can well afford to rest satisfied that his work will continue to bear
good fruit without any further public addresses on the subject.
The people are already familiar with his views, and their continued
reiteration by him in his speeches, especially during this period of
financial and industrial distrust, depression and unsettlement, would
tend to inspire fresh uneasiness as to the situation and the value of
corporate stocks and bonds. It would do this, owing to the extreme
nervousness and timidity of capital that prevails.
It is this abnormally sensitive and apprehensive condition of public
feeling that led to the recent senseless run upon certain New York trust
companies, and in a minor degree upon banks and savings banks, and that
caused very many of the depositors, after withdrawing their money, to
hoard it in safe deposit vaults, and various less safe receptacles,
instead of depositing it in other institutions.
Their hoarding it, naturally made conditions all the worse, through very
seriously increasing the stringency of the money market. So great became
the scarcity of loanable funds that from the 23d to the 31st of October,
call loans were made daily on the New York Stock Exchange at rates
averaging 50 per cent per annum, with some ranging from 75 to 100 per
cent. Such hoarding, on a large scale, is fraught with great danger, as
it involves a sudden contraction of the circulation and drain upon bank
reserves. In this instance it caused renewed panic and fresh breaks in
stocks, and it alone compelled the New York Bank Clearing House members
to vote unanimously to issue Clearing House Certificates—nothing else
would have offset the run on deposit institutions.
It would be very far from President Roosevelt’s wish to say or do
anything that would cause people to hoard money instead of employing it
in customary channels; for hoarding is a public injury and contrary to
good citizenship. Furthermore, it is entirely un-American. But the
public mind has been wrought up to such a pitch of distrust and
semi-hysteria, through the disclosures of corporate dishonesty, and
other disturbing causes, that a false, or at least exaggerated,
impression exists among many that all corporations are, or may be, in
the same boat. This want of confidence in the situation is very largely
what has caused the heavy and prolonged liquidation in stocks, and led
to the bank and trust company runs and great monetary and industrial
disturbance we have witnessed in this great and far-reaching crisis.
Mr. Roosevelt will, therefore, see, now that he is becoming more and
more cognizant of the situation, that what the public, and particularly
the investing class, needs in this period of stress and storm and
anxiety, is to be calmed and reassured and made aware that there is a
silver lining to the cloud, and no good reason for their loss of
confidence; for the country is still as great and grand, and prolific in
its resources, as ever, with its future no less promising and
magnificent than it was before this crisis darkened the sky.
It is known that he takes this view of the situation, and is earnestly
co-operating with the Secretary of the Treasury to ease the money market
and restore confidence.
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CHAPTER LXXXII.
OUR GREAT AMERICAN PANICS FROM FIRST TO LAST.
The panic of 1907 naturally revived public interest in all our previous
panics, and therefore a brief historical review of these is timely. The
small one that followed the throwing overboard of the historic tea in
Boston harbor in George the Third’s time, and which was the prelude to
the War of Independence—the victorious struggle of the old Thirteen
Colonies to throw off the British yoke—was of no importance, owing to
the country’s scanty trade and banking development, and the
corresponding scarcity of credits. It was a tempest in a teapot, this
sequel to the Boston tea party.
The panic of 1812 was the first of much magnitude in the history of the
United States, and it resulted from over-trading and undue expansion in
all directions, but was precipitated by our war with England in that
year. The banking capital of the country was then only seventy millions
of dollars, yet more than ninety banks failed in the run upon their
deposits that ensued, and the Government found great difficulty in
raising a war loan. Meanwhile, trade and manufactures, which had been
very active and prosperous before the declaration of war, suddenly
became almost paralyzed.
The change from undue inflation to the undue contraction born of fear
was disastrous in its wholesale destruction of market values and
credits. But the Government war expenditures, after it had succeeded in
disposing of its securities, gradually stimulated recovery from the
worst effects of the panic, and industries that had been suspended were
resumed, thus re-employing labor that had been left idle.
Not much has been recorded of the panic of 1823, which caused trade
depression till 1825, so it was evidently much milder and less
disastrous than that of 1812. It was another instance of the reaction
that follows over-trading and an over-extension of credits, without any
war or other great event to precipitate it.
The panic of 1837 was, however, much more serious and disastrous,
because it involved far greater results owing to the growth of the
United States in extent, population, and wealth in the interval. like
its predecessor, and indeed all other panics, it was due to the
over-extension of trade, speculation and credits, but it was
precipitated by the troubles of the United States Bank, and President
Jackson’s hostility to that institution.
Speculation had been running wild, particularly in land and new railway
projects, which were then in their infancy in England. The achievements
of George Stephenson, the builder of the first locomotive engine there,
had quickly kindled the fire of railway enterprise in this country, and
promoters busied themselves in raising capital for building and
equipping railways here; and incidentally it gave a strong impulse to
the widely prevailing speculation in land.
The panic of 1857 was, of course, infinitely greater in its extent and
consequences than that of 1837, owing to the same causes that made the
latter greater than that of 1812, namely, the growth of the territory,
population, and wealth of the United States. Its main cause can be
traced to the enormous increase of speculative enterprise in this
country, especially in railway building, following the great gold
discoveries of 1849 in California. But its immediate cause was the
general alarm produced by the failure of the Ohio Life and Trust
Company, which had its principal agency in Wall Street.
There, at the corner of Nassau Street, it had long been regarded as a
pillar of financial strength, and no institution in the United States
stood in higher credit or commanded greater confidence, although without
any good reason. When it suspended payment, the news came upon the
public with the suddenness of a thunderbolt from a clear sky. The
unexpected shock filled the financial and mercantile community with
dismay, and from one end of the country to the other credit was
destroyed.
This, indeed, was panic. Bank-notes were everywhere distrusted, and
presented for redemption; whereupon the banks everywhere suspended
specie payment, except that the Chemical Bank of New York redeemed its
own notes. Business depression and thousands of failures from Maine to
California followed, and nearly three fourths of the railways, and other
large corporations, defaulted in their interest and other payments, and
went into the hands of receivers. The depression grew deeper from month
to month for more than a year after the panic, and some of the best
railway stocks declined to $3 to $5 a share, including Michigan Southern
and Harlem. Meanwhile corporate foreclosure sales and reorganizations
told the story of the financial wreckage of the time.
The country had not long recovered from the effects of this great panic
when, on the 4th of March, 1861, Lincoln was inaugurated President, and
the Civil War broke out. There was severe depression—a war crisis—then,
but it was so slow, insidious, and prolonged that it was never called a
panic. It may be said to have commenced—in anticipation of the
threatened war of the South against the North—with Lincoln’s election in
November, 1860, and to have continued till the Government began to issue
the paper money of the war era in 1861, after the suspension of specie
payments.
One feature of the panic of 1857, and the prolonged depression that
followed it, duplicated the experience of 1837, and that was the almost
universal prevalence of what were called “shinplasters.” These were
practically I O Us given as change by anyone who had received a
bank-note or check for more than the amount due him in payment for
anything. In New York the notes of solvent New York banks were never
refused in payment, while those of banks elsewhere were tabooed; but in
making change, no specie was given, the banks having suspended specie
payments. So, unless the exact amount was tendered, shinplasters were
given for the balance.
The city was flooded with these personal evidences of debt for small
amounts, issued by storekeepers, hotels, restaurants, saloons, barbers,
and the rest of mankind, and many of these were passed from hand to hand
till they became too dirty and dilapidated to be handled. They were the
worst kind of filthy lucre, and understood to be only redeemable on a
return to cash payments by the banks. But of course many of them never
were redeemed. They ranged in amount from one cent to several dollars,
and this sort of scrip was more or less extensively issued from Maine to
Texas.
The Black Friday Gold Panic was a Wall Street convulsion, and not far
reaching, like the others. It occurred on Friday, September 24, 1869,
and was the result of a conspiracy, headed by Jay Gould, to corner gold,
and force the “shorts” and importers to buy at a high premium. The Tenth
National Bank, in Nassau Street, which he, and those associated with
him, managed to control, became conspicuously involved in the corner
through over-certifying their checks to the amount of about $7,500,000
on that day, and, as a result, it was closed by the Government bank
examiner. Several scandals cropped out in connection with this
conspiracy to corner gold, one of which involved the resignation of the
New York Assistant Treasurer, and another two brokerage firms employed
by the gold cornerers to buy and receive their gold. Gold, after being
bid up by the conspirators day by day from 119½ to 162¼, broke thirty
per cent on the announcement that the Government would sell five
millions of gold. This was followed by the suspension of the Gold
Clearing House Bank, and the Stock Exchange was also closed to check the
panic in stocks that ensued. While not a commercial panic, Black Friday
was very disastrous to many in Wall Street.
Next came the tremendous panic of 1873, which, commencing in Wall
Street, on September 13, with the failure of several prominent banking
and brokerage firms, including Howes & Macy, Kenyon Cox & Co. (in which
Daniel Drew was a special partner), Fisk & Hatch, and then Jay Cooke &
Co., rapidly spread, and soon covered the entire country. Many other
failures followed these from day to day, and crowds of sightseers
besieged Wall Street from morning till night, while the Stock Exchange
was closed, and remained closed for ten days to prevent the sacrifice of
stocks.
The severity of the distress that prevailed may be inferred from the
fact that on the 19th of September twenty-two Stock Exchange firms
suspended payment. Rumors of bank and trust company troubles flew thick
and fast, and there was a heavy run on their deposits, while the Union
Trust Company was temporarily forced to close in order to raise money on
its assets to meet the run upon it. Several banks were known to be
unable to stand the general run any longer, when, on the evening of
September 20th, the New York Clearing House resolved to issue
$10,000,000 of Clearing House loan certificates, in accordance with the
resolution adopted to meet the crisis of 1860-61. It was on the same
date that the Stock Exchange was closed by its governing committee.
On the 24th of September an additional issue of $10,000,000 of
certificates was authorized, and on the 27th, so great and widespread
had the panic become that all restrictions upon their issue were
removed. The banks, instead of paying checks in cash, except for small
sums, to depositors, certified them, payable through the Clearing House,
and the weekly bank statement of the Association was suspended on
September 27th, and not resumed till December 28th. The amount of
Clearing House loan certificates attained its maximum—$22,400,000—on
October 20th. In the interval business was resumed on the New York Stock
Exchange on September 30th, after its ten days of suspension. While it
remained closed there was a curb market on Broad Street for stocks and
bonds, but sales for cash there could only be made at panic prices. The
crisis of 1873 was far more severe than that of 1907, and recovery from
it was very slow. The panic of 1884 extended far beyond Wall Street, but
was most severely felt there.
There was a stock market panic in 1890, due to the failure of Baring
Bros. & Co., in London, and heavy gold exports from this side to allay
the panic there, but it did not spread much beyond Wall Street, and was
soon over. The panic of 1893 was, however, severe and extensive, and
15,000 failures were attributed to it throughout the country. As usual,
it resulted from undue speculation and expansion in trade, stocks, and
new enterprises. But it was more immediately caused by the agitation of
the 16-to-1 silver heresy, which led to a run on the gold in the United
States Treasury till the amount of free gold held by it, at all points,
was less than twenty millions, while the amount in the Sub-Treasury in
New York was reduced to only about $8,700,000. It was then, in February,
1893, that President Cleveland made his famous gold purchase for United
States bonds from the Morgan-Belmont syndicate, namely 3,500,000 ounces
of gold for $62,312,500 of four per cent bonds. This, aided by the
syndicate’s efforts, stopped gold exports and replenished the supply of
gold in the Treasury, and so restored confidence. Therefore the run
ceased; and after that the largely increased customs duties gradually
swelled the gold belonging to the Government to a far larger amount than
it had ever held before.
Coming down to the panic of 1907, we are confronted by its causes. These
were cumulative, but, as in every preceding crisis, the main cause was
far too large a mass of credits—that is, of debts—for the amount of cash
in which they were redeemable. Trade and speculation had been long so
active, and too often recklessly expanded, that this disproportion had
become dangerous, and a menace to our safety, as I pointed out several
times months before the crisis actually came. I said that a serious
reaction, a serious revulsion, was inevitable unless we moderated our
pace and mended our ways in the matters that I have elsewhere referred
to and criticised.
From my knowledge of banking, and my personal experience of our previous
panics, dating from that of 1857, I could foresee that this vast and
growing disproportion between the volume of credits and cash would
finally lead to collapse. This disproportion is always large, and always
becomes larger in periods of activity in trade and speculation. But in
this country, and particularly among our speculative Wall Street
millionaires and promoters, it had become unwieldy, while, very largely,
liquid capital had been converted into fixed forms that were unavailable
in raising cash.
