LXVI. THE UPS AND DOWNS OF WALL STREET…

LXVI. THE UPS AND DOWNS OF WALL STREET

ILLUSTRATED BY PERSONAL REMINISCENCES OF ITS LEADERS.

The mutations and vicissitudes, the ups and downs, of Wall Street can be best illustrated by sketches, from life, of the career and experience of its leading operators, who have often, though not generally, gone up like a rocket and come down like a stick.

I will not begin with those now foremost in the Wall Street arena, but go back to Jacob Little, whose name is still a household word on the Stock Exchange.

He died in the sixties, while the war between North and South was raging, and he had gradually ceased to be a power in the Street after the panic of 1857. He remained a bear on the rising tide of currency inflation following the outbreak of the war, and was submerged and wiped out.

He was an odd fish—singular in appearance, manner, and business methods, but for more than twenty years he had a great name in Wall Street. To speak colloquially, he was the cock of the walk by self-assertion and common consent.

He was the successor of Jacob Barker, who came from Philadelphia, and was the first great leader Wall Street had known. He was trained in his office, and began as a stock operator on his own account in 1835.

The panic of 1837 made his reputation and his fortune, for, being naturally a bear, he was largely “short” of stocks. That panic swept the whole United States with the besom of destruction, and sent prices down to zero. It left him a greater bear than ever, a preacher of distrust and a prophet of failure. He thrived on calamity, and grew richer and richer during the years of depression that followed that memorable revulsion.

From 1835 to 1846 he was in his glory and his prime, and no one disputed his leadership in the world of Wall Street. But then he met with a great reverse, not, however, through continuing to “bear” stocks, but through a “bull” operation in Norwich and Worcester Railroad stock. He attempted, with a Boston clique, to control it, and personally bound himself to the clique, in the sum of $25,000, not to sell his stock below 90.

He went to work to put it up, but it “bulled hard,” and refused to stay up. So he paid the forfeit, and sold out at the best prices he could get, losing a million, which was looked upon in those days as ten or twenty millions would be now. This was the only large bull operation he ever engaged in, and it confirmed him in his natural bearishness.

He more than recovered from this disaster, however, by breaking the “corner” in Erie stock not long afterwards. He was largely “short” of it, and the cornering clique had bought up all the stock on the market. They put the price higher and higher from day to day, but Jacob Little remained unterrified, and refused to “cover” his contracts. He was the only one “short” who stood out against the cornerers, and made no effort to buy in his stock. The eyes of all Wall Street were watching him, and the prevailing opinion was that he would be forced to “cover” at a ruinous loss, or fail.

But he had “a card up his sleeve” that the cornerers had never suspected, and just when they were expecting his surrender, or failure, at the maturity of his contracts to deliver, he produced a big bundle of new Erie certificates of stock and filled his contracts by delivering them. These had been issued to him in exchange for the company’s convertible bonds, unknown to the clique, the issue of the bonds with the convertible clause being also unknown to them.

Such a surprise and checkmate Wall Street had never known before, and the “corner” was broken, with resulting demoralization and disaster to the cornering clique, and great profit and eclat to Jacob Little. But subsequently he failed several times on the “bear” side, yet always managed to pay in full out of later successes. He was equally generous as a creditor, and compromised on easy terms, so as to give his debtors a chance to recuperate. Hence he was liked and respected notwithstanding his aggressiveness and the havoc he often wrought among speculators on the opposite side of the market.

He was a born speculator. Speculation was his daily bread. He liked it for its own sake. His ambition was to control the stock market, and he was willing to run extra hazardous risks to achieve this end. He once said: “I care more for the game than the results, and, winning or losing, I like to be in it!”

It was this feeling that kept him in Wall Street after his money power and his prestige of success, as well as his health, had passed away. He was out of debt, but without money in any considerable amount. He was a mere shadow of what he had been, a name and nothing more. Nevertheless, he risked his small operations with zest. But his health gave way more and more, and he fainted one morning in the board room, in Lord’s Court, and his end came not long afterwards.

He said, “I die poor!” But from the ashes of his estate and unsettled accounts his family succeeded in collecting about $150,000, which he had neglected to look after, for he had always been careless and easy-going in money matters, and attached little value to money except for its use in speculation. He was the very reverse of a miser, for he had never cared to hoard.

