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06/04/2012

From Gilt-Edged to Blue Chip - The Evolution of a Stock Market Term


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When the stock market was in full-scale panic mode in 1893, the New York Herald reported that “there was no relation whatever between prices made on the tape and the intrinsic value of the securities sold.” The paper noted that “the fall was perhaps sharpest in gilt edged, dividend paying stocks which have been comparatively firm while others were tumbling.”

Today even the most casual followers of the financial markets would describe those as blue chip stocks, while the term “gilt- edged” is now applied to one particular segment of the bond market.

How did this change in the language of investing come to pass? Perhaps the Stock Market Crash of 1929 played a role.

In its literal use, “gilt-edged” denotes the ornamentation of fine paper — the invitations to the wedding of Prince William and Kate Middleton were gilt-edged — and it has a place in the world of fine books, where the terms “t.e.g.” (top edge gilt) and “a.e.g.” (all edges gilt) are commonly used by book dealers.

The metaphorical uses of “gilt-edged” are wide-ranging. In Young America in Wall-Street (1857), George Francis Train wrote of “gilded churches for gilt-edged sermons,” and while immigrants to America did not find the streets to be literally paved with gold, in 1873 a New Jersey auctioneer advertised the sale of “300 gilt-edged lots in the classic and charming precincts of Rutherford Park.”

Present-day British sportswriters covering soccer and cricket often describe the squandering of a promising opportunity as missing or spurning a gilt-edged chance. One writer chronicling a 1–1 tie between Manchester United and Arsenal appeared to offer an ad hoc rating service for futility on the soccer pitch in his comment that a hapless Arsenal player “spurned four decent opportunities, two of them gilt-edged.”

As a financial term the earliest usage cited by the Oxford English Dictionary is an 1867 statement on not honoring drafts “unless secured by previous deposits of specie, gilt-edged paper endorsed with two good names, or US or solvent State stocks.” (In early usages the term “stocks” could apply to either bonds or equities.)

In today’s financial markets the term “gilt-edged” — generally shortened to “gilt” — denotes a British government bond (although the term can also be used in other countries). Britain’s Debt Management Office offers this definition: “A gilt is a UK government liability in sterling, issued by H[er] M[ajesty’s] Treasury and listed on the London Stock Exchange. The term ‘gilt’ or ‘gilt-edged security’ is a reference to the primary characteristic of gilts as an investment: their security. This is a reflection of the fact that the British government has never failed to make interest or principal payments on gilts as they fall due.”

In The Gilt-Edged Market (2003) Choudhry, Cross and Harrison label as “almost certainly apocryphal” the notion that British government bonds ever had actual gilt on the edges of certificates.

If gilt edges — actual or metaphorical — exist in a natural habitat of upscale respectability, blue chips have been a part of poker for a long time. Barry Popik, a compiler of American slang expressions, has located an example from 1878. He also cites a book entitled Glimpses of Gotham; and, City Characters (1880) in which the proprietor of a private gaming establishment boasted of the amenities offered to a select group of friends: “I have plenty of liquor. I have cards, and a set of regular red, white and blue chips.”

An 1891 newspaper article told of a poker game played by four cattle ranchers riding in the caboose of a train carrying their livestock to Chicago in which “the value of the chips was stated in unusual terms, a white standing for one steer, a red chip for five steers and a blue chip for 10 steers.”

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Blue chips, however, are not always the highest-value chip. The 1909 edition of The Official Rules of Card Games: Hoyle Up-to-date noted that in draw poker chips “are of different colors, usually white, red, blue and yellow. Their values are fixed arbitrarily. It is common to value a white chip at one, a red at five, a blue at 20 and a yellow at 100, although this is varied at will.”

Blue chips at many Las Vegas casinos have the value of $1, while the New Jersey Casino Control Commission has established the blue chip at $10. The $5,000 gray chip is the highest-value chip in actual use in Atlantic City, although the regulations allow for a $20,000 mustard yellow chip and a $25,000 gold chip. Perhaps a highly sought-after athlete choosing to attend Princeton or Rutgers should be described — using precise Garden State terminology — as a “gray chip recruit.”