Yet the people generally did not see the danger and take alarm till, on
October 21, the New York Clearing House was notified by the Bank of
Commerce that it would not clear for the Knickerbocker Trust Company
after the following day; and simultaneously the Clearing House made an
examination of the Mercantile National Bank, and ordered all its
officers and directors to resign at once, preparatory to assisting it.
Then the public suddenly took fright, and the run upon the deposits of
the Knickerbocker Trust Company caused it to close its doors about two
hours after it had opened them the next day. This added fuel to the fire
of distrust, and the run on the Trust Company of America and its
Colonial Branch, and also on the Lincoln Trust Company, began; and six
banks and a trust company suspended in Brooklyn, and the Hamilton Bank
in Harlem, on the day following.
At the same time there was a heavy withdrawal of deposits from all the
banks and trust companies, and the money thus withdrawn was not
deposited in other institutions, but hoarded. Hence the severe monetary
stringency that ensued, which caused call loans on the Stock Exchange to
command as much as forty to fifty per cent per annum at one time, and
from fifteen to twenty-five till the end of the year.
The New York Clearing House saw the urgent need of promptly fortifying
the banks in the Association against the drain on their deposits, and,
on October 26, resolved to issue Clearing House certificates against
such satisfactory assets as they might deposit, these certificates to be
used by them instead of cash, in paying their daily balances at the
Clearing House. This gave immediate relief to the banks, and was the
signal for every other bank clearing house in the large cities to do
likewise, besides which many of the country banks issued checks of their
own, from one dollar up, in payment of checks against deposits.
The other principal features and details of the crisis I have given
elsewhere. But it must not be overlooked that, severe as it was in its
actual effects, it was very largely sentimental in the sense that it was
precipitated by fear—fear born of distrust. That is the immediate cause
of all panics, but without the superinducing causes this fear would not
exist. In our case it was the very seriously impaired credit situation,
arising from a multiplicity of contributory causes, which inspired the
fear that caused the runs on the banks and trust companies, and the
hoarding of the money withdrawn, as well as the withholding of other
money which, in the absence of distrust, would have been deposited. To
fill the vacuum caused by hoarding, we outdid all our previous efforts
by importing about a hundred millions of gold.
This hoarding, and consequent stringency, apart from the issue, in all,
of $81,000,000 of Clearing House loan certificates, was responsible for
the premium on currency, which at one time was quoted at four to five
per cent, for it practically forced the banks to a partial suspension of
payments involved in requiring checks to be made payable through the
Clearing House, except in cases where they were willing to accommodate
depositors with small amounts of currency. But fortunately the premium,
which had dwindled to ¼ @ ⅜ on the 31st of December, disappeared at the
beginning of 1908. Meanwhile, all through the crisis, large employers of
labor had found great difficulty, and incurred much expense, in
obtaining currency enough to pay wages; and in Pittsburg and other
labor-employing centers, wages were paid largely in scrip issued by the
banks or employing corporations. This scrip was so generally issued that
in Pittsburg all the street car lines accepted it for fares.
No wonder that these conditions seriously checked buying of all kinds,
and caused demoralization and semi-paralysis in industrial corporations,
and that hundreds of thousands of operatives were thrown out of
employment by the stoppage or curtailment of work in mills and other
manufacturing establishments. But the storm being over, and the money
market again easy, there is every prospect of gradual, if not rapid,
recovery to a normal standard of prosperity in our trade and
manufacturing industries. It was not till January 11, 1908, that the
Clearing House reported the deficit in the bank reserves wiped out, and
a surplus of $6,084,050 accumulated against a deficit of $11,509,550 on
January 3d, and at one time of $81,000,000.
It should not be thought, because we imported a hundred millions of gold
from Europe to relieve the monetary stress produced by the crisis, that
we thereby placed this country under obligations to any other country.
The gold we imported we bought and paid for from our own resources,
equivalent to cash, in the shape of exports of cotton, grain, petroleum,
copper, and other American produce.
These commodities were even more necessary to Europe than the gold we
purchased there was to us. So the transactions on both sides were mere
matters of bargain and sale, no favor being shown on either side.
Indeed, both England and France did all they could to restrict our
importations of gold. The extraordinary advance of the Bank of England
rate to seven per cent, and its retention there till we discontinued our
purchases of gold, furnished practical proof of this. This was
justifiable, of course, as a defensive and protective measure for the
bank, but none the less it was an obstacle placed in our path.
Its proclaimed purpose was to prevent our taking gold from Europe as
much as possible, yet in the face of this heavy handicap we bought and
paid for and imported all the gold we wanted, and it was not till after
we had stopped buying that the Bank of England lowered its rate to six
per cent. This showed that we controlled the Bank of England more than
the Bank of England controlled us. We were not assisted; we assisted
ourselves, and neither asked nor received favors.
This important fact testified to the strength and wide sweep of our
resources, both financial and commercial, and also to the solidity and
soundness of our business position, and the foundation on which it
rested. The firmness, too, with which we bore the enormous strain of the
crisis, and the good order and condition in which we emerged from it,
were equally eloquent in testifying to the same effect, and showing that
ours is indeed a great country—the greatest of all nations in its
material resources and acquired wealth.
The advantage of this is largely shared by us with the rest of the
world, both in our enormous foreign trade and the vast amount of money
spent every year by American tourists in Europe. If the hundred and
fifty millions of dollars spent by them there in 1907 had been kept at
home, it might have obviated the necessity of our importing gold to
relieve the crisis. Europe has good reason to return thanks for all it
gets from us; and what would the trade and commerce of Europe be, in
this progressive age, without the United States of America?
The strength, the resolution, and the courage with which the country, as
a whole, bore the brunt of the crisis of 1907 augurs well for a rapid
recovery from its effects, and paves the way to renewed prosperity and
progress; and there is every probability that it will recuperate more
swiftly from the great and trying ordeal than it did from the memorable
panics of 1812, 1837, 1857, 1873, 1884, and 1893, for its wealth,
population, and general resources are now so vastly greater than they
were at any of those periods that comparisons are out of the question.
The growth of our banking system alone since 1873 is indicated by the
fact that in the very severe panic of that year the New York Clearing
House issued only $16,000,000 of Clearing House certificates to the
banks belonging to it, whereas in the panic of 1884 it issued
$21,000,000, in the panic of 1893 $41,000,000, and in this last panic of
1907 no less than $81,000,000. The crisis was severe but it was
purifying, and eliminated a vast amount of unwholesome and dangerous, if
not dishonest, speculative elements from the management of many of our
banks and large railway and industrial corporations, and left in its
place the legacy of a higher standard of business morality than we had
before. Hence, perhaps we may say, with Shakespeare, all’s well that
ends well, and, with the Bible, out of evil cometh good. At least we
have plucked the flower Safety from the nettle Danger.
This view of our country, and the situation, is shared by the banking
community of the Old World, who also absolve President Roosevelt from
blame or responsibility for the crisis. In this connection a leading
London banker, Mr. H. H. Raphael, a member of Parliament and one of the
most influential and popular financial men in Great Britain, said, in
December:
“We regard President Roosevelt as not only one of the most courageous,
but one of the ablest of all your long line of distinguished Presidents.
We admire him for his courage and independence. No wonder the heart of
the American people is with him; he is giving you a good housecleaning,
and you well need it; and although you are passing through financial
storm and stress now, we know something of the wonderful recuperative
power of the United States, and it will not be long before America will
be forging ahead on the highway of economical progress, cleaner and
stronger than ever.”
This opinion is well worth quoting because of its evident sincerity.
There is no suspicion of politics or office-seeking about the allusion
to President Roosevelt, and if one man more than any other in this great
country of ours deserves the resounding applause of a national “Hip!
Hip! Hurrah!” for his public services, it is President Roosevelt.
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CHAPTER LXXXIII.
WALL STREET AS IT REALLY IS. A VINDICATION.
Many people, and some newspapers, have a false impression that Wall
Street is a gambling arena that does a great deal of harm and no good,
and that it ought to be, as far as possible, abolished, while Wall
Street speculators have been recklessly and unjustly denounced as
gamblers.
But those who know Wall Street well have no such impressions of it, or
its speculators, or of the Wall Street community of bankers and brokers.
They can, on the contrary, testify that there is no more honorable and
responsible body of men in the world than its bankers and the members of
the New York Stock Exchange, and that nowhere is honesty, integrity, and
good faith more resolutely exacted than on that Exchange, as its
constitution, by-laws, and rules clearly show; and nowhere is a black
sheep, when discovered, more quickly and severely punished than there.
The penalties involve expulsion from membership, or suspension for any
length of time the Governors may think proper for violations of its
rules, and they are rigorously enforced in all cases. The same remarks,
I am glad to say, apply substantially to the stock exchanges in Boston,
Philadelphia, Baltimore, and other cities.
During the crisis of 1907, and the exposures of corporate irregularities
that preceded it, no members of the Stock Exchange were implicated in
the wrongdoing that surprised and shocked the public. The men in control
of the life insurance companies that were examined and held up to scorn,
for their misuse and misappropriation of other people’s money, were not
members of the Stock Exchange, nor were they Wall Street men.
The men who wrecked the Metropolitan Street Railway System were not
members of the Stock Exchange, nor were those apostles of unsound
banking, the speculative bank promoters who gained control of the three
chains of New York City banks to promote their own speculative purposes,
and inadvertently paved the way to the panic; nor was a member of the
Stock Exchange responsible for the failure of the Knickerbocker Trust
Company, or at all involved in that leading event of the panic; nor was
a member of the Stock Exchange responsible for any bank, trust company,
or corporation failure, or run that occurred anywhere during the crisis,
or at any time in the panic year.
Of course there may possibly be undiscovered black sheep in Wall Street
as well as elsewhere, for we find them in church pews, and occasionally
even in church pulpits; but we should not heap wholesale condemnation
upon either Wall Street or the churches on that account.
To call the buying and selling of stocks or bonds, on the Stock
Exchange, gambling, is a misnomer, a misuse of the word, due either to
ignorance of the transactions there, or malice. It is so whether the
purchases or sales are by investors or speculators, for speculation on
the Stock Exchange is not gambling. Whether stocks, or bonds, are
bought, or sold, by investors or speculators is immaterial between the
contracting brokers on the floor of the Exchange. They know no
difference whatever. Delivery of the stocks or bonds is made by the one,
and received by the other, in every case, and payments made accordingly,
at the sale and purchase prices, investment and speculative transactions
being treated exactly alike.
A sale and purchase is the work of a moment in the Board Rooms, and no
voucher is exchanged to prove it till comparisons are made at the
brokers’ offices, usually after the Exchange closes. But no contract
thus made in an instant of time is ever repudiated, no matter how heavy
a loss it may involve to buyer or seller, for the penalty of such a
repudiation would be immediate suspension from the Stock Exchange,
followed by expulsion when proved.
Members of the Stock Exchange are not only men of assured solvency and
respectability but of good social position, and generally of large means
and more than ordinary education and culture. Most of them, too, belong
to our best clubs. Any conduct of theirs that was considered prejudicial
to the interests of the Exchange would render them amenable to
discipline, and be promptly investigated by the Governing Committee,
whose duty it is to inflict the prescribed penalties, in such cases,
without fear or favor. The fact that a membership has a market value
varying from $50,000 to $90,000 is a certain guarantee of solvency and
fair dealing under ordinary circumstances. A Stock Exchange membership
thus carries with it a large property qualification, and its owner is a
substantial citizen, who is, as we know, often one of “the Four
Hundred,” or to be seen in our best society, and whose wealth, in many
instances, amounts to millions. Preliminary to admission also he has to
submit to a searching examination by the Committee on Admissions.