It was Anthony W. Morse who gave the finishing stroke to the career of Jacob Little, for, while Little was operating for a decline in the early sixties, Morse sprang into the speculative ring as a rampant bull, and bid prices up on the Stock Exchange, while it was still in Lord’s Court, in a way that astonished him and the other fossils of the board. They considered him utterly reckless. But Morse foresaw that the great war issues of United States currency—greenbacks as they were called—then being made would inflate the prices of stocks largely, and he accordingly, metaphorically speaking, rushed in where angels feared to tread.

He became the storm center, the hub, the pivotal point, in the wildest riot of stock speculation this country has ever known, or probably ever will know again; and who was he? A slight, fair-complexioned country lad, he came to New York without a dollar, and became a clerk in a stockbroker’s office. Then he married a woman with some money, and induced her to let him speculate a little for her, and was successful in making something for her, and enough for himself to buy a seat at the Stock Exchange, which then cost only $500, the initiation fee.

That was in 1862, up to which time he was both insignificant and unknown. But the bold, dashing style in which he immediately began to astonish the natives and rattle the dry bones of the fossils, by his rapidly advancing bids for railway stocks, showed that he was a man of the time, fully up to date. Had he not proved to be right on the market he would have been ruined at the start, but the market went with him, and it went with a rush that made the old fogies of the board say: “Well, well! this young fellow got the start of us—we are not in it!”

He first put up Cleveland & Pittsburg with the ease and celerity of a man who thought it a mere trifle to handle. Then he successfully took hold of Ohio & Mississippi, Rock Island, Erie, and Fort Wayne, and put them up in the same pyrotechnical and flamboyant way. He, in one day, marked Fort Wayne up from 118 to 152. He had unlimited confidence in himself, because he saw that he was on the right track, and the Street and the public followed him. He ran Pittsburg up from 65 to 108 amid great excitement, and bid 100 for the whole capital stock, “seller one year.” He then sold all his Pittsburg between 96 and 108. His firm, Morse & Co., were overrun with commission business at their large ground-floor office in William Street. By the early part of 1863 he had punished the bears badly, and made, it was estimated, at least $1,250,000, and his career of riotous success ran for just two years, during which he was supposed to have made enormously. There was a rush to join every pool he formed, so great was his prestige. Men crowded the sidewalk in front of his office trying to find out what he said, or what he was doing, so that they might do likewise; and if he gave a “bull” point on any stock, nearly all who heard of it acted upon it, feeling confident that it was a dead certainty. His fellow-brokers in the board largely followed him, like the rank and file, and rag, tag, and bobtail of the Wall Street crowd, because he had been always right. Never indeed was a Wall Street leader, before or since, more blindly followed than Morse. The whole country joined in the mad speculation there, and he was on the crest of the wave.

One night at the Evening Exchange Morse bid 112 for 10,000 shares of Erie stock, and Daniel Drew sold them. Then he bid the same price for 20,000 more, and Drew sold them. A day or two later Drew “covered” at a heavy loss. When Morse took hold of Ohio & Mississippi he jumped it from 49 to 69 in a couple of days.

Money was cheap and abundant, owing to the currency inflation, and speculation so active that many stock houses kept a relay of clerks for night work. Meanwhile speculation in gold was as rampant as in stocks, and hundreds of new mining and petroleum companies were launched, and the stocks of these were actively traded in at high and rapidly rising prices, while old and worthless stocks, like Bucks County Lead, were resuscitated and boomed with the rest.

Clergymen and women were drawn into this whirlpool of speculation, and any stock with “gold” in its name went off “like hot cakes.” One stock was considered about as good as another to buy, as all were going up. Morse led the crazy multitude in everything, and, among his other achievements, he put Rock Island up from 106 to 149, and, in doing so, bought the whole capital stock, which was then only 56,000 shares.

Morse’s doom was sealed by Mr. Salmon P. Chase, who as Secretary of the Treasury sought to stop the wild inflation, and particularly the tremendous bull speculation in gold, by selling gold for currency, and locking the currency up in the Sub-treasury, so as to make a tight money market. This had the desired effect, for it made money so scarce and dear that it forced the large speculative holders of stocks to sell, through the banks calling in their loans, and brought on a panic, just at the time when Morse was more heavily loaded with stocks than he had ever been before.

