PANICS, AND THE CRISIS OF 1907
A panic is a state of mind. It cannot be regulated by statute law
nor preached down by press or pulpit. At such times, suspicion,
apprehension, and alarm take possession; reflection and sobriety
are crowded out; men do and say irrational and unreasoning things;
incidents trifling in themselves are exaggerated into undue
proportions; all kinds of difficulties are conjured into the
imagination. The best that can be said of such a phenomenon is that it
is of brief duration.[59]
In Wall Street, where men are accustomed to looking forward at all
times, the question is ever in mind as to the next panic. The last one
left its sting; we are interested now in knowing about the future.
Have we learned how to avoid these difficulties? May we hope to
diminish their force and mitigate their terrors? May we rely upon the
superior organization of business and the greater quantity and quality
of capital to soften the effect of the next shock? I think not. We
may lull ourselves into a coma of fancied security as we reflect upon
experience and its expensive lessons, but we deceive ourselves if we
think that we shall finally arrive at a point where these convulsions
shall cease.
Nothing of that sort can come about among people strong with health
and vigor, confident and full of energy, and impatient for action.
With such a people life is incessantly mobile; a constantly increasing
volume of creative activity impels them onward. Panics are unknown
in dead countries and in countries that have not yet heard the call
of progress; in all other countries the violence of these shocks is
directly proportionate to the enterprise of the people. The more
civilization there is, the greater the creation of wealth; the more
wealth there is, the greater the volume of speculation that creates
wealth. In such circumstances it is idle to talk of a time when panics
shall cease, because confidence and enterprise must ever push onward,
speculation in material things must accompany them, supply must
overtake demand, and human nature with its moods and caprices must
finally pay toll.
Vast industrial, commercial, and credit expansions lie somewhere
ahead, and somewhere ahead excesses and indiscretions the world over
must play their part and exact their penalties. We should cease to be
surprised at these vicissitudes, for, “paradoxical as it may seem, the
riches of nations can be measured by the violence of the crises which
they experience.”[60] Moreover, panics are rarely such unmitigated
calamities as they are pictured by those who experience them. At least
they serve to place automatic checks upon extravagance and inflation,
restoring prices to proper levels and chastening the spirit of
over-optimism. In a world of swift changes they are soon forgotten.
We may seem to be prepared for these periodic set-backs, and there
may be men amongst us of sober reflection who are really wise enough
to foresee the top to a normal movement, yet the accidents that have
happened will happen again,--bad harvests, war, sudden failures,
earthquakes,--these are not easily discerned in advance. Sanguine and
ardent merchants will make the same old mistakes; good times will
engender the same old hallucinations; people who see, or think they
see, wealth being created all around them, will always rush in and buy
at the top; there will be too much work for the dollar to do--and after
that the deluge. Finally, in order that we may not become pessimists,
let us remember the words of the greatest of American philosophers:
“The changes that break up at short intervals the prosperity of man are
but advertisements of a nature whose law is growth.”
Another phenomenon quite as curious as that of panics, and one that is
similarly psychological, is the unhesitating, slam-bang zeal with which
we place the responsibility for these misfortunes on the shoulders
of others. We, as a people, have brought the disaster upon ourselves
by reason of our indiscretions. We have lost our heads and entangled
ourselves in a mesh of follies. But we do not admit such reproaches,
even in our communings with self. Not at all. The fault lies elsewhere,
and it is balm to our bruises to place it elsewhere with indignant
energy. It will not do to preach at such times about currency systems,
laws of supply and demand and kindred generalities, for these are
abstract and vague to a mind inflamed by losses. What such a man wants
is a head to hit; something concrete, a target for his exploding wrath.
And he never hesitates. He says Wall Street did it. His fathers said
the same thing, and his children will follow suit.
Now here is a strange thing. After a man has said, “Wall Street did it”
over and over again, he believes it, just as he believes or takes for
granted a similar tedious reiteration by the humble katydid. To such a
man, the thing he _wants_ to believe, when stated over and over again,
comes by repetition to fix itself in the mind as a demonstrated truth,
notwithstanding an utter absence of proof or of reasoning. He says
“Wall Street,” or “the Stock Exchange,” until he can think of nothing
else. It is a catch-phrase, short and sweet, which he hammers home to
his own ineffable satisfaction, and he thinks it and broods over it to
his heart’s content. The politician then comes along with his cures for
all the ills of society, and, finding Wall Street a convenient means of
perpetuating his accidental notoriety, his voice joins the harmony. The
indictment is then complete.
Take the panic of 1907 as the last and most conspicuous example. The
financial losses involved, and the extent of the disturbance of the
machinery of credit, made it the worst panic of this generation. As it
burst upon the country at a period when to the outward eye prosperity
reigned throughout the land, men were at a loss to explain it. They
could not understand how such appalling conditions could occur in
such apparently cheerful surroundings. As everybody was affected by it
in greater or less degree the whole country was full of people with
a grievance. They were themselves directly to blame for it, but they
looked elsewhere for the responsibility for their folly.
That sinister influences were at work was, in the popular mind,
undeniable; and by that same token we are pretty close to “Wall
Street” when we talk of things sinister. At about that time a member
of Congress made a speech in which he asserted, with all the art of
katydid repetition so dear to the heart of the true believer, that
the Stock Exchange was the cause of the panic. Rich men broke the
market and “held the bag,” he said, while panic-stricken owners of
property poured the invested savings of a lifetime into that capacious
receptacle. Nothing could be simpler. Newspapers must print such
things, and the public found what it wanted on the first page. Even
to-day, five years after the fact, this delightful explanation of the
1907 panic blossoms like the rose as a political campaign progresses.
The voice of the hustings “knows its business.”
Mr. John Burroughs warns us that it is one thing to treat your facts
with imagination, but quite another thing to imagine your facts.
Sufficient time has elapsed since 1907 to soften, somewhat, the bias
and prejudice created by the events of that year, and perhaps there
may be among us minds open to reason. The New York Stock Exchange
feels, honestly, that a great injustice was done it by the criticism
and abuse so generously poured out in the first shock of that event.
Far from causing the crisis, its members assert that the institution
fulfilled one of its most useful functions in giving ample warning
of its approach, and that, when those warnings were disregarded, it
concentrated all its machinery on the task of restoring order from
chaos. They speak feelingly when they say that never in its history has
the Stock Exchange been called upon to deal with so great an emergency,
and never has it demonstrated so admirably its fundamental purposes.
When they make these statements they offer to prove them. Let us
examine the proofs.
The panic of 1907 was not unlike many preceding financial disturbances.
The opening months of the year had witnessed a general liquidation
on the Stock Exchange, brought about naturally, and in simple,
automatic compliance with economic laws and precedents. There had
been over-expansion in all lines of business; careful students saw
the portent; able men of power and influence heeded its warning
and set corrective forces in motion months before the shock came.
Total transactions in shares sold on the Stock Exchange had risen
from 187 millions in 1904 to 284 millions in 1906, while the value
of the securities thus sold increased from 12,061 to 23,393 millions
of dollars respectively. This was too rapid growth, and the general
liquidation that had been under way for months effectually corrected
it, since New York City bank loans secured by Stock Exchange collateral
declined, as shown by the Comptroller’s report, from $385,652,014 in
August, 1905, to $251,867,158 in August, 1907--a corrective force
represented by $133,784,856.
The Stock Exchange has been defined as “a barometer of future business
conditions,” and never did a barometer give clearer warning. It said in
effect to all the banks of the country and to business men generally:
“There has been a widespread over-expansion of credit; it must stop;
we are doing our share here in New York to correct it; you must do
likewise.” And, in order that there might be no failure to understand
what was meant, New York City bank loans were reduced with drastic
emphasis, months before the panic came, by nearly 35 per cent. “Without
an exception,” writes Prof. S. S. Huebner, “every business depression
in this country has been discounted in our security markets from
six months to two years before the depression became a reality.”[61]
Senator Burton, another authority, emphasizes the point further: “In
addition to other influences which promote an earlier rise and fall,
there must be mentioned the more careful study and attention to the
financial situation which is given by dealers in the stock markets
and in great financial centres. They often forecast the grounds for
a rise or fall in prices before the general public is awake to the
situation.”[62] This, then, was the situation in the summer of 1907.
The Stock Exchange had “cleaned house,” and had liquidated thoroughly,
warning the country to go slow.
Why was not this warning heeded? I recall vividly the daily expression
of surprise, on the floor of the Exchange, and throughout the financial
district, in the months that elapsed between our March liquidation
and the outbreak of the October panic, that the country should pay so
little attention to “Wall Street’s” admonition; that it should continue
its unprecedented boom despite the plain intimation that the funds to
support it were exhausted, and despite the general knowledge of every
tyro in business that future conditions are discounted in Wall Street
as freely as promissory notes.
Had the business interests of the country so much as inquired into that
warning they would have found by turning to the Comptroller’s reports
of the loans of national banks for the entire country that such loans
had expanded from $3,726 millions in 1904 to $4,679 millions in 1907.
They would have seen that whereas the New York City banks _contracted_
their loans by nearly $134,000,000 from August, 1905, to August, 1907,
loans and discounts by the banks of the whole country in that period
actually _expanded_ $700,000,000. Surely it will not be urged that
Wall Street or the Stock Exchange had anything to do with bringing
about this expansion. On the contrary, it shows that speculation in
commercial lines, in new enterprises, in lands and in all the various
forms that “out-of-town” banks are expected to finance, went on and
on in vastly increasing volume long after the danger signal had been
hoisted on the Stock Exchange, and in utter disregard of the warnings
those signals conveyed.[63]
As the summer of 1907 advanced, speculation throughout the country
continued in rapidly increasing volume, while on the Stock Exchange
there was an almost complete cessation of activity. Business men of
the West and South seemed to feel that as there had been no serious
failures, and as the decline in the stock market had restored values
to an attractively low basis, there would be a normal recovery similar
to that which followed the panic of 1893. They felt that the trouble,
whatever it was, had now been corrected, and in this fancied security
they went about with further expansion of their business enterprises,
confident that no serious difficulties were in store. The Stock
Exchange was often cynically referred to in that period as “the only
blue spot on the map.” Its members were cheerfully invited by a Western
newspaper to “shake off their torpor and join the Sunshine movement.”
It is only fair to say that there was some force in the buoyant if
superficial viewpoint of the country at large, for in the autumn
of 1907 we were blessed with all the kindly fruits of the earth in
abundance. The average crop of our agricultural products gathered
that year was enormous, and behind it lay large reserves of wealth
that had accumulated from a series of good crops in the years just
preceding. There was, moreover, a partial failure of foreign crops that
brought about heavy foreign requirements, thus assuring rich returns
to American producers. Our railroads, which in the previous panic of
1893 were so affected by declining traffic and by the unproductiveness
of new territory into which they had ventured that bankruptcies
became general, were early in 1907 in better physical condition than
ever before. Their gross earnings were at a maximum; their surpluses
fat with the profits of recent years; their credit high. A long
accumulation of foreign-trade balances had made the inherent strength
of the nation greater than ever before. Finally there was the great
essential difference between 1907 and former years in that we were now,
by statute law as well as in fact, on a gold-standard basis.
And yet, without one unsound basic factor visible to superficial
observers, we were suddenly plunged into a grave disaster--a panic
which in actual money losses surpassed any of its predecessors. It
came, this cataclysm (as the Stock Exchange had vainly predicted six
months earlier), at the worst time it could possibly come, just when
the banks were called upon to furnish $200,000,000 to transport and
market the crops. Small wonder that in the face of such an optimistic
outlook men stood aghast at the violence of the panic. As they had
not understood the warning, so they could not understand its swift
fulfilment. In all the long processions of panic-stricken people who
stood in line at the banks in those trying days, not one in a hundred
could understand how an institution could be solvent and yet be forced
to suspend. Later on, smarting from losses, this bewilderment gave way
to distrust and suspicion, as is often the case, humanly speaking, when
men look elsewhere than to their own folly for the sources of their
misfortunes. They were in a receptive mood when the charge was made
that “Wall Street and the Stock Exchange” had brought about all this
misery; they believed it to be true, and many still believe it.
The charge was so widely circulated and was fraught with such
possibilities of mischief that there was danger of ill-considered
legislation directed against the Stock Exchange and supported by
ill-advised public opinion. Thus it happened that Governor Hughes of
New York, doubtless moved to forestall hasty law-making, appointed a
committee to investigate the Stock Exchange. In another chapter we
have reviewed the work of this commission; meantime, the words of its
chairman are quoted, in passing, as a sort of _ex post facto_ reply to
the outcry that “Wall Street did it.”
“The immediate cause of the panic,” he says, “was a simultaneous rush
to sell securities, by holders who perceived that there was trouble in
the money market, and who wanted cash to meet maturing obligations.
These holders were not Wall Street men merely, but people in all parts
of the country who had invested some of their savings in stocks and
bonds. The very _raison d’être_ of the Stock Exchange is to supply a
market where invested capital can be quickly turned into cash, and vice
versa. The remoter cause of the panic was a long course of speculation
in all kinds of property, real and personal, that had pervaded all
parts of the country, and many parts of the Old World, and had now
reached its climax.” Mr. White here adds in a footnote that it has been
“_shown conclusively that speculation on the Stock Exchange was not the
chief contributor to the collapse of 1907, but that speculation on a
much wider scale, through the length and breadth of the land, was the
exciting cause_.”[64]
I have said it was not surprising that the public failed to observe
signs of disturbance in the happy conditions that seemed to prevail
before the panic. The blindness of the mass of the people to these
impending catastrophes is, indeed, a marked characteristic of all
similar epochs. Let us digress for a moment and consider the history of
other great disturbances. In 1825 the King’s Speech as read by the Lord
Chancellor dwells on “that general and increasing prosperity ... which,
by the blessing of Providence, continues to pervade every part of the
Kingdom.” This was in July; in December of that year the whole country
was torn by a devastating financial crisis. The London _Economist_,
in 1873, dwelt at length on the “astounding” progress of the Austrian
States, and said, “All over the rich countries of the Danube, capital
and labor are vigorously at work in the discovering and turning to
profit the amazing resources which have been lying unheeded for
centuries.” This was written in March; the Bourse at Vienna closed its
doors May 9th, and a panic of exceptional severity was followed by long
and continued depression. On December 31, 1892, R. G. Dun & Company’s
_Weekly Review of Trade_ said: “The most prosperous year ever known
in business closes to-day with strongly favorable indications for the
future,” and yet four months later the storm burst.[65]
These instances go to show how the elect may err in estimating
conditions, despite the fact that in two of these three memorable
crises ample warnings of an impending catastrophe were proclaimed in
the stock market long before these prophecies of continued expansion
were printed. In each instance the portent was ignored; in each the
ultimate penalty was paid. So it was in our own great crisis of 1907,
and so it will always be.
There was a panic throughout the United Kingdom in April and October
of 1847, yet the early response to changing conditions took place two
years before, when stocks began to fail in July and August, 1845. In
the year 1857 commerce and industry expanded throughout America in
increasing volume up to the very eve of the August crisis, yet the
stock market in the summer of the preceding year gave clear warning of
what was to occur. One year before the panic of 1873 a similar “slump”
foretold what was coming, and the same was true of the year preceding
the panic of ’93.[66] Previous to the last-mentioned crisis stocks
began to fall, with unmistakable emphasis, early in 1892. Of seventeen
of the most active, five reached their maximum price in January,
1892, three in February, four in March, two--Lake Shore and Michigan
Central--in April. And as we have seen, identical preliminary warnings
developed on the Stock Exchange from one year to six months before the
last great panic of 1907.[67]
The panic that hit the Paris Bourse in October, 1912, causing a
disturbance not equaled in violence since 1870, was brought about
by sowing the wind through an immense public speculation based on
two fine harvests in Russia and a feverish revival of commercial and
industrial activity all over Europe. Up to this point all the indicia
of the movement--such as bank loans, building operations, public and
private extravagance, and a blind infatuation for speculation by a
normally prudent nation that had not speculated on a large scale since
the Panama débacle of 1894--corresponds exactly with conditions in
America just preceding the 1907 crisis. The similarity between the two
incidents goes even farther, for early in September of 1912 the French
bankers and _Agents de Change_, recognizing the strained condition of
credit, had deliberately put in motion corrective agencies designed to
stop the rise with the least possible derangement of confidence.
They would have succeeded, no doubt, and the situation would have
exactly paralleled our own discounting processes of March, 1907, but
for the unforeseen Balkan difficulty which, coming out of a clear sky,
upset the plans of the conservative financial forces and precipitated
a panic. It came, as a French banker explained, a week too soon--by
which he meant that, given a little more time, the worst phases of
the disturbance would have been avoided through gradual and orderly
liquidation. As it stands, the panic will no doubt go down into French
financial history as “the Balkan panic,” just as our disturbance of
1907 is ascribed, _faute de mieux_, to Wall Street wickedness; but
in reality both the French and American crises had their origin in
precisely similar causes. The Balkan news in Paris only precipitated
what the French Bourse had planned to accomplish in an orderly manner,
just as Wall Street and the Stock Exchange had done five years earlier
in a similar emergency. The essential lesson of both instances is that
the same causes which generate prosperity will, if pushed far, generate
an equivalent adversity.