Recent attacks upon the character of the New York Stock Exchange are
entirely unjustified and have been prompted by either ignorance or
prejudice. If the Stock Exchange were abolished great enterprises would
soon be paralyzed. Without its medium it would be impossible to raise
the capital for conducting our great railroad and industrial
corporations; investors would be deprived of the means of finding
profitable employment for their capital, and there would be no free
market for the many millions of securities there dealt in. Abolish the
Stock Exchange and the free play of market forces which best develop
real values; then investors would be kept in the dark and their
properties would be exposed to grosser manipulations than ever thought
of by stock market operators. The New York Stock Exchange, it should be
remembered, is nothing more than a well-systematized market place for
the exchange of or trading in securities. From the very nature of its
purpose and its organization it cannot exercise any direct control over
the management of the corporations whose securities are dealt in by its
members. It may establish certain rules as to the conduct of business by
its members, and may insist that only securities of certain standards
shall be dealt in on its floor. Beyond that it cannot go; and buyers and
sellers alike, as in all matters of business, are expected to exercise
their own intelligence as to the merits of investments. One thing is
certain, that whatever its shortcomings there is no organized body of
business men where the standards of integrity are higher and more fixed
than on the New York Stock Exchange. Its transactions are carried on
chiefly by word of mouth; the spoken word being as sacredly kept as
signed contracts. Further, there is a Board of Governors to whom any
complaint can be carried, whose purpose is to prevent all abuses within
its power and to maintain the highest possible standards of business.
All infractions of the rules are promptly punished. Certainly, whoever
begins throwing stones at the New York Stock Exchange should first look
and see if his own window-panes are not in danger.
A great deal of nonsense is also heard about speculation. Now,
speculation, like many other good things, may be carried to excess, and
is then injurious and open to the severest criticism. But speculation
within reasonable limits is most beneficial. It is one of the main
incentives to enterprise. Crush this disposition to venture, or the
willingness to accept a risk, and enterprise would languish, trade and
industry would decline, and we should gradually settle down to certain
industrial and commercial decay. In the present highly developed state
of modern civilization speculation is a motive power of the first
importance, and being a part of human nature itself cannot be
eradicated. In the course of ordinary business, speculation is the
natural balance wheel of trade, furnishing a class of operators who are
willing to buy or sell when others for various reasons are disinclined.
Moreover, by keeping up the conflict between a large body of buyers and
sellers the true value of securities or commodities is more safely
determined than when speculation is entirely absent. The short seller is
always a buyer at a lower price, and therefore a supporter in case of
decline. Conversely, the long buyer restrains undue advances by selling
to secure his profits. Again, the banker is better able to judge the
value of collateral in a free and active market, a factor which is much
to the advantage of both legitimate borrowers and lenders who may not
have the remotest interest in speculative movements. The giving of
credit and the making of loans is very largely dependent upon a thorough
test of values such as speculation only often determines. Of course
speculation is sometimes carried to excess, and much injury results in
consequence. Such excesses which are the consequence of defects in human
nature must always be expected and are better corrected by experience
and public opinion than by any artificial regulation. Who has not the
right to profit from good business judgment, especially if that judgment
incurs the risk of the future; and who should complain if his own
judgment leads him into losing transactions? Concerning speculation
there is also another foolish misconception. Speculation is frequently
confounded with gambling, although the two are radically different.
Speculation is based upon knowledge and facts, whereas gambling deals
solely with chance. It is a fallacy to suppose that any but a small
percentage of transactions on the New York Stock Exchange come under the
head of gambling. What difference is there between buying stocks and
bonds on part payment, or margin as it is often called, and buying land
or houses or other property with only one-fifth in cash and carrying the
balance on mortgage? Such transactions are speculative, are strictly
moral, and entirely a matter of business judgment. All operations
entering into the future are necessarily speculative. So far as the New
York Stock Exchange is concerned its rules are drawn for the strict
purpose of protecting legitimate trading, and an actual transfer of
property is required for every transaction. Of course, abuses exist in
all trades and will continue to exist, rendering it the more necessary
to use a little intelligent discrimination before condescending to loose
denunciation, which may easily do much harm and no good.
The President’s attack on options in his recent message to Congress
certainly cannot apply to any business transacted on the New York Stock
Exchange, as options are not dealt in there. Options of from three to
sixty days were dealt in a great many years ago, but were abandoned long
since. Every purchase and sale now made on the floor of the New York
Stock Exchange provides for a delivery on the day of purchase, or the
following day, and payment made therefor upon delivery of the security,
and no law can possibly be passed by Congress, or the State Legislature,
to prevent a broker thus buying securities for a customer on part
payment on terms satisfactory to himself, any more than a law could be
enacted to prevent a dry goods, hardware, grocer, or merchant in any
other line from extending credit to his customers. Nearly all the
business of the world is thus transacted, and could not be done on a
large scale otherwise. In London, however, most of the business is
virtually on an option basis, as it provides for fortnightly
settlements, there being two settlement periods each month, which can be
extended from time to time indefinitely at the option of the parties
connected therewith.
The method of doing business in “futures” prevails on the Cotton and
Produce Exchanges, and could not well be transacted, to the extent of
making an active market for the benefit of the producers, on any other
basis, in my opinion. To do away with dealings in futures would simply
do away with the exchanges, which would be to the disadvantage of the
farmers. A farmer, as soon as he ascertains that his crop is secure,
makes a calculation of how long it will take to put it in his barn,
thrash it out, and transmit it to Chicago, and he sells it to deliver
during that month or a later one, thus ridding himself of any further
risk of fluctuation in the price, and is made happy thereby. If he is
deprived of such a market, it puts him back to the old way of doing
business, when the large dealers from Liverpool, Chicago, and other
quarters sent their agents direct to the farmers at harvest time, and by
bringing all kinds of discouraging influences to bear upon them made
them sell at a fraction above the cost of production; as against this
they are at present able to hold their crop back and get the highest
price. In having the ready market which now exists the farmers have all
become rich. Why, therefore, change the present plan, which has given so
much prosperity to the producers of cotton and other products, to what
might be likely to reverse their present satisfactory condition?
Members of the New York Stock Exchange, in cases of insolvency, are
required, by the rules, to immediately notify the Stock Exchange of
their inability to meet their contracts, and the selling or buying in
“under the rule,” to close defaulted contracts, if there are any,
usually follows the announcement of a failure and failure carries with
it suspension. But failures in the Stock Exchange are very few and far
between, considering that there are eleven hundred members. They are
indeed far below the average of failures in mercantile business, and
they are generally followed by satisfactory settlements and readmission
to membership, and a resumption of business.
This speaks well for both the integrity and the conservatism of Stock
Exchange houses. It is very seldom that what would be called a bad
failure occurs among them. There are, in fact, no abuses on the Stock
Exchange, for trickery and unfair dealing is impossible, owing to the
strictness of the surveillance and discipline constantly maintained over
the members, who are also themselves punctilious in keeping their
contracts and observing the rules, and doing only what is fair and
square in business. This is essential to their own interests and
success, as bankers and brokers, without regard to the penalty of
suspension, or expulsion, for any irregularity. That penalty they
approve of, for it is a protection for all of them, except an occasional
black sheep that they are glad to see weeded out of the Exchange.
How necessary the Stock Exchange is to the banks was shown during the
recent crisis, as in preceding panics, when to protect themselves they
were forced to call in their loans by wholesale, and where necessary to
at once liquidate the collaterals. It was the Stock Exchange that made
this liquidation possible, and saved many of the banks and trust
companies from suspension, as well as many bankers and brokers, who were
enabled by it to pass through the trying ordeal, instead of going to the
wall in Wall Street.
The Stock Exchange therefore obviously performs a great and very useful
and important function in monetary affairs, besides being the barometer
of values for stocks and bonds, as measured by prices, while the cotton
and the grain exchanges perform a similar service with regard to those
speculative commodities.
Yet one effect of the crisis of 1907 has been to give a new impulse to
Wall Street detraction, and sharpen the teeth and claws of the
detractors. While many are mistaken enough to hold Wall Street
responsible for the past year’s financial disaster, many more are
equally mistaken in declaring that President Roosevelt caused them by
his speeches and the Government prosecutions of law-breaking railway and
Industrial Corporations. Both charges are unreasonable and false, but
this consideration is a small matter to those who have no hesitation in
making reckless assertions which they are unable to prove, and who are
as ready to vent their spite as they are their prejudices.
Many indeed without knowing anything about Wall Street speculation, and
who have never speculated anywhere, blame speculation for a host of
evils that are in no way due to it. Some of them would even close the
Stock Exchange to stop speculation there, forgetting apparently that
this would deprive investors and banking institutions as well as
speculators of a market for securities, and make all the stocks and
bonds now listed and dealt in there practically unmarketable. In such an
event there would most certainly be a fall in their prices greater than
any we witnessed in 1907.
It is true that in the manipulation of stocks matched orders may have
been occasionally resorted to, despite the rule against it on the Stock
Exchange, but it is only because of the difficulty, or impossibility, of
discovering or proving it, for there is no body of men subject to
stricter discipline, or more amenable to it, than the members of the New
York Stock Exchange, nor any more patriotic, as their generous acts
during the Civil War, and at other times, have abundantly shown.
Neither should it be forgotten that they pay the State of New York a tax
of two dollars on every hundred shares of stock they sell, which is an
important source of revenue to the commonwealth. That the Stock
Exchange, as a free market for securities, is indispensable to the
country is beyond question. It is necessary to our national needs, and I
am proud of being one of the oldest of its members, my membership dating
from 1864; and I am able from long personal experience and observation
to testify to the integrity, soundness, and general good character of my
fellow members and the banking community of Wall Street.
Therefore take my word for it that Wall Street is not as black as it is
painted, and that anyone’s money is as safe there as anywhere in
business, if properly placed, and handled with good judgment. If any of
it is lost it is by its owner, and he has only himself to blame for his
ill luck. But it is always to the interest of his banker and broker to
have him make money, for when a customer loses his money his broker in
some degree shares the loss by losing him as a customer.
In conclusion, I hope that if any of you ever take a flyer in Wall
Street, you will come out of it, with flying colors, on the winning
side, and with a good opinion of the Street proportioned to the
magnificence of your success!
------------------------------------------------------------------------
CHAPTER LXXXIV.
THE FINANCIAL AND TRADE SITUATION, PAST,
PRESENT
AND FUTURE, REVIEWING THE CRISIS OF 1907, WITH CAUSES AND REMEDIES.[10]
Footnote 10:
An address delivered by Henry Clews at the annual meeting of the
Pittsburg Chapter, American Institute of Banking, at Pittsburg, Pa.,
on Tuesday evening, February 25, 1908.
It gives me no ordinary pleasure to address an audience of Pittsburg
bankers, for Pittsburg is the hub of our iron and steel industry, and as
it has no rival in the manufacture of iron and steel, it may well feel
proud of its supremacy. It is no exaggeration to say that the rise and
progress of that industry in Pittsburg is one of the marvels of the age.
A few years ago Pittsburg was known in New York as the Smoky City. A
little later she became known as the City of Steel and Coal. Now,
through the alchemy of the brains of your wise men, she is known as the
place where smoke and coal and steel are in some mysterious way mixed up
in such a form that they fill your pockets with pure gold. To the
millionaire of to-day we bow in deference to his wealth. But to the
grimy sons of toil, who planted the seed and bore the burdens of the
earlier days, we take off our hats with reverence. The founders of your
city chose wisely in selecting this spot for settlement, at the river’s
junction, in the midst of rich deposits of coal and iron. It seems
rather odd that your two greatest products should be glass, which is
brittle, and steel, which is tough. You also excel in producing cork,
which is light, and iron, which is heavy. Surely extremes meet in your
city as well as rivers. Down our way we wonder what you do not produce
when we learn of the diversity of your wares. It certainly seems to me
that a man could learn a whole lot if allowed to visit all your various
foundries, factories and mills, but it would take him nearly as long as
to go through college, as their name is legion. The welcome which you
have given me touches me deeply, and I assure you that in future I shall
preach the doctrine that there are others in Pittsburg whose mission it
is to dispense happiness besides Mr. Carnegie.
If we glance at the history of steel manufacturing in the United States,
we find it centered in and very largely confined to Pittsburg, and if we
recall the enormous fortunes made in that industry by Mr. Carnegie and
many others, under the protection of high tariff, we see one of the
greatest wonders of trade development and modern enterprise.
Yet it was not until after the beginning of the war between the North
and the South—the great conflict waged from 1861 to 1865—that any large
or even considerable amount of steel was manufactured in the United
States. But now we lead the world in making it, and Pittsburg is our
great source of supply. At the same time, we can justly say that the
march of invention and modern improvement in other directions has kept
pace with the growth of Pittsburg and our marvelous progress in iron and
steel-making.
This reflection is particularly gratifying in view of our recent
financial crisis, in which New York was the storm-center, and Pittsburg
almost as stormy for a time. But both cities, like the country at large,
stood up bravely and made the best of the situation by all the means at
their command. Both fortified themselves by a good emergency measure and
issued Clearing House Certificates, according to their needs. Pittsburg,
however, went one or two better than New York, and, like many other
cities, issued scrip; and better still no one in Pittsburg refused it,
not even a car conductor for fares. Here was public spirit rising almost
to the height of patriotism.
Now, Pittsburg in common with the rest of the country is again about on
an even keel financially, with its banks on a cash basis, its cashiers’
certificates and scrip redeemed, and its Stock Exchange reopened. But
unfortunately the crisis gave industry a blow from which it has not yet
recovered, although conditions are steadily improving all over the
United States. The iron and steel industry received the hardest blow of
all, and from a feast you quickly passed to a famine, which is a way the
iron trade always had. It is proverbially, however, as quick to recover
as to collapse; so all we have to do is to keep up our courage and wait,
and we may feel assured there is a good time coming. But whether it will
come soon, or later, is a question about which iron-masters, financiers,
and trade doctors generally are much divided in opinion at present. It
is a good sign, however, that work has been resumed in fully
three-fourths of the entire Duquesne works of the United States Steel
Corporation in Pittsburg, although it is admitted that only 46 per cent
of all the Corporation’s works are running.
In September, 1906, when stock and bond prices were manipulated
abnormally to a 3½ per cent basis, while six months’ money was loaning
at 6 per cent, it was evident that one or the other was too high; and
considering the growing demand for the use of money it became quite
apparent it was not money that was too dear, but securities. At that
time I persistently advised every one to get out of stocks and out of
debt, and keep out for a prolonged period.
Since then security values went down prodigiously—$3,500,000,000 would
scarcely cover the depreciation at its lowest point of those dealt in on
the New York Stock Exchange alone. Our financial situation is vastly
different, however, from what it was in any of our previous great
panics, of which there have been a number, since that of 1857, which
began with the failure of the Ohio Life & Trust Co. at the time of my
advent in Wall Street. I have been in all the subsequent panics, and the
present conditions differ from those of all the other great financial
storms because the wealth of the nation has become so vast as to make it
the richest in actual wealth and productiveness of all nations. As a
matter of fact, our wealth-making developments have been so extensive
and excessive as to have forged ahead of our banking facilities. This
has had much to do with our recent setback. Wise and sagacious
capitalists saw the handwriting on the wall in Wall Street and
elsewhere, and those who did unloaded their securities in 1906, dumping
their stocks at top-notch prices, amounting to at least $1,000,000,000,
upon weaker-backed people.
This unloading, together with the San Francisco earthquake disaster,
which wiped out $350,000,000 of property, struck the staggering blows
which did more than anything else to pave the way to the recent panic
conditions. The selling out by big holders was followed by all the large
railroad systems in the country selling huge amounts of bonds, stocks
and short-term notes. These being offered to stockholders of record at
apparently tempting prices, were floated. But this great mass of new
securities coming on the market was an indigestible one, and absorbed
the capital of a very large number of the rich men of the country and
put it in fixed form; and most of these heretofore very rich men have
ever since been in the position of a man who, having had a “Sherry
dinner,” is urged to accept another dinner at Delmonico’s immediately
afterwards—his wish strong but his capacity lacking.
What produced the panic was a number of adverse factors happening one
after another in rapid succession.
I summarize, briefly, the causes as follows:
FIRST.
The Boer war which left England in almost as bad a financial strait as
we were in through the culmination of a similar period of overdoing in
trade and speculation in new industrial ventures, together with an
excess of new issues of British Consols during the war period resulting
in a recent decline in the price of these prime securities to 81—about
the lowest price on record.
SECOND.
Germany was in fully as bad a condition owing to extravagant industrial
enterprises, rivalling our own, and which required the most careful
nursing to avoid a collapse.
THIRD.
France acted alone in financing Russian loans, and in the crisis of the
Japanese-Russian war was compelled unwillingly to supply new funds in
order to protect the French loans already outstanding. Hence France had
little or no money to lend except to the French.
FOURTH.
The Japanese-Russian war brought both of these countries forward for the
first time as prominent and important factors in the world’s money
market, and both are still, like Oliver Twist, crying for “more.” This
conflict and the Boer war combined wasted over $2,000,000,000 of
capital.
FIFTH.
Funds were almost unobtainable except at prohibitive rates at the time
of our recent crop-moving period, and for causes already mentioned we
could not look to Europe for help. Usually Europe discounts New York
securities bills for about $300,000,000 at this period, but last year
Europe said: “No; we have troubles of our own.”
SIXTH.
The California earthquake with losses of $350,000,000, and the Chili and
other earthquakes of less importance and severity in various parts of
the world were heavy blows at prosperity.
SEVENTH.
The compulsory unloading of very many millions of dollars of stocks and
bonds by large capitalists and operators, together with immense sales of
new securities by corporations and railroads, and the manipulation of
prices and stocks up to a 3½ per cent interest basis while time money
was loaning at 6 per cent, and above, on the best of collateral. Besides
which heavy, excessive and reckless operations in real estate and mining
enterprises having been made all over the nation, caused large amounts
of capital to lose its liquid quality and become fixed.
EIGHTH.
The investigation of the great life insurance companies and the
Metropolitan railroad, and the sad disclosures, followed by the absurd
fine of $29,400,000 by Judge Landis against a corporation with a capital
of only $1,000,000, had a demoralizing effect upon the public mind. This
preposterous fine savored of confiscation and alarmed investors.
NINTH.
The Interstate Commerce Commission’s examination of the Chicago & Alton
deal and the consequent developments further undermined the confidence
of investors.
TENTH.
The making of injudicious loans by the Knickerbocker Trust Co. and the
chains of banks, both in Manhattan and Brooklyn, which caused the
suspension of the institutions and arrest of officials on criminal
charges intensified public distrust, while the collapse of the Copper
market unsettled the metal markets all over the world and resulted in a
reduction of dividends on copper shares, and a serious break in the
price of all that class of securities.
LASTLY.
A gross abuse of our credit system and the consequent inflation of all
values, stimulated by loose banking and promoting methods, proved the
climax in a series of events which culminated in the sharpest though not
the severest panic the present generation has experienced. The main
cause of the panic was that of general overdoing. Credit was
over-extended; speculation was reckless and ill-advised; expansion of
every sort was being carried to excess by over-confidence, until finally
the country’s floating capital was practically exhausted through being
turned too rapidly from liquid to fixed forms. We have only to glance at
the demands upon new capital during the last year or two to realize this
fact.
Some idea of the congested state of the stock market may be obtained
from the fact that during the last five years the total amount of new
securities authorized was $6,800,000,000; the eleven months of 1907
alone accounting for $2,000,000,000 of this total.
During the latter period our railroads authorized $1,400,000,000
securities, of which they were able to issue only one-half, owing to
money market conditions. Of industrial securities less than $500,000,000
were authorized, but nearly $400,000,000 of these appear to have been
issued.
These figures take no account of the issues of municipal securities, and
those of many other business concerns of a minor character, but they are
quite sufficient to indicate the extraordinary demands upon the money
market during the last two years, demands which in connection with huge
speculative borrowings imposed an unbearable strain upon the banks and
precipitated the March, August and October collapses in the stock
market. Other influences have undoubtedly been at work to cause the
breakdown, but no single factor compares in importance with that of the
excessive issues of new securities and obligations during the past two
years which the country was utterly unable to assimilate.
In discussing the cause of the recent panicky contraction and
disturbance in the business and financial world, nothing, however, could
be further from the truth than to charge it all to the great corporation
exposures and prosecutions.
As I have said, there were many other things that contributed to bring
about last year’s depression and disturbance, and to cast over the
bright sky of business prosperity the heavy clouds of distrust, reaction
and panic.
The recent clouds in the financial sky can remotely be attributed in a
large measure to the effect of the tremendous railroad, industrial and
commercial development of the last ten years, which brought about
capital requirements in excess of the ability of the country to supply
them.
Naturally and necessarily, this resulted in precautionary steps being
taken by bankers and others to limit demands that capital could not
supply.
This conservatism and consequent contraction of the overwhelming volume
of business will, it is believed, prove the strongest force in averting
further trouble and disaster.
In an effort to meet the demands of the enormous business offered them,
the great railway and industrial corporations sought to enlarge their
equipment at vast expense. In this they acted unwisely. They overtraded.
It was perhaps excusable not very long ago, when confidence was in its
zenith and credit superabundant, to attempt the financing of mammoth
undertakings. But unexpectedly and like a bolt out of a clear sky, came
the startling insurance and other exposures, and gradually timidity took
the place of confidence.
Then capital, which is always more timid than usual at such times, began
to contract, and many railroad and industrial corporations found
themselves unable to borrow the large sums needed to meet their
extraordinary expenditures.
The banks, in many instances, having already over-extended credits, were
unable to provide the necessary funds, and new securities, owing to
excessive supplies and other causes, ceased to find the ready market
that they had enjoyed for so long a period. Investors took wing.
Curtailment, therefore, in every direction became a necessity; President
Roosevelt can no more be blamed for the recent depression and panicky
disturbance than he can be credited with all the great prosperity that
preceded the crisis.
That this reaction, culminating in a panic so severe, came just at the
time it did, is largely if not wholly coincidental. It cannot be denied,
however, that the startling disclosures of wrongdoing on the part of
many of the great railroad and industrial corporations disturbed the
confidence of the public to the core, and paved the way to it.
Being now myself optimistic, I look on the sunny side and hope for the
best. It is, however, a time for conservatism, and while trusting in
Providence, it is well to keep our powder dry. It is a good time to
cultivate the virtue of patience, and make haste slowly until all the
aftermath of the panic, in the way of liquidation and the elimination of
unsound timber from business structures, is completed.
This will leave everything in the financial and industrial world
stronger than before. It will also leave us with a higher standard of
business morality resulting from the exposure of looting and other
illegal practices and abuses of power in the management of large
corporations. The stoppage of the evil of rebating by the railroads is
of itself a great gain in this respect, and for this we have to thank
President Roosevelt.
As to the future, Pittsburg and the iron and steel trade should be the
first to feel improvement in the general business of the country, for
iron is still the best barometer of the times, as it leads all other
industries in both depression and recovery, and what an eventful history
Pittsburg can point to, the world knows.
It was at Pittsburg that the Bessemer process was first applied to steel
making in America, and the giant strides in the industry that followed
its supersedure of the open-hearth process not only astonished ourselves
but all Europe. It was a new departure on a grand scale, this
application of science to mechanical methods, a revelation that was
marvellous in the trade expansion and wealth it produced.
Yet it is not improbable that before long, if not immediately, the
Bessemer process by which this immense development was achieved will be
very generally superseded by the open-hearth process of steel making,
which originated and had its early development in this country. Thus in
the whirligig of time it will displace the Bessemer process, by which it
was itself displaced. This, as you are of course aware, is owing to
improvements, chiefly by Talbott, an American engineer, in the
open-hearth process, which for a long time has been considered almost
out of the race in competition with the Bessemer process. This reminds
us that history repeats itself.
The open-hearth process has now been brought to such perfection that its
superiority over the Bessemer process is declared by many in the trade
to be established. Thus practice makes perfect, and time works wonders.
Its superiority over the Bessemer process is said to have been
particularly demonstrated in dealing with ores of any but a very low
phosphorus grade. This American improvement in the open-hearth process
has been already widely recognized and adopted in England, and we are in
this way repaying the debt we owed to that country for the Bessemer
process.
The steel manufactured in the United States last year aggregated
23,246,000 tons, of which 12,275,000 tons were by the Bessemer process
and 10,971,000 tons by the open-hearth process. There were also some
other varieties of production, copied from processes in use on the
European Continent, but the general drift, I am informed, is now towards
the open-hearth process.
Out of Pittsburg, of course, I should not talk so much about steel, but
iron and steel are Pittsburg’s bread and butter. This reminds me that
apart from agriculture the principal sources of our national wealth are
minerals and manufacturing. Mining and manufacturing are primary and
fundamental industries. Our agricultural income last year, according to
the United States census estimates, was about seven thousand millions of
dollars, while the metals mined were valued at about two thousand
millions, against $1,902,517,565 in 1906.