Broken in health, and looking weary and haggard, he tried to sell, and this set every one of his followers selling like a flock of sheep, and prices tumbled from bad to worse under the general rush to realize. Fort Wayne fell at the morning session of the board on that fatal Monday of the Morse panic, on the 18th of April, 1864, from 153 to 119. Then Morse left the room for the last time, and, going to his office, said to his partner, “The game is up!” Reading had also fallen that morning nineteen per cent.; Pittsburg, seventeen; Hudson River, twenty-three; and all other active stocks about as much.

This monetary tornado, that found Morse overloaded with stocks, there and then swept him out of the Stock Exchange, for, knowing that he was hopelessly ruined, he wrote an announcement of the suspension of Morse & Co., and sent it to the board a few minutes after he had left it. The failure proved a very bad one, and the firm was unable to settle or resume. Morse was no longer the leader of Wall Street, and many of his customers, in a semifrantic condition, rushed in upon him and denounced him bitterly. The king had been dethroned, never to regain his crown, nor ever to get a fresh start.

Pandemonium reigned during the rest of the day, and at the Evening Exchange uptown at night Speculation had been so widespread, and Morse had been so implicitly trusted as a leader, that the collapse ruined thousands, including many women, and a raving, cursing mob crowded into the Evening Exchange and overflowed into the Fifth Avenue Hotel. There was a night of horror in hundreds of homes. Morse was upbraided and cursed, and many of his customers, as is usual when they lose their money in a broker’s office, blamed him for their losses.

Then for a year Morse disappeared. When he returned he looked more haggard than ever, and he died poor soon afterwards. No one ever accused Morse of being dishonest, therefore his Waterloo defeat gained him widespread sympathy. Few Wall Street magnates had more friends than Anthony W. Morse from start to finish of his career.

John M. Tobin, who had been a ferry gatekeeper for Commodore Vanderbilt on Staten Island, figured largely as a speculator in the gold room, and also as a stock operator, during the two years of the Morse campaign, and saw many ups and downs. He began to loom up still more after Morse sank below the horizon in 1864. He was known to be the agent of Commodore Vanderbilt in cornering Harlem stock, and shone in Vanderbilt’s reflected light, although a large operator on his own account.

The Harlem “corner” was a memorable event. Through the winter of 1863-64 the stock had been selling at about 60, and Vanderbilt was a director and large stockholder, and, moreover, determined to make what he called “a big thing” out of it. The road was, however, generally considered of little account except for carrying milk. So, in connection with his street-railway projects for improving its value, he engineered the stock up to 117. He counted upon getting a charter from the Common Council; but its members tricked him, and after passing a favorable resolution they sold the stock “short” and then rescinded the resolution, and it fell to 72. So they made money at his expense.

He then applied to the Legislature at Albany for a Harlem franchise to lay rails in Broadway; and the legislators saw there was room for stock speculation in this. They made a favorable report on a bill granting Vanderbilt’s application, and on this Harlem stock rose sharply to 150. Then they and their friends, including the New York Common Councilmen, sold it short largely, thinking they had a sure thing; and Tobin bought for Vanderbilt all that was offered. On March 25, 1864, they voted, by prearrangement, against the bill, and Harlem stock fell to 101.

The sellers of Harlem rejoiced, for they had large profits on paper; but Tobin still continued to buy the stock, and under his purchases it rapidly recovered. The commodore was determined to punish them. Within ten days Harlem was up to 150 again. A week later it touched 185, and thereafter, for ten days, fluctuated between 175 and 200. Daniel Drew sold calls on it for 30,000 shares, thinking it could not stay up long, and the professional speculators, both in and out of the Stock Exchange, took a hand in selling it “short” on the same theory. The Morse panic swept over it in April, but still it stood up, like a pyramid in the desert, and Tobin still continued buying for Vanderbilt.

In May the price of Harlem was put up to 300. It stood at 285 on the day 15,000 shares had to be delivered, and they were settled for at this price. Daniel Drew compromised by paying $1,000,000 to Tobin in settlement of his own Harlem “shorts,” but the claim against him was $1,700,000. He, however, threatened a suit for conspiracy. Tobin’s share of the profits of the corner was about two millions, and this made him worth three.

