The great upward and downward swings of speculative prices, herein
referred to as cycles, have invariably preceded or accompanied
periods of business inflation or depression. This fact, apparently so
elemental, is often disregarded by that very large class of speculators
which is continually looking for artificial and unpregnant explanations
of price changes. There can be no doubt as to the existence of
manipulation, and, in rare cases, movements of considerable importance
may be traced to this source alone; but manipulation consists, in
its fullest sense, of the tactics resorted to for the purpose of
liquidating shares in anticipation of a decline which the long-distance
thinkers believe to be inevitable; or, per contra, for the accumulation
of shares prior to a great recovery or readjustment. It is seldom
employed as a positive means of enhancing or depressing values. In
fact, to do either by mere manipulation would be an impossibility.
Every observer of great speculative movements knows that at the highest
point of a movement, and during the first half of a decline everything
appears roseate, while at the lowest prices, and during the first half
of an advance, the reverse is true.
There are several contributory causes which operate to produce these
false appearances. The primary cause is the curtailed perspective
and imperfect logic of the public investor or speculator. The most
difficult thing to drill into the mind of the unsophisticated is
the fact that speculation cannot possibly be successfully based on
appearances which are open and obvious. Such a process is a flat
contradiction of the word itself. It is unseen future developments
or, in some cases, hidden and submerged present truths which must be
consulted. Yet we find a great majority of the public element who
seek riches in the speculative arena, constantly harping on the large
business of certain corporations, and the excellent state of general
trade as a reason for purchasing shares. These factors have, in all
probability, been discounted in current prices. Generally speaking, the
present is of no more use than the past in forming opinions of future
price changes. It is a certainty that sales of stocks could not be made
in great volume to good advantage unless everything _did_ look rosy,
for who would purchase shares at high prices if the future appeared
threatening or unpropitious, and who would sell holdings in the face of
encouraging and inspiriting prospects.
This brings us to the second phase of the question--the _creation_
of false appearances, which is, in truth, the highest form of
manipulation. When so-called inside selling is going on, great business
is reported by railroad and producing corporations; dividends are
increased, and public expressions of confidence emanate from men of
high standing in the financial world. The effect of all this expressed
optimism is, market-wise, of a negative character. When it is most
prevalent and most decisive, prices halt or even decline. This period
and action represents selling at the only time when advantageous
selling is possible. In the main the truth only is told about existent
conditions, possibly about the near future. Nothing else is necessary;
but nevertheless the sellers are anticipating, not the events of the
next week or the next month, but of a more remote period where they see
probabilities in regard to which a discreet silence is maintained.
The constantly recurring cycles of prices, the alternate inflation and
depression, must therefore be traced to something far more important
than the grossly exaggerated potentiality of mere manipulation.
Principal Crises of the Last Century.
That crises in the financial world have occurred at more or less
regular periods is a matter of history. Since the beginning of the
nineteenth century ten of these readjustments have occurred. In 1812,
after ten years of prosperous conditions preceding the war of that
year, business fell off materially. The real panic, however, occurred
in 1814. Washington was taken by the British on August 24th, 1814, and
suspension of specie payments was general in the following two weeks.
In 1824, the protective tariff enactments were followed by general
inflation in all lines of business. Two years later, in 1826, a general
depression occurred with many failures. The depression at this period
was even greater in England than in the United States, and many writers
attribute the entire trouble to European business reverses, but it is
probable that we had been living beyond our means and that this fact,
to say the least, aggravated the disturbance.
In 1837, after six years of good times, another crisis occurred. This
depression was attributed to various causes. The great New York fire of
1835, the loss of charter by the United States Bank in 1836, and the
calling in of $37,500,000 of government deposits by President Jackson,
are all given due consideration. The actual panic, however, did not
appear until May 10, 1837. All the banks suspended specie payments,
and securities,--in fact all properties of whatever kind--fell
rapidly in value. The most plausible explanation of this crisis is
over-speculation in land. The other evils mentioned might easily have
been rectified by the recuperative powers of a growing country, had the
more serious element of wild inflation been absent.