This metallic product for the year, it is estimated, was turned by
manufacturing it into materials having a market value of fifteen
thousand millions of dollars. If we add that of agriculture, the
metallic products, and manufacturing, together, we have a total
valuation for the year of twenty-four thousand millions of dollars. The
fertility of our natural resources is here shown by their rapid rate of
development. But this, while contributing so largely to our present
national wealth, is not an unmixed good. We should always bear in mind
that the more we take out of the earth, and the more we strip our
forests of timber, the less we have remaining. In forestry, however, we
are now preparing for the future by replanting, but we cannot replant
minerals.
The mineral products of this country have more than trebled since 1890;
more than doubled since 1899; and are more than five fold what they were
in 1880. From 1900 to 1906 our mineral product increased at a rate
representing a hundred and ninety millions a year.
I am quoting these statistics as a reminder of the vastness of our
natural resources, and the recuperative power of the nation, which is
one of the most encouraging features of the national situation. These
resources are the backbone of the country’s greatness; and those who can
see nothing cheerful in the outlook and to whom everything at times
looks as blue as indigo, will do well to think of them, for they are
Nature’s national banks, that can never fail, and unfailing sources of
our national prosperity.
It was these resources, in the form of exports to foreign countries,
that enabled us to purchase and pay for—without borrowing or asking
favors—the one hundred millions of gold that we imported to relieve the
crisis. Here was indisputable evidence of the large international trade
balance in our favor, and of our monetary and commercial independence of
the rest of the world; and this gold we still hold, although in the
ordinary course of commerce we may reasonably export some of it before
long, for we have plenty to spare and money is superabundant at two per
cent on call in Wall Street. Meanwhile our exports of produce and other
merchandise continue extremely heavy, and they were never heavier than
during the crisis, that is, in the last three months of 1907, while in
January, 1908, they rose to a total value of one hundred and
twenty-eight millions, or $17,742,352 more than in January, 1907. This
is all the more favorable because our imports since the crisis have very
largely decreased. In our January exports, cotton alone represented
$76,687,508 of the total, and breadstuffs $24,463,503.
As to our national finances and the defects of our currency system,
there is much that calls for reform, but there seems to be little or no
prospect at this session of Congress of the passage of a comprehensive
financial measure, although it is a remedy we need. We shall therefore
have to rest content for the time being with the much amended emergency
currency measure, familiar to us as the Aldrich Bill. This provides only
for the issue of a maximum of five hundred millions of currency by the
Government to the national banks, to ward off a panic or mitigate its
effects, the banks to pay six per cent interest per annum for whatever
they take of this emergency currency, and give security in acceptable
railway, municipal and other bonds for it to the Treasury.
So far, so good. I am, therefore, strongly in favor of the Aldrich
measure as a panic remedy, naturally so as I originated the fundamental
part of it. It will do much to prevent panics, and will effectually stop
the hoarding of currency that accompanies them, for what inducement
would there be to hoard it when a supply of five hundred millions of new
currency would be open to the banks? There could be no extreme scarcity
of money then; nothing in any way approaching the stringency that not
only New York but the whole United States suffered under in the last
three months of 1907.
Yet the great remedy, the comprehensive financial reform measure we need
will be ultimately passed by Congress, and its provisions will include
the modification of the Sub-Treasury system, which has always been a
source of much mischief through locking up Government money received for
Customs duties and internal revenue taxes, that ought to be kept in
circulation. The proposition, however, to establish a central national
bank in New York, or anywhere else, as a substitute for it, is to be
strongly deprecated. It would be a rich plum for those who controlled
it, but would excite the jealousy and hostility of all the other banks.
Moreover, such a bank would in effect be a revival of the old United
States Bank, against which, and the scandals and corruption connected
with it, President Jackson made war so vigorously as to force it into
liquidation. The second experiment of a United States bank was no less
involved in scandal and no less a failure than the first, and in each
case there was the same inglorious end, compulsory liquidation. Both,
too, were used as political machines, and guilty of favoritism and many
abuses of power, and a new central bank would give us another big
political and speculative machine, liable to the same evils and
objections. Therefore all bankers should resolutely oppose a central
bank. It would not be a remedy for any of the evils complained of, but,
instead, furnish us with a new complication.
While we can hardly expect any fundamental changes in our currency
system at present, one improvement might easily be made in it by
Congress at once, and that is by the removal of restrictions on the
amount of national bank notes taken out or canceled per month, as well
as by establishing a bank-note redemption bureau at every United States
Sub-Treasury, so as to save the delay and expense of sending to and from
the Redemption Bureau at Washington, that all the national banks are now
subjected to. As a minor remedy this should be urged upon Congress.
Turning to the United States bonds pledged with the Treasury to secure
the national bank notes, we all know that they are as good as gold, if
not better, but still they are evidences of debt, and it is a false
economic principle to issue currency on such a basis. Moreover, it is
costly for the Government, for it practically and permanently prevents
it, in the interest of the national banks, from redeeming the bonds
deposited to secure national bank notes, out of its surplus income.
Still it has great merit in giving us a safe and sound bank currency.
Ultimately this system, born of the civil war, will be superseded by a
better one, but this will doubtless be done in a manner which will not
interfere with or impair vested interests.
Owing to the short time now left of this session of Congress, nothing
more than the “Aldrich” bill can possibly be enacted at this time. Its
simplicity is a recommendation to Congress. But, nevertheless, Congress
should later pass a permanent currency bill, a bill which will settle
every question as to the finances of the nation, at once and for a
century to come. Such a bill is possible, and in fact it would be the
simplest kind of measure for the Government to adopt—one to provide for
just the kind of currency, and the amount of currency the business of
the nation, the banks, and the people should have; one to provide for a
perfectly elastic currency without creating the slightest depreciation
of money or danger of loss to banks or Government. It should provide a
perfect way of obtaining money to move the crops, and furnish an
all-sufficient means of preventing or breaking panics. It should make
the money of the United States still more current and acceptable in all
parts of the world. This would make the nation greater in the eyes of
other nations, and give the United States Treasury a proper command of
the commerce and finances of the world, within ten years after being put
into operation.
All the Government need do to effect such change in the finances of the
country, and to acquire all such advantages for the Government and the
people, in my opinion, is to wipe out the whole system of National Bank
Currency, and give such banks, or any banks, Government currency direct,
upon the same securities and such other kinds of securities as the
Government is willing to accept, and permit the banks to increase or
diminish the amount it obtains whenever the business of the banks
requires it; every bank to do no more than give sufficient security for
the money. The Government need do no more than to take the security and
hand the bank the money. The Government should be paid for the use of
the money a low rate of interest, say one per cent. No bank should be
required to pay more.
The credit of the Government will be all sufficient for the credit of
the currency, and every dollar of it would be perfectly secured by the
security given the Government for it by the banks. The issuing of the
money by the Government under this system would not injure the credit of
the Government in the slightest degree. Banks should be allowed to
increase or diminish the amount of money they obtain in amounts which
can be decided by the law. Such a system would be satisfactory to all
the people, except the national banks. These banks have been given the
privilege of having their names on the money they issue long enough. The
money of the banks has ever been Government money. The Government has
promised to pay it if the banks did not, and has had the means of
paying. Let the Government do as it should: issue all the money. Let it
be circulated by banks which give proper security for it. Enlarge the
means of securing the Government, by accepting State and Municipal
bonds, or even Railroad bonds, to the extent of say 50 per cent, and
Government bonds for the other 50 per cent.
The amount of additional business this change in the finances of the
country would make the Government, would be no greater than any other
change would make, and would be much less than what will be necessary if
the present bill before the Senate is passed. All the great work and
expense of settling up the affairs of broken national banks and paying
off their notes will be stopped.
There would be no such things then for the Government to settle. The
Treasury can be required by the law to keep all the currency issued for
the purpose, that may be taken up, distinct and separate from all
Treasury receipts from other sources.
The severity of the panic ordeal of 1907 that the New York banks passed
through was reflected in the issue to them by the New York Clearing
House, on and after October 22d, of, in all, a hundred millions of loan
certificates, although the largest amount of these outstanding at any
one time was eighty-four millions. This form of banking relief is purely
American and has never been adopted in Europe. The maximum issue of
Clearing House loan certificates in the panic of 1893 was $41,690,000,
and in the panic of 1873 $26,565,000. But in 1893 New York bank deposits
were only $400,000,000; in 1907 they were $1,050,000,000, exclusive of
Trust Companies. The maximum of certificates in 1907 was reached in the
third week of November, but the Clearing House banks showed their
largest deficit in reserve—$54,100,000—in the first week in November.
Simultaneously the loan certificates issued by the Boston Clearing House
reached their largest aggregate, $11,995,000. It is noteworthy also that
three powerful New York banks then held one-third of all the loan
certificates issued by the New York Clearing House. One of these held
$13,500,000; another $10,000,000; and the third $7,500,000. The obvious
object of this was to enable the strong banks to loan a part of their
cash reserves to weak associates.
The Clearing House Committee and the New York banks individually and
collectively did splendid work in mitigating as far as possible the
effects of the panic, while the Secretary of the Treasury, Mr.
Cortelyou, rendered very valuable service by co-operating with the
national banks to reduce the monetary stringency through large Treasury
deposits and facilitating the importation of gold.
Mr. Morgan and several other private bankers also rendered praiseworthy
service during the panic, and my firm did its part by loaning to the
members of the Stock Exchange, at the most critical period, three
million dollars at moderate rates of interest.
The New York Clearing House is a non-incorporated association, but its
reserve is the foundation for an enormous amount of the country’s
commercial credit. Of course, the banks and others holding practically
unsalable collateral for loans, that the borrowers were unable to repay,
were forced to help the borrowers and save themselves from loss by
continuing to hold them through the crisis for a better market. There
were many cases of this kind, particularly among the Trust Companies,
and there has been much slow and careful after-panic liquidation of such
collateral, and much of it has still to be done. It is, however, being
facilitated by the decided improvement that has taken place in the
market for first-class bonds.
Capitalists who for the past two or three years had been dissatisfied
with the returns of ordinary investments and who had gone into hazardous
speculations and extensive underwriting of new bond issues in the hope
of large and quick profits, have been sobered by their heavy losses and
are now seeking safety in prime investment bonds.
Had the market for bonds not improved as it has, it would have been
practically impossible for the New York Central and other Railway
Companies to have marketed the large amount of notes they have succeeded
in selling since the beginning of this year. The after effects of the
panic, as well as the panic itself, would also have been far worse than
anything we have witnessed had it not been for the previous heavy
stock-market liquidation, a liquidation that in many cases had been
practically continuous from the end of 1906, and that was most drastic
and disastrous in August, 1907.
That the banking situation has become normal is indicated by the
elimination of loan certificates and the resumption of normal methods by
all the Clearing Houses in the United States, and particularly by the
resumption of the weekly detailed bank statements by the New York
Clearing House. This occurred on February 8th for the first time after
their suspension on October 26, 1907, and was supplemented by statements
of the non-Clearing House banks and Trust Companies, including actual as
well as average conditions. This last is a new and commendable feature,
which every Saturday will enable us to learn how all the banking
institutions in New York City and its several boroughs stand, both
individually and collectively, in their average and their actual
condition.
That we are assured of a superabundance of money at low rates of
interest is evident from the large and growing accumulations of surplus
funds in the banks from Maine to California, and the light demand. All
the indications favor a protracted period of extreme ease in the money
market, modified only by gold exports and the withdrawal by the
Government, from time to time, of some and probably a large part of its
deposits in national banks. This again reminds us that the Sub-Treasury
system makes the Government an unlimited hoarder of money, with only
evil results. This, alone, calls for its modification.
But while the large aggregate of the surplus funds of the banks
testifies to the return of confidence, and with it the return to banking
channels of hoarded money, it also reflects the dullness of trade and
much idle machinery and unemployed labor. Hence the bank clearings of
the United States in January were twenty-five per cent less than in
January, 1907. This condition of affairs has been and still is severely
felt by the Railways, whose largely reduced gross and net earnings and
long lines of empty cars tell why a number of them, like many industrial
corporations, have reduced or passed their dividends, or paid them in
scrip. More railway and industrial corporations will probably have to
accommodate themselves to circumstances and do likewise in consequence
of reduced earnings. That we expect, and are prepared for, while the
trade depression lasts, and hence we all hope and trust it will be
short.
Meanwhile we cannot ignore the political situation in this Presidential
year, and the disturbing and depressing effect of the recent message of
President Roosevelt to Congress, with its onslaught on Wall Street,
followed by the unjust bitter attack of Mr. Bryan on Stock Exchange
speculation, which he denounced as gambling. Wall Street was thus ground
between the upper and nether millstones of the Republican and the
Democratic parties; it was fired on from both sides with hot shot, grape
and canister, without any good reason.
