Finally, try to investigate and study all these matters for yourself. Read the men who have spent their lives in the study of economics. Compare the results attained by our great financial institutions with those reached in similar lines abroad. In the particular application of these studies to the New York Stock Exchange, you will find that charges such as we have been considering could be brought against any institution that has stood the test of time and made the mistakes that fallible human beings must make. You will find that if changes and improvements seem to come about slowly it is not because of the unwillingness of the Exchange to remedy these conditions, but because of the gravity and deliberation with which they must be considered in the light of the future as well as the present.
The management and control of a great public business, especially one that has long survived public criticism, is no light matter. It requires more than common industry, and more than common ability. What the Stock Exchange asks of you and of every thoughtful citizen in the land is a recognition of these matters, and a patient survey of all that enters into them. The critic in “The Vicar of Wakefield” laid it down as a good rule that you should _always_ say the picture would have been a better one if the artist had taken more time. Criticism offered in this spirit the members of the Stock Exchange can bear with good humor. What hurts them on the raw is the critic’s failure to study and investigate, or, getting back to the text of Mr. Bryce’s sermon, “the neglect to think.”
CHAPTER VI
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.