The details of the panic of 1907 are still fresh in mind, and need be
but briefly referred to. Banks and trust companies closed their doors
and suspended payments to depositors. Cash and credit became almost
unobtainable; we were face to face with demoralization. Clearing-house
certificates were resorted to at practically all banking centres
throughout the country; there was a general requirement of time notices
for withdrawal of savings bank deposits; all normal credit instruments
were impaired. The Secretary of the Treasury was forced to exercise
heroic discretion in the matter of security for government deposits and
for the very necessary increase of a note circulation that was then
suffering from a spasm of contraction. There was an immense hoarding
of funds and a consequent drying up of fluid capital, while from one
end of the country to the other, there was liquidation, business
contraction, retrenchment, panic, and ruin. “Wall Street” and the Stock
Exchange had foreseen that the chain was only as strong as its weakest
link, and had done what it could to prepare the public for the break.
To assert at this late day that it did aught but its full duty is
humbug _in excelsis_.
I have already cited one instance, the country’s expanding bank loans
as contrasted with “Wall Street’s” contraction, to show how plainly the
warning was conveyed. As another instance, take the immobilization of
capital tied up in the enormous real-estate speculation then prevalent.
In New York City alone the increase in mortgages recorded jumped from
455 millions in 1904 to 755 millions in 1905, an increase over the
previous years of 32.7 per cent, and 66 per cent, respectively.[68]
The figures showing the increase in building permits are similarly
significant, revealing the fact that in 1905, 1906, and the early
months of 1907, money was pouring into new construction at a rate
without precedent. In Greater New York alone, not including Queens
County, building permits granted in 1904 amounted to $153,300,000,
and in 1905 to $229,500,000, and in the face of disaster this rate of
increase continued up to the very eve of the panic.[69]
Outside of New York the expansion in building operations was equally
rapid and equally ominous, showing an _increase_ in twenty-five
cities alone from $201,300,000 in 1903 to $234,200,000 in 1904,
to $280,400,000 in 1905 and to $307,800,000 in 1906--all this but
a small part of the actual funds thus locked up throughout the
whole country.[70] We thus find that one of the most important and
inevitable causes of the panic was the absorption of exceptionally
large amounts of capital in enterprises that required a considerable
time for completion, or which, when completed, were not immediately
profitable; and to them may be added factories and extensive public and
private works of every kind. This form of expansion, as Senator Burton
points out, when carried to extremes almost invariably brings about a
disturbance.
Now let us consider. Does all this expansion of bank loans outside of
New York and all this tremendous increase of building operations show
that the Samsons of “Wall Street” were pulling down the temple on their
own heads in order to slaughter the Philistines, as alleged, or does it
show an indifference and lack of readjustment to the growing stringency
of money, as revealed by the Stock Exchange in its liquidation of
March and April? “As a rule,” said John Mill, “panics do not destroy
capital; they merely reveal the extent to which it has been previously
destroyed by its betrayal into hopelessly unproductive works.”[71]
There would have been no such “betrayal” had judicious reflection and a
measurement of facts followed Wall Street’s warnings.
A shrewd man, one of the old school of New York City wholesale
merchants, who has nothing whatever to do with Wall Street or the Stock
Exchange, yet whose trade arteries extend to many parts of the country,
has long governed his business by the published reports of Stock
Exchange transactions. If he sees there revealed a wholesome, normal,
and conservative expansion in all lines of business and a money market
that betrays no uneasiness as to the future, he presses on into new
lines of endeavor, confident that the immediate future is serene. If he
finds an urgent liquidation on ’Change, with the coincident phenomena
of impaired credit instruments, he draws in his lines and waits. It
makes no difference to him who is rocking the boat, nor why; experience
has taught him that if it rocks, the time has arrived to go ashore. And
this steady old merchant, I have no doubt, is but one of a numerous
type.
Those who ignore the economic tides that ebb and flow through the
medium of the Stock Exchange as they did in 1907, do so because they
do not understand that these great market movements are really but
expressions of natural laws. If there is a rising tide--a boom--it is
attributed by thoughtless people to speculation and gambling. If there
is a bad break, it is caused by panic-stricken repentant sinners, or
by the activities of the bears. The essential point that is missed
here lies in the fact that, while bulls and bears alike may have their
brief hour, sooner or later, regardless of them, the market responds to
actual conditions and discounts the future of those conditions.
Booms are not made on the Stock Exchange; they are made in the
country’s fields and forests and workshops. Panics are not created
there; they have their origin in mistakes and excesses throughout the
world, and in psychologic conditions which stock markets cannot hope
to control. The pendulum may swing far, but it comes back. Sooner or
later the movement of prices tells the exact story of future business,
and of credit, and of all the economic agencies that enter into them.