Speculation in stocks, as conducted through Stock Exchange brokers, is
no more gambling than speculation in real estate or ordinary
merchandise. All trade is more or less speculative because it involves
risks. If it did not involve risk there would not be so many mercantile
failures as there are every year, yet no one calls trade gambling. Every
time a merchant buys a line of goods, he makes a venture, not knowing
whether they will rise or depreciate in market value on his hands. He
buys also on credit, just as he gives credit to his customers; and what
is the difference in principle between this form of credit and the
credit a stock broker gives his customers who pay ten per cent on the
par value of their purchases while the broker provides the balance and
holds the stocks as security? This is the margin, which is a credit in
the account of each of them; and I call it a credit instead of a margin,
which is a better word for brokers to use.
The present anti-speculation crusade is accompanied by many delusions
and very imperfect ideas concerning the conditions and equities of
business operations. Who is to decide which are speculative transactions
and which are not? Business cannot be conducted without making contracts
entering into the future, and that is speculation. The builder who
contracts to build you a home is a speculator; the manufacturer who
agrees to deliver a thousand cases of cotton goods sixty days hence is
dealing in futures, and all operations extending into the future are
unavoidably of a speculative character. Even marriage is often called a
lottery. It is quite impossible and thoroughly stupid to try to
eliminate speculation, for it is an essential element in all business
transactions, except those for cash. If business were reduced to the
latter basis, it would soon become injuriously restricted and more
exposed to corners and violent fluctuations than ever.
As to legitimate or illegitimate speculation, who is to decide between
the two, and where is the line to be drawn? If the investor buys
securities in advance of his income, expecting to complete the purchase
later on, is that legitimate? Suppose circumstances compel him to change
his mind and sell before his original purchase is completed, is that
legitimate? And in what respect does such a transaction differ from the
ordinary marginal contract? It may, perhaps, differ in intent; for the
speculator usually buys with a view to taking advantage of temporary
fluctuations. Yet, who would be bold enough to investigate the
intentions of buyers or sellers? Only the most drastic kind of force
could compel divulgence of such secrets, and is it possible to establish
any such system of espionage in this country? Speculation, as often
stated in these advices, when confined to reasonable limits is
beneficial. It is the natural balance wheel of commerce and finance. By
its means and through the conflict of opinion between buyers and sellers
real values are established by simpler and more reliable means than by
any other known methods. No Government investigation will ever ascertain
the real value of our railroads so well as the higgling and bargaining
between buyers and sellers, which is alike the moving spirit of commerce
and the arbiter of values on all Stock Exchanges the world over.
Speculation is liable to be carried to excess, and abuses in speculative
methods undoubtedly exist; but these are better corrected by a strong
and elevated public opinion than through any legal measures based upon
political claptrap. There is a flood of nonsense in this campaign
against speculation, anti-option, etc., which does not find believers
here but may in other parts of the country. It consists very largely of
political humbug, and is nothing more than one of the usual methods by
which crafty politicians play upon the ignorance and prejudice of the
masses for their own advantage. After the elections this mania will
probably pass away, to be then recognised as one of the psychological
features usually following a panic. Previous instances of this sort of
agitation were the granger and populist movement, which exhibited many
of the present symptoms of political insanity. Nevertheless, such
agitation may do serious harm, and its fallacies should be fearlessly
exposed in order to prevent the people from being deceived and misled.
Even now this agitation, especially us manifested in hostile State
Legislatures, is seriously interfering with that restoration of
confidence that is absolutely necessary to business recovery. It is
keeping both capital and labor idle. Capital is proverbially timid, and
until such attacks cease enterprise is sure to be more or less
repressed. Of course there are abuses that need rectifying, but it is
folly to carry restraint to the point of extinction. Because a few
individuals play golf to harmful excess, would any sane person suppress
so wholesome a sport? Yet that is precisely the policy of many of the
reformers of the present day. Too frequently these reform movements
savor of ignorance. Their purpose is frequently admirable; but the
country sadly needs more sanity in their application.
President Roosevelt condemns “options” very vigorously, as if they were
now dealt in on the Stock Exchange, as they once were, ranging from
three to sixty days; but they have not been traded in there for many
years, all purchases and sales of stock being deliverable and receivable
on the day following the transactions on the floor of the Exchange,
except those specifically for “cash,” which means, to be delivered and
received the same day. But on the Cotton, Produce and Coffee Exchanges,
and Chicago Board of Trade, nearly all the transactions are in
“futures”—and these are a boon to cotton and grain growers and coffee
importers, who, through them, can sell their growing crops and
importations months before they actually possess and are ready to
deliver them, so in advance making sure of the prices they will get for
their farm products and importations.
This is speculation, yet perfectly legitimate, and I think that if
President Roosevelt and Mr. Bryan knew more about these markets and the
N. Y. Stock Exchange from actual experience, they would see the
injustice of much that they have said in decrying the evils of
speculation. Black sheep and exceptional wrongdoing should not be held
up as examples of all and everything in Wall Street; and because
unscrupulous men sometimes embezzle in order to get money to speculate
with, Wall Street should not be held responsible for their crime, any
more than a river should be blamed for a man’s suicide because he jumps
into it to end his troubles. There is nothing illegal or against public
welfare in a broker buying and selling stocks and bonds for his
customers in conformity with the rules of the N. Y. Stock Exchange, nor
can there ever be; and I know that such business is just as honorable
and legitimate as the buying and selling of iron, dry goods or real
estate on credit. It is credit that keeps alive the business world.
The attacks on the financial center of this country are indiscriminate,
and I am sorry that President Roosevelt, who has done so much good in
other respects, should have nipped the bud of reviving confidence in the
stock market in the way he did, for his denunciation of Wall Street,
coupled with Mr. Bryan’s wholesale and wild condemnation of the Stock
Exchange, led to a renewal of liquidation in the stock market, and a
fresh decline in prices through creating fresh distrust of their
holdings among investors.
The New York Stock Exchange is a great national and international
market, and its 1100 members compose a very honorable and wealthy body
of men, whose integrity in all their business transactions is
unquestioned. They are bound not only by the rules of the Stock Exchange
to be absolutely honorable and strictly honest in their dealings, but
their own interests and their relations with their fellow members and
their customers compel them to be so, and to be also above suspicion.
Summary punishment, even to expulsion from membership, would follow any
dishonorable or dishonest act on the part of any of them, and such
instances are of extremely rare occurrence. It is therefore unjust to
stigmatize these men, these bankers and brokers of good business
standing and good social position, in the manner they have been
stigmatized recently by Mr. Bryan; and again I think that if he knew
Wall Street better than he does he would have been more discriminating,
and would have confined his severest criticism to the speculative
capitalists who have probably at times abused the Stock Exchange by the
manipulation of stocks.
The so-called practice of “washing” is strictly prohibited by the rules
of the Stock Exchange, but as it is very hard to detect and prove, in
some instances, doubtless it may possibly have gone unpunished. The
Stock Exchange, however, earnestly endeavors to ferret out and prevent
and severely punish all violations of its rules.
After every great panic, the Stock Exchange has been made a scape-goat,
and unjustly assailed as the main cause of the trouble. The fact however
that the two great opposing forces in national politics are now united
in their attacks upon Wall Street is unusual, and foreshadows more
attacks of the same disturbing character during the presidential
campaign. This is a depressing factor in both the financial and trade
situation, and we see evidence of it in all directions. It is, of
course, a factor that retards recovery from the crisis by retarding the
growth of confidence, and how far its influence will extend we have yet
to see. But of one thing we may be sure, and that is, we shall be
reminded of it very forcibly from time to time from the batteries on
both sides of the political battle ground until after the November
election; then the guns will cease to belch their thunder. Hence we must
be prepared for it in the interval and make the best of it, remembering
the old adage-“Forewarned, Forearmed.” But never before has politics
hurled its javelins so fiercely against Wall Street, and that
practically means all the Stock Exchanges in the country. The joint
attack is against stock speculation, and no Stock Exchange in the world
ever was or ever can be free from that. It would obviously be absolutely
impossible to distinguish investment from speculative transactions on
the floor of the Stock Exchange, or tell whether long or short stock was
being bought and sold. Because speculative capitalists in control of
large corporations have managed them dishonestly for their own benefit,
and in furthering their schemes and speculations employed stock brokers
and used the Stock Exchange, it and its members should not be held
responsible for the wrongdoing of these men, as it is a market open to
all the world, just as is the London Stock Exchange or any Bourse in
Continental Europe. To restrict its scope and operations by law would be
to lessen its usefulness to investors and corporations issuing
securities, and destroy its utility as a free market for all.
Wall Street being not only a local but a national and international
financial center, the whole world, not only the whole country, is
tributary to it, and it is indispensable to the whole country. Yet it is
made the target at present for all sorts of political abuse, and various
schemes have been urged for suppressing trading in stocks, all of which
are of course chimerical, for as long as we have securities, there must,
in justice to the millions of holders, be a market for them. Without it
there would be a sort of chaos of confusion and abnormal prices, for it
is the speculator who is often the most keen and discriminating in
judging the true value of securities. The much maligned “bear” is the
safety valve of the market. He often prevents the manipulation of the
price of a stock to an unfairly high figure by exposing the weak points
in the situation, which is a protection to a prospective buyer.
A great deal of shallow abuse is still being showered on the Stock
Exchange from all parts of the country. This always follows a panic. It
pleases a certain class of ignorant and misguided people to hear Wall
Street denounced and maligned on every opportunity. It matters little
whether the accusations are right or wrong. So pessimistic is public
opinion that the worse the charges the more numerous the believers. No
one looks on the other side; no one is told of the manifold services and
advantages of Wall Street as a financial center. No one is taught that
Wall Street is merely a central market for capital, just as Chicago is
for wheat, Boston for wool, New Orleans for cotton, etc. How many
appreciate the fact that Wall Street is as essential to the business
life of the country as is the Legislature at Washington to our political
life? How many realize that Wall Street is the primary nerve center of
the American business world; that a blow struck there is an injury to
the whole financial and business fabric of the nation? How many forget
that in Wall Street the investor can deal with greater advantage to
himself, as a rule, than in any other financial market? How many
understand that there the country can best settle its accounts; send its
savings, and make its investments more readily and on better terms than
anywhere else? The very individuals who most violently abuse Wall Street
are often among the first to go there for financing new enterprises or
to pick up cheap investments. Thither, also, these same grumblers hasten
in order to “get rich quickly.” When they succeed nothing is heard about
the “wickedness” of Wall Street, and they flatter themselves as to their
own superior shrewdness. But when these same individuals lose, then Wall
Street is nothing but a “gambling hell and a cesspool of iniquity.” They
fail to recognize that their losses are the result of their own
cupidity, or inability to discriminate between sound and unsound
investments. They usually lose because of their own bad judgment; but
nevertheless, there is no end to their objurgations.
Now Wall Street after all is little different from any other department
of business and industry. Its makeup naturally includes men with similar
failings and similar impulses to good and evil that exist everywhere;
men who are better than the politicians who make capital by abusing Wall
Street; men who are better than some of the trusts or the unions which
aim to selfishly and often relentlessly grasp all within their power. It
may also include a very few who unscrupulously manipulate property for
their own advantage and at every opportunity. But it also includes a
vast majority of men of high principles, of great foresight and of
enlightened self-interest; men who recognize that their own welfare is
dependent upon their regard for the welfare of others. Most of such men
are rarely heard of, and their good deeds and honorable achievements are
not exploited in the daily press, which is naturally interested in the
search for the abnormal. Wall Street probably contains a much larger
percentage of strong brainy men than any other community, because right
there centers the management of large affairs and great organizations
which demand the highest ability. True, Wall Street attracts some men of
unscrupulous and predatory instincts because of the great opportunities
for accumulating wealth by devious and often improper methods. The
occasional flotation of questionable schemes and the improper use of
funds held in trust undoubtedly are sometimes among the greatest evils
connected with Wall Street. They are evils that its best men are most
anxious to see eliminated, and it is satisfactory to know that strong
efforts are being made in this direction. It cannot be too strongly
stated that many of the abuses which aggravated the late panic could not
be repeated, and have been stopped forever. Whatever defects remain, the
business standards of Wall Street are upon a distinctly higher plane
than existed some time ago. In spite of troubles and pessimism the world
is growing better and better. But so long as fools with money are to be
found, just so long will there be sharpers ready to take the one and
leave the other. It is useless to expect the millennium. Human nature
changes slowly, and the only means of checking abuses is to establish
rules and standards of a high order, and to keep alive a public opinion
that will insist upon their enforcement. An alert and vigorous public
opinion is often more effective in preventing evil than the punitive
measures which are applied after the wrong has been done.