Commodore Vanderbilt chuckled, and disposed of the Harlem road by leasing it at eight per cent. on the stock to the New York Central & Hudson when he got control of it. So Harlem proved a bonanza to him till the end, and is still one of the splendid assets of his descendants. After the “corner,” Tobin bulled gold on a tremendous scale in the face of the Union victories that terminated the war. He bulled it from 198 to 211 against the “short” interest at the beginning of 1865, and then it broke on him so heavily that he lost more than $1,500,000. After that he met with a succession of disasters in the stock market, and lost every dollar that he had, besides running in debt with his brokers. He then retired to live with his sister on a farm on Staten Island, and was never seen again in Wall Street. He saw ups and downs with a vengeance. So did his contemporary of the open board, E. A. Coray, who made and lost about as much.

Addison G. Jerome had a career in Wall Street more brief than that of Anthony W. Morse, but he is still well remembered there as a shining light. He entered Wall Street as an operator early in 1863, after being a merchant in the dry goods trade, and during the rest of that year was called “the Napoleon of the public board,” so conspicuously active, bold, and successful was he in his operations. He was a friend and broker of John Tobin’s, and coöperated with him in bulling Harlem, with the result that he made a very large amount of money out of it, first by the rise from 60 to 117, when Commodore Vanderbilt was dealing with the New York Common Council, and next when he was punishing the legislators at Albany for going back on him, as he phrased it, in the 1864 “corner.”

He became a brilliant leader, and had a host of followers, and was successful in everything he undertook until he bulled Michigan Southern, and, with a clique that he formed, bought control of it. He put it to high figures, and was sure of his position. But Henry Keep, the treasurer of the company, and a keen operator in stocks, stepped in, and turned Jerome’s success into utter and disastrous failure.

Henry Keep knew something that Jerome was unaware of, namely, that a clause in the Michigan Southern’s charter permitted its directors to increase its capital stock. So he called a secret meeting of the board, and an increase of 14,000 shares was voted. Then, with this increase for future delivery, he sold the stock against it, and borrowed to make his deliveries, which made Jerome think Keep was largely “short” of Michigan Southern. He and his clique, therefore, kept on buying and advancing the price, while Keep kept on selling more and more. The final result was that Jerome called in all his loans of the stock, so as to force the “shorts” to “cover,” and that Keep responded by delivering the 14,000 shares of new stock, which caused a fall of twenty per cent. in Michigan Southern in one day. This involved the loss of nearly all the three millions of money Jerome had so quickly made, and killed him as a leader, although he was respected as an honorable man. He took the loss of his fortune and prestige so much to heart that he sickened and died in the following year of some obscure disease, a virtually ruined man. But, fortunately, during his nine months of phenomenal success he had settled enough on his wife to keep the wolf from the door. His ups and downs were remarkably swift even for Wall Street.

Leonard W. Jerome, a younger brother of Addison’s, was prominent in Wall Street and society, and as the driver of a four-in-hand, long before the latter appeared, and continued in the Street long after Addison passed away. His career was also marked by memorable ups and downs. In 1863 he was a large holder of Hudson River Railroad stock, which the bears had hammered down to 107. So he formed a strong clique to bull it against the “short” interest, and bought all the stock that was offered until he had taken nearly all the capital. Then he bid up the price gradually till it reached 175, and made the stock so scarce that he loaned it to the bears to make their deliveries, at five per cent. a day. The shorts, estimated to represent about 50,000 shares, finding there was no help for them, covered at a very heavy loss, while Jerome made a great deal of money by squeezing them, presumably two or three millions.

His prestige increased with his wealth, and he became a social as well as a financial lion. He had been watching Pacific Mail since it succeeded the Nicaragua Transit Company in 1856. In 1861 its stock fell to 69, but in the next year its earnings were enormous, and 26,000 of its 40,000 shares were bought by a combination of operators, mostly its directors, who transferred it to Brown Brothers & Co., to be held in trust for their benefit for five years; and they selected Leonard Jerome to bull the stock in the open market. Under his manipulation it rose to 160 in thirteen months after he commenced operations for the ring. There was a large “short” interest in it by that time, and, to force the “shorts” to settle, he put it to 200, and kept it there, and they settled.