This was not well understood in 1907, and, as I said at the beginning,
I doubt if it will ever be understood in the sense that it will avoid
a recurrence of panics. All that we may hope for is that periods of
depression, which are inevitable, may not be attended in future by
such a loss of the reasoning faculties as that which brought about the
affair of 1907.
Now let us consider another cause of the panic--the currency system,
always bearing in mind the fact that the first and greatest cause of
the panic was the over-expansion outside of New York that has just
been described. The causes which we are now to consider were of minor
importance when measured by this overshadowing matter; nevertheless
they played their part and must be considered accordingly.
Not all panics, to be sure, can be prevented by a perfect currency
system, yet this one could have been measurably prevented, and “Wall
Street” and the Stock Exchange had labored for years so to prevent it.
At the gatherings of the Chamber of Commerce, at the bank meetings, at
all the meetings of merchants and manufacturers for years preceding
1907, the mischievous effects of our currency system were proclaimed
and the ultimate outcome predicted. Congress was petitioned again and
again to remedy those intolerable conditions, and to permit national
banks to expand their circulation under proper safeguards, but without
avail.
When the storm burst, a most impressive object lesson in practical
finance resulted. What was at worst but a normal stringency of the
circulating medium developed, when added to abnormal demands from the
country at large, into conditions that created great alarm. There was
no way by which the banks of the country could use the resources which
they actually possessed to meet the urgent requirements of the hour.
A great nation of enterprising people found itself--and still finds
itself--compelled to do a banking business differing in degree, but not
in kind, from the old-woman-and-her-stocking system of finance. The
way our bankers got down on their knees to London and Paris in that
emergency, frankly admitting their inability, under our old flint-lock
laws, to handle a situation which foreign bankers meet without
difficulty, is a subject at once painful and humiliating. Literally our
bankers begged for help and got it. Some day we shall have to beg again.
Had the national banks of New York City enjoyed the right to expand
their circulation in the manner provided by the plan of the American
Bankers’ Association, at least a part of the débacle would have been
avoided. “The banks and trust companies of this city have in their
vaults the largest store of good credit that can be found in any
city in the world,” said one of America’s foremost economists as the
panic raged, “but much of it is utterly unavailable because of our
currency system. One of the trust companies that closed its doors
has in its possession live assets amounting to over $50,000,000. All
this credit is dead. It cannot do the work of a single dollar in the
paying-teller’s cage. What is wanted in a time like this is freedom to
convert the credit of banks into a medium of payment that will satisfy
the people.”[72]
True enough, and just what the whole financial community, including the
Stock Exchange, had been repeating for years. Currency issues which do
not provide for _all_ situations, including not only ordinary demands,
but also such exceptional cases of shrinkage as this one was, can never
be called perfect, nor even safe. There is no health in them.[73] The
most effective and the most rapid means of regulating and protecting
the general credit situation is by increasing or diminishing the volume
of outstanding bank-note currency not covered by a reserve of gold
or other lawful money. This method is employed successfully both in
France and in Germany. The Bank of France and the Imperial Bank of
Germany to some extent regulate credit conditions by acting as central
banks of discount; but their most effective action is by increasing
or diminishing the uncovered amount of their outstanding notes. When
additional currency is needed as a circulating medium they supply
this currency by issuing notes. When contraction of currency, or a
check upon the further expansion of bank credits is desirable, they
accomplish the result by diminishing the volume of their outstanding
notes and by raising the discount rate. This system is as nearly
perfect as any yet devised.[74]
Whether we shall ever succeed in adopting it, or something like it, in
America, is the burning question in our banking offices to-day. Until
something is done, the layman who distrusts the plan of a central bank
and looks upon Wall Street with abhorrence, may find satisfaction
in knowing that the average New York banker is the most worried and
harassed man in American business life. With millions of other people’s
money in his possession subject to withdrawal by check at sight, and
with millions of the best security in the world in his vaults lying
absolutely idle and worthless so far as raising currency is concerned,
he stands between the devil and the deep-blue sea. Anything that
frightens his depositors, or even remotely suggests panic, gives him
a cold chill. People who talk of manipulation by New York bankers as
a cause of the panic of 1907 or any other panic are blind to the fact
that any disturbance of normal conditions is the one thing that bankers
would avoid as they would avoid the plague.