No king, on being crowned, was ever prouder or happier than I, when I
first stepped on the floor of the New York Stock Exchange as a newly
elected member. The pride that I felt at that time has grown and
increased every year since that day, so long ago, as I have seen the
Exchange grow in influence and moral power. There is no body of men in
the world superior to the members of our Exchange in honor, integrity
and truthfulness. Every transaction on the floor is done on word of
mouth. Sales involving millions of dollars are consummated without a
scrap of writing, and it is a rare occurrence that even a dispute arises
over a transaction, and even then, unless a witness can be found to the
transaction, the matter is settled usually by each party assuming
one-half the loss, as both the buyer and the seller know that the other
is just as square and honest as he is, and that the dispute is over a
misunderstanding and not a misrepresentation. Many people are wont to
worry over the nervous strain under which their friends in the Stock
Exchange are laboring in busy times. Their worry is unnecessary, as the
busy time on the “Street” is the happy time. Many people pretend to be
shocked at the want of dignity which prompts the members to skylark and
act like boys. Don’t be shocked. This is the recreation which offsets
the strain and keeps the members young. One of the most impressive
scenes that can be witnessed is viewed from the gallery on the morning
of a very busy day. At five minutes to 10 the members are seen quietly
gathering in little groups around the different “posts,” chatting and
smiling—at 10 o’clock exactly a gong sounds which announces that
business can begin. Every man on the floor commences to yell and paw the
air, and one who did not understand would think that he was watching the
working room of bedlam. But if he watches closely he will see that order
reigns in seeming chaos. Automatic signals on the walls, quickly moving
pages and telephone clerks in the booths at the side of the Exchange
room, all work in harmony, and the great machinery “moves in a
mysterious way its wonders to perform.” Almost everything in the
country, yes in the world, has its influence in this great market. The
grains of wheat, the kernels of corn, the bolls of cotton, the chinch
bug and the boll weevil: each has a vote. The miner deep in the bowels
of the earth and the crew on a swiftly moving railroad train, the track
walker and the laborer are all exercising indirectly an influence. All
the great railroads and industrial corporations come to Wall Street in
their time of need, and if their object is worthy they do not leave with
their wants unsupplied. Wall Street proper, as represented through the
New York Stock Exchange, is the barometer of the country. Every man,
woman or child who has a dollar invested or deposited in a savings bank
is interested in the good or bad times which prevail in the Street. In
times of great disaster or need, the members of the Exchange are the
leaders in contributing to the relief of the afflicted. There is a lot
of good in Wall Street that outsiders know nothing of; if you are one of
them, find out the truth. Be sure to hear witnesses on both sides. Honor
and truthfulness are the cornerstones on which the whole fabric of
business in Wall Street is built, and confidence is the keystone of the
arch that covers all transactions. The fact that a weak spot is
occasionally uncovered proves the strength of the general structure.
There is no place in the world where the measure of confidence between
employer and employee is so large and where loyally to each other is so
marked. In whatever business a young man intends to embark, a year or
two in Wall Street is a good training, as he will learn much that will
benefit him in after life. He would realize the necessity of close
attention to work and the true application of the principles of the
Golden Rule. In these times of reckless denunciation of Wall Street a
general application of this rule by those who attack by innuendo and
without a scintilla of truth would help to restore confidence and give
evidence of fair-mindedness on their part. Men in high places prefer
charges and the very wording of their complaint proves that they are
beyond the depth of their knowledge. Wall Street will survive all
attacks, and the refutation of these attacks by well-meaning but
mistaken men will in the long ran redound to its lasting good. This is a
time of trial by fire in both business and private life, and those who
have nothing to fear will come out of it unscathed, and the New York
Stock Exchange will be in the front rank of those declared guiltless and
worthy.
Possibly there are a few abuses undiscovered on the Stock Exchange that
should be remedied. Nevertheless, I affirm without fear of contradiction
that there is no business institution in the United States where
standards are as high or where the integrity of its members is equal to
that prevailing on the Stock Exchange. Therefore, let the people and our
Legislatures come to their senses, and awake to the fact that in
striking at the financial district they are hurting themselves quite as
much as those whom they seek to destroy, and that the evil transactions
are small in comparison with the good. Let them understand that in
fomenting discontent of this sort they are intensifying the general
depression, adding to the number of unemployed, driving capital into
hiding and generally interfering with that recovery in commerce and
industry which is now so earnestly desired. The present antipathy to
Wall Street savors largely of public hysteria, bogyphobia and political
dementia. Apparently, it is a disease which must run its course; if so,
the best cure will be a period of reflection in which to cultivate
calmer and more rational views.
At the same time that Wall Street is being riddled with hot shot, the
railways are being harassed by State legislation, involving low rates,
and projects are on foot that in effect would prevent their development
to meet the wants of the people. All this is oppressive and inimical to
the national welfare, and I advocate as a remedy removing the interstate
railways from the control of the States, and placing them entirely under
the control of the United States Government. This Congress can and
should do promptly.
Another great difficulty the railways and other large employers of labor
now have to contend with is the refusal or unwillingness of the Labor
Unions to consent to a reduction of wages to meet reduced earnings. A
lowering of wages has become absolutely necessary, for they are still at
the high figures to which they were pushed during the long period of
prosperity. They are at a boom level that railway and manufacturing
corporations cannot afford to pay in these altered times. The Labor
Unions should recognize this at once, and reduce their wage scales, and
not wait until they are forced to yield. Moreover, they should see that
with reduced wages a larger number of men could be profitably employed
than is possible with wages as they are, and in this way the ranks of
the unemployed would be reduced. This of itself would be of great
benefit to both the working men and their employers, as well as to the
country at large. It is a time when common sense should be brought into
play in the adjustment of means to ends in wages as well as other
matters, for the more it is the quicker will be recovery from the
effects of the panic, and the less will be the suffering from industrial
depression by labor as well as capital. This in the concrete means that
it would result in there being fewer workmen in actual want, and fewer
corporations going to the wall. It is one of the great remedies that the
situation now calls for.
A general reduction of wages would to almost a certainty cause some
mills that have closed to reopen, and cause others that are running on
part time to run on full time. The advent of Spring will of course tend
to stimulate recovery, so we shall have the help of Nature to repair
damages. With Nature as an ally, we ought to rapidly overcome all
obstacles in the way of complete recuperation.
Readjustment of existing conditions is the order of the day, and where
there’s a will there’s a way, as we all know. The general reduction that
has taken place in the price of commodities, and to some extent in
rents, furnishes a very good reason of itself why wages should be
reduced from the high points to which they climbed to meet high prices.
As it is, the inequality between wages and prices is very conspicuous,
and equality should be restored as quickly as possible. Equality is
another name for justice. It is also the touchstone of taxation. Workmen
should not forget that even half a loaf is better than no bread, and
that by accepting reduced wages they are paving the way to better times
for themselves as well as for the country. Then, too, they owe a duty to
society at large. No one should be governed by the narrow, selfish
policy of living for himself alone. This is a world in which we must
give and take, and labor and capital have mutual interests.
The decline in commodity prices, that were before excessive, has been
salutary and of vast benefit in bringing the necessaries of life within
easier reach of the wage-earning masses, and in preventing many
industries from going from bad to worse, through cheapening their
supplies of raw material. The people generally, as consumers, benefit by
this reduction in the cost of production, and in turn it tends to
increase consumption and quicken trade and manufacturing enterprise. All
these influences, too, toad to strengthen confidence in the situation
and hope for the future. But the over-trading, extravagance and
excessive speculation that primarily led to the panic should be
carefully guarded against in the future.
The very severe and extensive liquidation that we have witnessed, not
only in Wall Street but all over the country, has made the financial
situation sounder and therefore safer than it has been for several
years, for it must be confessed that many of our speculative captains of
industry and finance passed far beyond the bounds of conservatism in
their operations, and invited the crisis we experienced by their
reckless assumption of inordinate risks and liabilities.
It was a fitting retribution when some of them were engulfed by it.
Especially culpable and dangerous to the public were those speculative
capitalists who sought and gained control of chains of important
national banks, and then used their resources to extend their own
hazardous speculative schemes. These men were really the immediate cause
of the crisis, and they are now deservedly paying the penalty for it.
But this is a small consideration in comparison with the enormous amount
of havoc they created. One good thing, however, has come out of so much
evil, and that is improvement in our banking condition, by the exposure
and eradication of this unsound banking that prevailed in New York, and
to some extent elsewhere.
We shall, in this generation at least, have no more such speculators
stepping into control of large New York banks and using them pretty much
as if they, their assets and deposits, were their own property. Those
responsible for this unsound banking were public enemies, and we are
still feeling the effects of their reckless and illegal proceedings. The
fact that several of them are now under indictment for their offences is
a reminder that the way of the transgressor is hard. Their elimination
from the banking world removed a source of great danger, which might, if
allowed to continue longer, have resulted in a far worse state of things
than they actually created before their career was brought to a close.
A salutary effect of the panic is the check it has given to extravagance
and waste in living expenses, and the practical lesson in economy that
it has taught very many, for economy is wealth. To reduce expenses after
business reverses is the best way to recuperate, and a little adversity
is not without its uses among us, for we are beyond question the most
extravagant people in the world. This extravagance in living has been
the prime cause of much of the “graft” evil that has lowered the tone of
our business and political life, to say nothing of abuses of power,
embezzlements, corporation-looting, and other forms of dishonesty.
President Roosevelt in his war against illegal and dishonest corporate
practices has certainly worked for the good of the country and to raise
the standard of business morality; and the life insurance, railway and
other corporate scandals that we are all familiar with have shown how
much reform and purification were needed even in high places. Let us
never forget, as the Bible tells us, that “Righteousness exalteth a
nation” however great may be its material prosperity.
That there is a very large amount of money lying idle and available for
investment in first-class bonds was conspicuously shown by the result of
the sale by the City of New York on February 14th of fifty millions of
four and a half per cent bonds, when three hundred millions were bid
for, at an average price of about 104¾. This oversubscription of six
times the amount offered came from people who would not have touched any
but gilt-edge securities.
Of course, the present cheapness of money accounts for much of this
large New York subscription, as apart from investors, banks and bankers
are seeking safe employment for their surplus, in securities that can be
promptly marketed on the Stock Exchange whenever necessary. The latter
is an indispensable condition with them, particularly now in view of the
national banks being enormously indebted to the Government in the shape
of Treasury deposits, and also in view of the future needs of the
Government calling for their return. This is already giving a hardening
tendency to time money.
Although trade is largely prostrated through inactivity, it is safe to
say, notwithstanding what is bad in the situation, that fundamental
conditions are generally sound, and therefore recovery while gradual
will be the easier for it. Meanwhile with inactivity forced upon us, let
us be masterly in our inactivity, and make a virtue of necessity. There
is much in knowing when to stop and when to go ahead; when to ’bout ship
and when to take in sail, and double reef the mainsail and the topsails,
or heave to, and when to sail under bare poles or a full spread of
canvas. Skillful navigation is necessary to success.
With regard to bank reserves, it is especially important during this
period of depression that they should be kept exceptionally strong and
as much as possible, within reasonable limits, above the required
percentage. Twenty-five per cent of reserve against deposits in the
central reserve cities, and especially in New York, is not always
sufficient, as we have seen, from time to time, to enable the banks
there to weather a storm.
The Bank of England maintains an average reserve of nearly twenty-five
per cent larger than that; and it is guarded from suspension in times of
panic by a suspension of the bank act by the Government, which allows it
to issue its notes ad libitum without any compulsory reserve. Here are
two elements of safety. The stronger in reserve the banks keep
themselves, the more confidence in them and in the situation will be
strengthened, and the stronger confidence becomes, the more enterprise
can build upon it. So the banks by their conservatism should do all they
can to encourage confidence as the prime requisite in recuperation.