In tracking early usages of “blue chip” in the financial markets the Oxford English Dictionary is surprisingly unhelpful. There’s a 1929 reference to the odds of agriculture becoming a blue chip, but the earliest example relating to the stock market dates from 1932.

At one time a case was made for Oliver Gingold, a Wall Street Journal writer, originating the term in the 1920s, but an article published in the Journal on January 1, 1929, credited the usage to John W. Gates in a comment he purportedly made in October 1902, in reference to high call money rates paid by investors buying stock on margin: “‘The game was being played with blue chips’ and that people who could not stand the pace or the price were not obliged to sit in.”

Gates’ propensities were amply indicated by his nickname, “Bet a Million,” but the condition described actually occurred a month earlier at a time when Gates was in Europe. On September 19, 1902, The New York Times reported heavy buying in two railroad stocks, “it being pointed out that in a high money market only the very rich can afford to take these stocks.” In this period Gates possessed celebrity status as a financial player, so it seems reasonable to assume that if he had said anything so quotable, it would have been directly attributed to him.

Barryinroom

Barry Popik

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Because of the work of Barry Popik, we can follow the evolution of the term. Popik cites an 1888 newspaper article in Duluth, MN, reporting on trading in the Chicago commodity markets that makes reference to “the ‘blue chips’ as the brokers call the local heavy weights.”

In an 1892 article entitled “Day of Wild Excitement in the Stock Exchange” a Chicago newspaper reported that “transac- tions were not only enormous in the aggregate, but nearly all the individual trades were on a large scale.” The paper quoted an exchange between a broker “rushing up to the Reading crowd” asking “What’s bid for one hundred?” and the brush-off he received: “‘Run away, little boy,’ answered another mopping his brow. ‘We are playing with blue chips only today.’”

Reading Company was a favorite rail- road stock of the period, but the reference here is not to its intrinsic investment quality — the way that we would use “blue chip” — but to the price of the stock on that particular day.

The poker origins of “blue chip” are reflected in an 1899 Wall Street report from the Philadelphia Inquirer chronicling the course of market capitulation: “The little gamblers were cleaned out of their money a week ago. On Monday and Tuesday the red chips were raked away from the middle class. Today the blue chips were reached. Today’s was a big men’s market. It was liquidation by the men with big bank rolls that broke the market this afternoon.”

As used by The New York Times in the 1920s, the term denoted a volatile stock favored by investment pools for their pump-and-dump schemes. In 1922, for example, the Times noted that Mexican Petroleum would be absorbed into the company owning three-quarters of its shares: “Brokers say that the exchange into Pan American Petroleum would prove advantageous to the shareholders, relieve the Stock Exchange of any embarrassment in connection with the trading and take away from the professional traders a stock which has come to be considered Wall Street’s ‘blue chip’ in the speculative game.”

In a 1924 article on a stock split by General Electric the Times commented of the pre-split shares that “one of Wall Street’s favorite ‘blue chips’ passed out of existence. Although the old shares were more or less of an investment, there nevertheless was always considerable speculation in them, and they were popular because of the width and activity of their movements.”

Similarly, in a 1926 article on an impending stock split the Times reported that “American Can has had an exciting time on the Stock Exchange during the last four or five years. It has been the subject of many pools and has made a great deal of money for the ‘crowd’ which acted as its market sponsor.” While the stock would continue to be listed on the NYSE after the split, the Times noted that “the elimination of the old shares ... will remove from trading one of Wall Street’s favorite ‘blue chips.’”

Today a stock split is a badge of honor for a blue chip stock even though it doesn’t alter a shareholder’s proportional ownership in the company. A split does mean that movements in the stock price will be of a smaller dollar amount, which in the frenetic environment of the 1920s would make the stock less visible to naive and unwary investors ready to be impressed by large, flashy gyrations in the market.

There is, however, an early example of “blue chip” as a synonym for “gilt-edged,” which involves General Electric. In November 1909, The Ticker (which later became The Magazine of Wall Street) ran a slice-of-investing-life story in which one of the characters is described as “the closest-mouthed, smoothest-running piece of human machinery to be found south of the Singer tower.” (The Singer Tower was at the northwest corner of Liberty Street and Broadway and achieved the unusual distinction of being the tallest building in the world when it was completed in 1908 and the tallest building ever to be demolished when it was torn down in 1968.)


Museum of American Finance


This investor “had accumulated a fortune by dealing principally in the gilt-edged stocks,” and among his holdings were “Lackawanna, General Electric, Jersey Central and a bunch of other aristocratic cats and dogs. When asked why he favored such gilt-edged stuff he would reply, laconically: ‘Blue chips for mine.’”

The wisdom of hindsight — which is, of course, the only investing wisdom guaranteed to work every time — gives this investor a .333 batting average. Though tarnished by the financial crisis of 2008, General Electric can still claim blue chip status. The two railroads, however, went into bankruptcy in the 1970s and were incorporated into Conrail.

So how did “gilt-edged” come to lose its place in the investing lexicon, dislodged by a term from the poker tables? Let’s start with a comment composed in the lofty heights of the pre-crash market of 1929.

An investor writing in the September 7, 1929 issue of The Magazine of Wall Street confidently noted, “I have the great satisfaction of having bankers and investment counsels advise me that my holdings are all gilt-edge ones.” Blissfully unaware of hazards to come, he boasted that “practically every one of my stock certificates has written in large type across its face Dame Fortune’s Golden Smile of ultimate success and glorious independence.”

The transition to “blue chip” was already under way. The term was used in two articles in the September 21, 1929 issue of The Magazine of Wall Street and the following month, when the stock market was in the midst of cataclysm, the New York World reported on October 28, 1929 that “fantastic efforts to justify ‘scarcity values’ for blue chip stocks have been abandoned almost overnight.”

Perhaps a piece of newspaper humor can offer a clue as to why this process became solidified. There was a day when the editorial pages of newspapers included jests about current events. Following the Stock Market Crash of 1929, the Wichita Eagle printed this acid-etched quip: “In the new lexicon of definitions in Wall Street an investment stock might be termed one that does not sag more than 50 points in one day.”

Stock market commentators had long taken care to delineate between speculations and investments, with investments said to offer a degree of safety that speculations could not claim, but such distinctions were now grounds for satire. Perhaps in this new environment the grandiloquent phrasing of “gilt-edged,” with its intimations of a prosperous future ruled over by Dame Fortune, inevitably lost ground to the term that had its source in gambling.

In Ten Years of Wall Street (1932), Barnie F. Winkelman wrote, “The leading issues are usually quoted at high prices ... Over a term of years, investors in the ‘blue- chips’ have done well, but for those who purchase in a rising market, a financial parachute is advised. Such premier issues, however, offer the best investment opportunities in a long decline.”

This brings us to the modern understanding of “blue chip,” but then as now, remember to pack your parachute.

RESOURCES

Choudhry, Moorad, Graham “Harry” Cross and James Harrison. The Gilt-Edged Market. Oxford: Butterworth-Heinemann, 2003.

The Official Rules of Card Games: Hoyle Up-to-date: Publishers’ Fourteenth Edition of Rules of Popular Games. Cincinnati, Ohio: The United States Playing Card Co., 1909.

“Played Poker for Cattle.” Spokane Daily Chronicle, July 23, 1891. Reprinted from the Pittsburg [sic] Dispatch. Accessed on Google News Archive.

Popik, Barry. www.barrypopik.com/index. php/new_york_city/entry/blue_chip/.

“Simpson’s Luck: The Man Who Knew All about Reading.” The Ticker, November 1909.

– Jay Hoster

Jay Hoster is compiling a book of quotations about the investing experience. He has a particular interest in Wall Street folklore and can generally get a microfilm machine to work without having to pester a librarian. As a result of a convoluted family theory about naming offspring, he was named for Jay Cooke and Jay Gould.

The author wishes to thank Robert H. Jeffrey, retired chairman of The Jeffrey Co., for reading a draft of this article.

This article originally appeared in the Winter 2012 issue of Financial History a publication of the Museum of American Finance.

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