There was a third cause of the panic in the course pursued by the
President. In some quarters it is still termed “the Roosevelt panic,”
and there exists a belief that the President by his actions and
speeches played a large part in bringing about the crisis. Personally,
I feel that this has been exaggerated. There had been, unquestionably,
wrongdoing by certain corporation managers. The President, with a
characteristic vigor not unknown to politicians, seized upon it as
a theme for his speeches, and the “evils,” the “malefactors,” the
“corruption” and “dishonesty” with which he bruised the air, raised a
suspicion in many quarters as to the status and security of the whole
financial situation and undoubtedly contributed to the frightened
liquidation of the day. The impression these utterances produced
abroad, where American securities were popular, was painful, and led
one returning tourist to remark that Europe was acquiring the idea that
we were “a nation of swindlers.”
All panics are largely psychological, and this was no exception. The
President’s public speeches came at a time when emotion, apprehension,
and alarm filled men’s minds; and at a time when those irrational moods
were most likely to exaggerate the difficulties that existed, and to
conjure up difficulties that did not exist. Panics _seem_ to come from
lack of money, the real difficulty is lack of confidence, and it was to
this that the President’s course directly contributed.
I am of the opinion that, judged by his public utterances, especially
his October speech at Nashville, Tenn., the President had not the
remotest idea that such an awful shock as the panic of 1907 was
imminent. He was not a student of economic conditions; he had no
familiarity with crisis-producing phenomena; he had never seen a
panic at close quarters. His speeches did not cause the panic, for
that disturbance was foreordained; they served, however, to hasten
it, to intensify it, and to keep it alive. Perhaps I may add that the
sparks beaten by him from the anvil of political expediency at that
unfortunate moment threw more light upon the President himself than
upon the evils he condemned. Perhaps, too, that was what the President
most desired. In any case, the fact remains that just as there is too
much confidence in times of excessive expansion, so there is too little
in times of unreasoning depression; and that the President’s attitude
aggravated the latter situations is undeniable.
But by what stretch of the imagination can the Stock Exchange be
credited with playing any part in this third cause of the panic?
If temporary depression results from exposure of wrongdoing among
railroad, industrial, or financial institutions, nowhere in the land
is execration poured forth upon the evil-doers more vigorously than
within its four walls. Far from complaining, the Stock Exchange and the
whole investment community welcome such exposures, despite their effect
on the market, for the precise reason that their own protection and
benefit, if nothing else, is promoted by it.
There was yet another reason for the panic, closely related to the
attitude of the President. I refer to the predicament of the railways
of the country as 1906 passed into 1907. Staggering under a load of
traffic which sorely taxed their equipment, the managers of these
properties cried aloud to the investing public for funds. But capital
was not to be had. Tied up in real-estate speculation and in quarters
whence it could not be easily recovered, the normal supply of capital
was immobile and inert. What was worse, encouraged by the attitude of
the President, an epidemic of radical anti-railroad legislation became
manifest in the several States, new and onerous burdens of taxation
were imposed, and a wave of distrust and suspicion regarding railway
investments was created. Simultaneously the cost of wages and materials
advanced--both characteristic phenomena indicating trouble--and, as
a consequence of all this blockade, the ratio of net to gross in the
matter of increased earnings fell from the normal proportion of about
40 per cent. in the first nine months of 1906, to less than 10 per
cent. in the same months of 1907.
Railroads are public utilities that must continue to handle business
offered them no matter what happens, and so, to meet all these abnormal
demands, but one course was left open to them, and that was to raise
funds by issues of new stock. This, of course, amounted practically
to an assessment of stockholders; as an expedient it failed because
“Wall Street” had already recognized the symptoms of disease. It was
too late. Money and credit attract money and credit, and confidence
attracts both. There was a shocking absence of confidence in the
emergency of 1907, and the railroads suffered enormously by it.
With this matter certainly Wall Street had nothing to do; it could not
in fact do more than it had just done in pointing out to the country
at large, through a drastic process of liquidation, the obvious
withdrawal of far-sighted investors from a situation that had become
tense. Nor can the railroads be censured, because the great volume of
business that confronted them was not created by them, and yet had to
be transported by them. The fault lay, of course, in the wholesale
and reckless expansion of all lines of industry, and in the immensely
increased extravagance of public and private life.