In 1865 Pacific Mail’s capital was increased from four millions to ten, and yet its stock stood at 240, and it paid twenty per cent. a year in dividends. The year after, it was increased to twenty millions, yet it sold at 180, with Jerome still bulling it. But in 1867 he met his Waterloo in it. To use his own words, he had bitten off more than he could chew. The company’s earnings fell off largely, and its report showed assets reduced from thirty-four to twenty-two millions; the Government paper-money issues were being rapidly contracted, and the flood of “water” injected into the stock was beginning to tell upon it. Moreover, Jerome had agreed to buy the old five-year combination’s stock at 160. Owing to all this, accompanied by a generally weak stock market, Pacific Mail broke, under enormous sales, from 163 to 115 in a few days on his hands, and he lost practically everything he had, except some real estate. After being thus ruined by Pacific Mail, Leonard Jerome ceased to be a power in Wall Street. He had no longer any prestige there, and soon retired from it entirely, and died, at the home of his daughter, Lady Randolph Churchill, in London, a poor man. He had experienced his full share of the ups and downs of Wall Street.

Pacific Mail was nothing to Leonard W. Jerome after he lost his money, nor he to Pacific Mail. The company had seen its most palmy and prosperous days, and its water-logged stock was heavy on the market. It suffered from reduced traffic and bad management, and in 1871-72 its stock had sunk to so low an ebb that the directors felt it was necessary to do something to mend matters. So, having little of the stock, they decided, instead of trying to reëlect themselves, to give up the ship. They retired to make room for a new board in November, 1871, with Alden B. Stockwell at the helm as president. Nominally the new board selected him, but really he selected them to do his bidding.

His name was then very little known in Wall Street, but he was known to have been a steamboat clerk on Lake Erie, and more recently to have married the daughter of Elias Howe, the sewing-machine inventor and manufacturer of Bridgeport, Conn., and thus acquired wealth and become the president of the Howe Sewing Machine Company and the Willcox & Gibbs Company.

He had come to Wall Street to see what he could do, and finding Pacific Mail stock down to the 40’s in 1871, he began to bull it with a vigor that excited some wonder; and the wonder grew when it was found that he had secured stock and proxies enough to elect his own board of directors. He elected them and himself by a vote of 118,000 shares, and became Commodore Stockwell at a bound. His wish was law to his codirectors, and the irreverent called it a dummy board.

With the assets of the Pacific Mail Company under his control, and acting for it, he soon managed to get control, and become president, of the Panama Railway Company. He began, on this acquisition of the Pacific Mail Company, to bull Pacific Mail stock anew by making splendid promises. In October, 1872, while the company’s steamers were foundering and burning with alarming frequency, he claimed that it had increased its property by large purchases, and was earning more than eleven per cent. a year in excess of the Government subsidy. This, he said, would enable it to pay twelve per cent. on its capital stock from January 1, 1872. Then he asked for authority from the Legislature at Albany to reduce its capital stock from twenty millions to ten, which was granted; but the company never availed itself of this authority, and to this day its capital remains at twenty millions.

The stock, that had been as low as 40, responded to his “bull” statements and manipulation, for Wall Street saw that the intention was at least to put the stock up. It rose, after a good deal of see-sawing, to about 107, and Commodore Stockwell was the sensation of the time in Wall Street. He became, like Leonard W. Jerome, what was called a “big swell.” He had one of the largest houses in Madison Avenue and one of the showiest turnouts in the city, and yet he had been commodore for less than a year.

He did not confine himself to Pacific Mail and the other interests mentioned, but took hold of that railway cripple, Boston, Hartford and Erie, and bought 30,000 shares of Atlantic and Pacific Railway preferred at 25, a stock of uncertain legal status, although the certificates had been printed by the company, because there was no legal authority for its issue. But this did not prevent the stock from being made active for a short time in Wall Street at prices a good deal above cost.

Before long, however, it became discredited, and so also did Boston, Hartford and Erie stock, while Pacific Mail suffered under fresh losses and reduced earnings. The stocks of the three companies were vigorously attacked by the bears and they all went down together, Stockwell being unable to support them, and all that he had made was lost. This state of things involved him in a snarl about the 27,000 shares of the Pacific Mail Company’s treasury stock, and a compromise was the result, by which he is said to have given his note to the Pacific Mail Company for $1,140,000, indorsed by the Howe Sewing Machine Company.

Then, at the next election, he ceased to be its president, and a new board of directors was elected. He was also dropped from the Panama Railroad directorate and the Atlantic and Pacific board. He had lost his money and his prestige, and there were none so poor as to do him reverence. He led a precarious existence as a small speculator afterwards, and, not long before his death, failed for a small amount as a member of the Consolidated Exchange.

He was a man of popular manners, and, in describing his change of fortune, he humorously remarked: “When I first came into Wall Street, it was asked, ‘Who is that man Stockwell?’ But I was respectfully spoken of as ‘Mr. Stockwell’ after I had made a good deal of money bulling Pacific Mail; and when I was elected president of Pacific Mail, I was styled ‘Commodore Stockwell’ and ‘a Wall Street leader,’ and a great man generally. But when Pacific Mail broke, and broke me, I became ‘That red-headed cuss Stockwell.’” Thus are the ups and downs of Wall Street, and Wall Street opinion, illustrated in real life.

Of all the great operators of Wall Street, however, Daniel Drew furnishes the most remarkable instance of immense and long-continued success, followed by utter failure and hopeless bankruptcy. His early success as a stock speculator was all the more surprising because he was an illiterate man, who had barely learned to read and to write enough to be able to sign his own name in a sprawling, illegible hand.

He had been a cattle drover, and after that the keeper of the Bull’s Head Tavern, at the New York Cattle Yards, and was without any experience of banking or Stock Exchange affairs when he first came into Wall Street; and he never even read a newspaper. But he succeeded in making money from the start, and then joined others in putting capital into Hudson River steamboats; and his investments in these became large and proved very profitable, although he knew nothing about running steamers himself.

His shrewdness enabled him to make millions by stock speculation, and before long, without knowing anything of the stock brokerage business except as a customer, he entered into a Stock Exchange partnership, his firm being Drew & Robinson. For many years this house was prosperous and prominent, and Drew, after it was dissolved, and when at the summit of his prosperity, said to a friend who rated him at twenty millions, “I guess sixteen will cover it.”

After that Drew’s cunning and sagacity seemed gradually to fail him. He met with a succession of disasters through bad judgment, but was more liberal than before in endowing the Drew Theological Seminary and other Methodist institutions. Yet, instead of giving the endowments in cash, he gave his notes for them, and paid interest on these. The consequence was that when he finally lost every dollar that he had, and was declared a bankrupt, without any assets, the notes were worthless. While in this bankrupt condition and dependent for a home on his son, he died, and his death was as unnoticed as that of any other Wall Street wreck. He had gone out of sight, and out of mind, when his money was gone. Never did anyone go further up or further down in Wall Street as a stock speculator than Daniel Drew.

Charles F. Woerishoffer was a brilliant Stock Exchange operator, who made a large fortune out of nothing and then lost most of it again by overstaying his market as a bear after the panic of 1884.

James R. Keene came to New York with several millions, made out of mining stocks in California at the time of the great Bonanza gold discovery at Gold Hill, when Flood and O’Brien, Mackay, and John P. Jones made their millions. But Keene, after adding to his “pile,” lost all he had through overextending his operations in bulling stocks and grain in the eighties. He, however, got a fresh start through being employed by large interests to manipulate stocks for them, and after several more ups and downs he is rich again.

Henry N. Smith, a former partner of Jay Gould, made five or six millions as an operator in stocks, only to lose them again and die poor. The brief meteoric Wall Street career of Ferdinand Ward, who lured General Grant into forming the firm of Grant & Ward, is well remembered. He went up so high that when he came down he landed in Sing Sing prison. Fish, the president of the Marine Bank, did the same, after being long in good repute.

It is unnecessary to dilate on any of the Vanderbilts, or Goulds, or Russell Sage, or Henry Keep, or Henry Villard, or William E. Travers, because they had no totally overwhelming reverses in their Wall Street career; but John F. Tracy, the president of the Rock Island Railroad in the sixties, was ruined by his stock speculations after being worth more than five millions, and he had to relinquish his presidency, and died in poverty. Cyrus W. Field, too, lost nearly all his large fortune through overloading himself with Manhattan Railway stock; and Addison Cammack, the Ursa Major of Wall Street, died worth little in comparison with what he had once possessed.

