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 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 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.