In 1848, after a long period of prosperity, broken only by the war with
Mexico, business inflation and over-speculation again brought about the
logical and inevitable result. Europe also had been over-speculating
again and a crisis in England soon extended to the United States.
Liquidation was drastic and the depression lasted until the discovery
of gold in California began to bear fruit.
In 1857, one of the most serious, as well as the most short-lived, of
our crises occurred. Again speculation was extreme; December, 1856,
marked the high point in securities, and prices continued to sag for
some months; but it was not until August, 1857, that a panic occurred.
In 1864, came a crash in speculative prices following tremendous
inflation. Between April, 1864, and April, 1865, leading stocks
declined from $50 to $100 per share. As the inflation of this period
was caused largely by the high prices of commodities and greatly
increased railroad earnings occasioned by the events of the Civil War,
most writers on the subject do not consider it in their theoretical
discussions of crises.
In 1872, another boom was on, particularly in Iron and Steel. The
Chicago and Boston fires had not been as effective in breaking stock
prices as might have been expected. Prices of stocks began going down
materially in April, 1873, and in fact had been rather “toppy” during
the preceding years. This panic, like most of the others, was preceded
by enormous speculation and high prices. It is interesting to note that
while stocks were declining, general business was booming. The trained
minds of Wall Street were learning to discount the future at longer
range and more accurately. The iron and steel business exceeded all
former records in 1873, both in the matter of normal price and actual
production.
In January, 1884, numerous failures and suspensions produced a panic
which was in reality the culmination of a long decline. As in 1872,
this panic was preceded by enormous general business. The steel and
iron trade again broke all records in 1882, and other lines were
equally prosperous.
In 1893, the period of prosperity which followed the enactment of the
McKinley bill was rudely broken. Speculation had been rampant, as
usual. On May 4th, 1893, the National Cordage Company went into the
hands of a receiver. Only a year prior to that date, this corporation
was paying 12% in dividends and the stock was selling well above
par. There were many badly inflated stocks and many rotten spots in
the speculative stock markets. The Distillers and Cattle Feeders
shares fell from $70 to nothing, and were assessed $20 per share.
The aggregate liabilities of business failures in 1893 were almost
$350,000,000, over 20% greater than in 1892. Banks failed right and
left, and several leading railroad companies went into the hands of
receivers.
In 1903, another period of depression occurred. It is doubtful if this
period can be rightly classed with the other crises already mentioned,
for it was more in the nature of a drastic but orderly retrenchment
than a panic, and the bull stock market of 1902 was again in full swing
early in 1904.
In thus briefly detailing the crucial points of nineteenth century
financial affairs, there is no intention of entering an economic
discussion, and no pretence of giving anything like a comprehensive
history of the events preceding or following their recurrence. The
subject here discussed is speculation, and the object sought is to
gain knowledge that may be of value in forming opinions as to future
prices. We may gain some information of this character by analyzing the
following points:
1--Did price declines in stocks precede, accompany, or follow
panics, crises, or general business depression?
2--What are the signs which usually precede such periods?
3--What are the salient causes?
4--Can any dependence be placed in the regularity
of these recurrences?
On the first head it will be found that in all cases the top of the
stock market has been reached prior to the actual eruption in general
business. Stock speculation in 1814 and 1826 was not of great volume
nor importance, and cannot be given much consideration.
Beginning with the panic of 1837 we find that the highest prices for
stocks were made in October, 1836, while panic conditions did not occur
until May, 1837. Preceding the panic of August, 1857, highest prices
were reached in the last months of 1856. Highest figures were recorded
in April, 1872, just one year prior to the panic of 1873. The stock
market anticipated the troubles of 1884 by 17 months of declining
prices. In January, 1892, stocks began declining and continued their
downward course until the panic of 1893 cleared the atmosphere. In our
last period of depression (1903) stocks had reached their pinnacle in
September, 1902, just one year before the market turned for the better.
We find therefore that in the majority of instances, highest prices for
stocks were reached long before business troubles were openly apparent.
This action represents to a certain extent the selling of stocks by men
who were wise enough to foresee trouble.
Another interesting fact in regard to crises is that they are usually
preceded by record-breaking business in all directions. As iron and
steel may be considered the best barometer of business conditions, the
following tables are instructive: