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.