The New York banks, holding as they do largely the reserves of other
banks throughout the country, should hold a reserve nearer to that of
the Bank of England, which is also the depository of the reserve of
other banks, but in a much larger proportion. If the New York banks had
held thirty per cent reserve last October, when the Knickerbocker Trust
Company failed, there might have been no necessity for issuing Clearing
House certificates, and in that case there would have been no hoarding
of money and little or no panic. But the banks are naturally desirous of
making money by keeping their loans and discounts at high figures, so
they are apt to look upon reserves above the legal limit as money
wasted. The legal limit, however, is too low in the central reserve
cities. My remedy is to raise it. It ought, in my opinion, to be at
least thirty per cent instead of twenty-five per cent, and apart from
any legal requirement, the New York Clearing House should adopt a rule
requiring the banks in the Association to keep a reserve of thirty per
cent. The banks would lose a little in profits by this change, but they
would gain in safety, and reduce our liability to panics. Their
experience during the crisis, when for ten weeks, until the end of
December, currency loaned at a premium ranging from two per cent to five
per cent, should make them anxious to avoid another such ordeal, and an
ounce of prevention is better than a pound of cure.
One unpleasant part of the aftermath of the panic in New York was the
failure in one week, at the end of January, notwithstanding that they
held five millions of loan certificates, of four banks belonging to the
Clearing House, because of runs on their deposits, and the refusal of
the Clearing House to give them further assistance. Whether or not any
of these will be able to resume is still undetermined. Yet, in sharp
contrast with the excitement and alarm that prevailed for weeks after
the Knickerbocker Trust Company failed, the public regarded these
failures with apathy, and the recovery in the stock market which was
then in progress, chiefly under the covering of short contracts, was not
even checked by it, so much had sentiment changed in the interval. These
failures had been practically discounted, large as they were, by what
had gone before, including the decline in stocks. Yet collectively they
had more than twenty-one thousand depositors. These may eventually be
paid in full, but it is very uncertain when that will be, for the law is
a slow coach, especially when a permanent receivership is fastened upon
a bank, largely owing to the long wait usually necessary for the
conversion of slow assets into cash. Moreover, the expenses of
liquidation eat up a large part of the assets under the system of fees
for receivers and their counsel, which have always been much too large
for the work done, and consequently they involve injustice to the
creditors. Laws should therefore be passed substituting for fees fixed
rates of compensation, per diem, for both of these, that is salaries;
and meanwhile the courts should, under the existing laws, reduce their
fees to reasonable amounts, and so correct this evil of extravagance in
the cost of liquidation, which in some instances has been so excessive
as to practically amount to robbery of the victims. This is a needed
remedy that should be urged upon State legislatures.
Two of these failed banks are expected to resume within six months,
while the other two will be wound up, and probably pay depositors forty
per cent or fifty per cent of their claims within about that length of
time.
Very fortunately, however, the crisis of 1907 was much less prolific of
bank failures than that of either 1873 or 1893. In 1893 no fewer than
one hundred and fifty-eight banks suspended, and of these sixty-five
went into permanent receiverships, while eighty-six resumed within the
year, and seven later. But few of these banks had a capital of half a
million or more, their average capitalization being only $169,000. The
banks generally in the fourteen years interval had gained immensely in
strength as well as in number, and their power of resistance to the
effects of the crisis, when it came, had been correspondingly increased.
While the profits of trade and manufacturing have been dwindling,
prophets as to the future of business and prices have increased
enormously, and they were never more numerous or more divided in opinion
than they are now. Some of them point to the fact that with the single
exception of steel, in the hands of the United States Steel Corporation,
prices have declined, and they argue that unless demand increases they
will, like stocks and wages, naturally go lower, and that the Steel
Corporation will be forced, by the reductions already being made by the
independent steel makers as well as by the heavy decline in iron, to
follow suit. These also look for somewhat prolonged depression. But many
other prophets are sanguine that we are already seeing the worst of it,
and that commodity prices are about as low as they are likely to go. The
true prophets are probably the conservatives who steer between these
conflicting opinions and avoid both extremes. But whatever may come, on
the ebbing or rising tide, of our business life, we should, as
Longfellow says, “Learn to labor and to wait, with a heart for any
fate,” and at the same time hold ourselves always ready to make the best
of our opportunities as they arise, and, as America is pre-eminently
rich in opportunities, we shall not find them waiting long. In any
event, the wants of eighty-four millions of our people must be supplied,
and we are the most progressive nation in the world. I therefore
ask—Who’s afraid?
I am quite of the opinion that the time has arrived for calamity howling
to cease; there is now no occasion for undue anxiety. Caution, however,
may be necessary, especially in commercial operations. The worst of the
financial depression has been seen, and the long-distance view is
certainly more encouraging than at any time during the last six months.
Business men have now no reason to feel otherwise than confident. I
firmly believe that recuperation will be quicker after the recent panic
than was experienced after any of the previous great panics since the
one of 1857.
Now is the time for the timid to develop bravery, for the strong to aid
the weak, for the ignorant to be willing to learn from the wise. Let us
all work together for the common good, and the upward tide will bear us
all along towards better times and lasting prosperity. Panics come in
cycles and it will be years before another one can strike us. Let the
worker give his best services to his employer. Let the employer grant
justice and fair pay to the worker and to all, and the nightmares and
storms of the past year will be forgotten or remembered only as a lesson
taught by experience, which will serve to teach us not to overdo in the
future but to temper enterprise with conservatism.
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CHAPTER LXXXV.
AMERICAN SOCIAL CONDITIONS.[11]
Footnote 11:
An address by Henry Clews, LL.D., to the students of Yale University,
New Haven, Conn., November 1, 1907.
_Mr. Chairman and Students of Yale University_:
As you gentlemen of good old Yale are studying American social
conditions, I am glad to have the opportunity of addressing you, and I
congratulate you on the prestige you will derive from graduating at so
great and famous a university. You are now on the threshold of American
citizenship and have good reason to be proud of the prospect before you,
with its unlimited possibilities.
Surely it is a privilege that you all value, and can hardly overvalue,
that of becoming American citizens, and thus forming a part of this free
and glorious Republic, where the gates of opportunity are thrown wide
open to you, and the golden harvest of success stands ready to be reaped
by the worthy and deserving, who are able and willing to do good work,
and work hard in their chosen calling. I may reasonably predict that
some of you will become leaders of thought, trade, science, literature
or art, and that will be your ample reward. I base my prediction on the
fact that you are not here because you are compelled to be, but because
you have a thirst for knowledge, for information, or suggestions that
may be of use to you in this connection, and are willing and anxious to
work hard to attain what you desire. The first requisite to attain
success in any form is this willingness to study and work for what you
want, so, being equipped with this necessary quality at the start, you
are prepared to make headway in the battle of life.
The pessimist is abroad in this fair land of ours, in these days,
preaching the gospel of discontent, and a favorite text is that the
young man has now no show, or little chance to get on in life. Do not be
misled or discouraged by such a false doctrine. There never was a time
when brains were at a greater premium than at present, nor courage,
education, industry, and energy more requisite or in greater demand. The
harder you have to struggle to complete your education, the better
fitted you will be for that battle of life, for in your youth you will
have attained victory over the obstacles which lie in the path of
success. Disappointments may embarrass you, but you must conquer them,
instead of allowing them to conquer you. Every victory, thus won, will
be an incentive to further efforts and achievements, and will provide a
stepping stone to success.
Right here, let me impress upon you that the foundation stones of real
success in life are industry, honesty, and truthfulness. These are
jewels which every man can possess, if he cares to. Do not be honest
because it pays, or as a matter of policy. Be honest because you are
conscientious, and it is right to be honest and a reproach to be
dishonest. A man who is honest and truthful in all things is the highest
type of manhood, and commands respect in every walk of life.
While you are still young, I advise you to have an ideal. Make up your
mind what you are best suited for, and strive with all that is in you to
perfect yourself for the work of such a position or profession. While it
is the almost universal desire to become rich, remember that there are
other things in life more to be desired than great wealth. Whether
amassed in Wall Street or elsewhere. Few of the great authors,
scientists, professors, or inventors have been wealthy men, yet they
were great public benefactors, and their names will live in the pages of
history long after the very rich men of the world have been forgotten.
Learn well the history of your country. Study the science of Federal,
State, and Municipal government. Study also finance and banking. Whether
you go into Wall Street or not, it will be useful to you. Before you
leave Yale, try to inform yourselves on all the subjects that will make
you useful citizens, as well as competent, practical workers. School
yourselves to be polite and courteous under trying circumstances.
Politeness is one of the strongest allies one can have in his dealings
with his fellow-men. It is not only so in my field of activity—Wall
Street—but everywhere.
Read only good books. Libraries are now so plentiful that—even if you
have not one of your own—good books are within the reach of all, and
here at Yale you, of course, have an embarrassment of riches from the
Greek and Latin classics to modern literature.
While you are improving your minds, take good care of your bodies. You
are not yet too old for me to give you points. Exercise all you can in
the open air. Cleanliness of body, and neatness of dress, even if you
are not millionaires and your clothes are threadbare, will often be
taken as a guarantee of good character. Be thrifty and economical, even
if you cannot equal Russell Sage, and never get into debt, if you can
help it.
Strive to learn to do some one thing, in the line of your studies,
better than anyone else can do it, and you will have a specialty to
recommend you to a chosen career. Whatever you attempt to do, do it with
your whole soul—as Mr. Roosevelt, our strenuous and gifted President,
says: “Buck hard and hit the center of the line.”
I have been much impressed with the manual training schools, which have
recently been established in New York City. I wish that manual training
could be added to the course in every school and college. Mr. Booker
Washington has ably presented the plan in his Tuskegee Institution,
where every man to get an education must learn a trade, and every man
who learns a trade gets an education. It is a substantial personal asset
for rich or poor.
Because you live in a city, do not think that the country is less
attractive, and has no chance to grow like a town. The State of Texas
alone could give to every man, woman, and child in the United States a
full-sized building lot 20 × 100, and then, allowing for public
highways, have over one-third of the area of the State left for the
production of food supplies. The West, the Southwest, and the South, are
yearning for newcomers. Horace Greeley used to say: “Go West, young
man!” The emigrants from foreign shores will some day realize that there
is a welcome ready for them outside of cities. Colonies will be formed
and men of intelligence will be needed to rule and advise the newcomers;
and those of you who can speak a foreign language will be well fitted
for such a position. But you may aspire to the United States Senate, or
to become Wall Street millionaires.
The natural resources of our country are constantly being developed, and
men of brains and courage will be sought to lead the armies of workmen.
Every man cannot be a captain of industry, but a man of pluck and
education need not remain a private in the ranks very long. Still, avoid
that vaulting ambition that overleaps itself and falls on the other
side.
Whatever your calling may be, try to become your own master in your
younger days. Nothing will give you so much self-reliance as the habit
of relying on yourself. You may possibly fail at first, but great
successes are often built on failures, if the one who fails will profit
by the lesson. Bulwer Lytton tells us that in the bright lexicon of
Youth, there is no such word as Fail.
When you graduate, do not imagine that your education is completed.
Consider that you are just beginning to be able to learn, and that your
College life has simply been a period of training to put you in
condition for the real struggle for knowledge. Practice makes perfect in
all the professions.
See to it that you acquire some new point in knowledge every day that
will be of future value to you. This will mean 365 good ideas acquired
in a year, and every one of these ideas will be like money out at
interest, or like seeds planted in good soil. They will blossom and bear
fruit.
Do not believe that all men in politics are rascals, or weaklings, who
can be bought for a price. If you have the inclination, get into
political life and be a factor in the affairs of your district. Honest
and truthful men will be most welcome in this field, and may be of great
public service.
Do not be worried by the statements made by so many pessimists that
society, and the country at large, are on the verge of moral bankruptcy.
I tell you that the world is growing better every day, and good men are
held in higher respect than ever. Of course there are more rascals, and
more thieves, than there were fifty years ago, but that is because there
are far more people. The percentage of bad to good is relatively
smaller. Men who do wrong are found out oftener and sooner than they
were in the olden days, and the news of wrongdoing is carried all over
the land by telegraph and telephone and published broadcast in the daily
papers. A hundred years ago a man might commit a crime a thousand miles
from New York and we could not get the news of it in a month, even if it
was sent at all.
Use all your endeavors to suppress the use of profanity or obscenity in
public places or elsewhere. This is one of the crying evils of the day
and our women are never safe from the insults of having to listen to
talk that would not be tolerated in a first-class barroom. But of course
the present company is excepted. You are all gentlemen and scholars.
Be cheerful under adverse circumstances. Ella Wheeler Wilcox expresses
what I mean when she says: