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rarely bothered to give their proposition any semblance of serious merit. They could sell shares in a mine that was not even a “hole in the ground” or in an invention the chief recommendation for which was the enormous profit made by Henry Ford’s early partners. The victim was in fact buying “blue sky” and nothing else. Any one with the slightest business sense could have detected the complete worthlessness of these ventures almost at a glance; in fact, the glossy paper used for the prospectus was in itself sufficient to identify the proposition as fraudulent.
    The tightening of federal and state regulations against these swindles has led to a different type of security promotion. Instead of offering something entirely worthless, the promoter selects a real enterprise that he can sell at much more than its fair value. By this means the law can be obeyed and the public exploited just the same. Oil and mining ventures lend themselves best to such stock flotations, because it is easy to instill in the uninitiated an exaggerated notion of their true worth. The S.E.C. has been concerning itself more and more seriously with endeavors to defeat this type of semifraud. In theory a promoter may offer something worth $1 per share at $5, provided he discloses all the facts and adds no false representations. The Commission is not authorized to pass upon the soundness of new securities or the fairness of their price (except in the case of public-utility issues which come under the terms of the Public Utility HoldingCompany Act of 1935). Actually, it appears to be doing its best, by various pressures, to discourage and even prevent the more grossly inequitable offerings. But it is essential that the public recognize that the Commission’s powers in this respect are severely limited and that only a sceptical analysis by the intending buyer can assure him against exploitation.
    Promotional activities are attracted especially to any new industry that is in the public eye. Profits made by those first in the field, or even currently by the enterprise floated, can be given a fictitious guise of permanence and of future enhancement. Hence gross overvaluations can be made plausible enough to sell. In the liquor flotations of 1933 the degree of overvaluation depended entirely upon the conscience of the sponsors. Accordingly, the list of stock offerings showed all gradations from the thoroughly legitimate down to the almost completely fraudulent. 7 A somewhat similar picture is presented by the aircraft flotations of 1938–1939. The public would do well to remember that whenever it becomes easy to raise capital for a particular industry, both the chances of unfair deals are magnified and the danger of overdevelopment of the industry itself becomes very real.
    7 See Appendix Note 55, p. 792 on accompanying CD, relative to investors’ experience with brewery-stock flotations of 1933.
    Repercussions of Unsound Investment Banking. The relaxation of investment bankers’ standards in the late 1920’s, and their use of ingenious means to enlarge their compensation, had unwholesome repercussions in the field of corporate management. Operating officials felt themselves entitled not only to handsome salaries but also to a substantial participation in the profits of the enterprise. In this respect the investment-trust arrangements, devised by the banking houses for their own benefit, set a stimulating example to the world of “big business.”
    Whether or not it is proper for executives of a large and prosperous concern to receive annual compensation running into hundreds of thousands or even millions of dollars is perhaps an open question. Its answer will depend upon the extent to which the corporation’s success is due to their unique or surpassing ability, and this must be very difficult to determine with assurance. But it may not be denied that devious and questionable means were frequently employed to secure these large bonuses to the