I venture the prediction that when these conditions again prevail, as
they must in a great and vigorous country like ours, the Stock Exchange
will still be found sounding its warnings, but it will not do to hope
that those who learned the bitter lesson of 1907 will profit by that
experience, because the condition of _mental_ disturbance which is a
part of every panic cannot be regulated by the will, nor kept within
bounds by the statute law. The one lesson we have learned from the
predicament of the railroads in 1907 is that there is a tendency toward
disturbance in large accessions either of business or of capital. “At
intervals,” says Walter Bagehot, “the blind capital of a country is
particularly large and craving; it seeks for some one to devour it, and
there is ‘plethora’; it finds some one, and there is ‘speculation’; it
is devoured, and there is ‘panic.’”[75]
Summarized briefly, I have attempted to show in the foregoing pages
that the Stock Exchange for many months prior to the panic had been
steadily liquidating and contracting, and had served notice on the
country at large that the time had come to put a stop to the prevalent
over-expansion. It has been demonstrated that instead of heeding these
warnings the general business of the country, as evidenced by the
increases in loans and commercial discounts and by an over-speculation
in real estate and in public and private extravagances, continued to
expand up to the very eve of the panic, and was stopped then and there
only by sheer lack of capital. Nothing can be of greater importance
in any consideration of the 1907 crisis than that its overshadowing
cause was the attempt to do too much business on too little capital,
and compared with this all other aspects of that situation are of minor
importance.
I have shown that an antiquated currency system played a conspicuous
part in the crisis, through contributory negligence on the part of our
law-makers. The part played by the President has been cited as a third,
though somewhat negligible, factor in sowing the seed of distrust, and
also the trying position in which the great common carriers of the
country found themselves after the seeds of distrust had been sown.
These were the four causes of the panic of 1907.[76]
How well the Stock Exchange did its work in that great emergency is a
matter of record. It did not close its doors; there were no failures;
no relaxation of the protection afforded the public; no departure
from the high standard of morality which is ever its goal. In one
week, ending October 25th, 5,166,560 shares passed through its hands,
representing, with the transactions in bonds, a par valuation exceeding
$483,000,000.
Now, in the very nature of things, a financial panic is the inability
of many debtors to meet their obligations, plus the fear that many
others may be in the same plight. At such a time men hasten to sell
for cash that for which there is the readiest market. Thus they sell
securities because securities are immediately convertible; thus they
turn to the Stock Exchange, because that is what Stock Exchanges are
for. Hence it follows that in a crisis such as that of 1907 the ruinous
decline manifests itself more sharply, and is felt more keenly, on the
Stock Exchange than on the Cotton Exchange or the Produce Exchange. Men
turn to it for first aid to the injured, and the greater the casualty
list, the more marked is the disturbance of values. That this is not
well understood by the public often unfortunately leads to suggestions
of improper methods where none exist.
Finally, where do we stand? Orthodox economists like Wells talk of
over-production as a cause of panics; currency experts bewail a lack
of circulating media; theorists of the school of Jevons are driven to
seek in sun-spots the potent force of all our harvests; Levi and Mill
dwell upon the periodicity of panics and would fix their appearance by
schedules of time; politicians and thinkers-in-embryo point the finger
at Wall Street, and yet, with all that has been written, thirteen great
crises at home and abroad within the last century show that we have
not begun to get at these disturbances. Drought has been a cause of
mischief, yet we have learned to irrigate and to conserve; epidemics
have smitten us, yet we have mastered sanitation; floods have ruined
whole territories, yet we have built dikes and levees. But every now
and then, when business seems to be at its best, when merchants are
dividing large profits, and when labor is best rewarded, a panic occurs
and the whole structure collapses.
To say that Wall Street or Lombard Street or any group of men
anywhere can bring such conditions to pass is to deny all the facts
of experience. Depressions may come from any of a hundred causes, but
panics originate in the mind; they are manias. Walter Bagehot gave up
trying to prescribe for them because he realized that sudden frenzy
is not an ailment to be foreseen and prevented. “But one thing is
certain,” he said, “that at particular times a great many stupid people
have a great deal of stupid money;” to which he adds, “our scheme is
not to allow any man to have a hundred pounds who cannot prove to the
Lord Chancellor that he knows what to do with a hundred pounds.” When
thousands of people ignore all the warnings of experience, as they
always will do; when with a blind misdirection of energy they sink
borrowed capital in quagmires at fancy prices, as they always have
done; and when, shorn of their all, they are simultaneously seized with
a mania to denounce others for the consequences of their own folly,
as they always must do, one cannot avoid the thought that perhaps
Bagehot’s humorous solution is the best that has been devised.[77]