges of the world have
-xisted the short sale has been bitterly condemned, but invari-
ably indorsed after thorough investigation or painful experi-
ence, as a vital and indispensable factor in the maintenance of
free securities markets everywhere.’ As an operation neces-
sary in organized speculative markets it has, therefore, stood
that hardest of all tests—the test of time. Short selling was
forbidden in England by Sir John Bernard's Act in 1733; yet
this law failed to halt the practice, and in 1860 it was repealed.
18 See Appendix Vlle.
19 See Appendix VII{,
0 See Appendix Vig.