How violent the vicissitudes of Wall Street are at times we may easily infer when we recall the tremendous convulsion produced by the gold conspiracy of Black Friday, on September 24, 1869, which involved thousands in enormous losses, and caused both the Stock Exchange and the Gold Clearing House, and Gold Exchange Bank, to be closed; or when we think of the devastating Northern Pacific panic of May 9, 1901, or of the far-reaching and long-continued havoc worked by the panic of 1873.

The memorable failure of Jay Cooke & Co., early in the last-mentioned panic, will be recalled by many as vividly as the collapse of the Ohio Life and Trust Company that started the panic of 1857.

All these reminiscences of the ups and downs of Wall Street will serve to remind my readers that, while it is often easy to make money, it is still easier to lose it. Therefore, boldness should be always tempered with caution in the pursuit of the Almighty Dollar in Wall Street.

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LXVII. RECENT WALL STREET BOOMS

THE RESISTLESS POWER BEHIND THE MARKET.—THE ADVENT OF GOVERNOR R. P. FLOWER.—HOW STOCKS WERE BOOMED WITH A DASH.—A SUDDEN DEATH AVERTS A BIG PANIC.—MR. MORGAN AS A RAILWAY REORGANIZER.—HOW BANNIGAN UNLOADED HIS RUBBER.—MILLIONS WON ONLY TO BE LOST.

Wall Street, after the election of McKinley, enjoyed a boom such as it has seldom known. Probably the most interesting feature about this boom was that it was not in any sense spectacular. In that respect it is unique. Prices of stocks went higher and the intrinsic value of most of them was greater than ever before. The market had all the qualities that normally would cause intense excitement and focus the attention of the entire country on the Stock Exchange. Yet in spite of these conditions the Street was in a normal state of mind, and it is doubtful if the general mass of the people, who get their information from the newspapers, were aware that there was even an ordinary boom in Wall Street. This unusual condition was due, I believe, to the fact that the boom we were enjoying was built on a foundation that reached clear to the bowels of the earth. There was nothing unnatural or artificial about it. Wall Street, instead of being the center, is simply one of the centers that reflects the general prosperity throughout the country. Farmers, merchants, mechanics, mill workers, and miners are all so intent on keeping pace with the progress in their own pursuits that they have no time to cast eyes our way. The same conditions that boom stocks may boom everything else in the country at an equal rate, so that we are in nowise deserving of special attention.

Another factor, too, had developed in the Street that prevented the usual excitement and hurly-burly incident to a rising market. This was the absence of a pronounced central figure. Usually a boom centers about some one man who stands boldly out in the open, and whose hand is known to be manipulating values. But then the manipulation was being carried on by a method that was as quiet as it was novel and unusual. That the market was being manipulated was apparent enough even to the most casual observer. But the source of this manipulation was probably known to only a few.

They knew that a new order of things had come, due to the most powerful influence that had ever manifested itself in Wall Street. This influence was very largely composed of the Standard Oil combination, who introduced in their Wall Street operations the same quiet, unostentatious, but resistless measures that they had always employed in the conduct of their corporate affairs. The heretofore conspicuously big operators were mere tyros beside the men who are running things for us now.

At his best, Jay Gould was always compelled to face the chance of failure. Commodore Vanderbilt, though he often had the Street in the palm of his hand, was frequently driven into a corner where he had to do battle for his life; and so it was with every great speculator, or combination of speculators, until the men who control the Standard Oil took hold. With them, manipulation has ceased to be speculation. Their resources are so vast that they need only to concentrate on any given property in order to do with it what they please; and that they have thus concentrated on a considerable number of properties outside of the stocks in which they are popularly supposed to be exclusively interested is a fact well known to everyone who has opportunities of getting beneath the surface. They are the greatest operators the world has ever seen, and the beauty of their method is the quietness and lack of ostentation with which they carry it on. There are no gallery plays, there are no scare heads in the newspapers, there is no wild scramble or excitement. With them the process is gradual, thorough, and steady, with never a waver or break. How much money this group of men have made it is impossible even to estimate. That it is a sum beside which the gain of the most daring speculator of the past was a mere bagatelle is putting the case mildly. And there is an utter absence of chance that is terrible to contemplate. This combination controls Wall Street almost absolutely. Many of the strongest financial institutions are at their service in supplying accommodations when needed. With such power and facilities it is easily conceivable that these men must make enormous sums on either side of the market. So far, fortunately, their manipulations have all been one way—upward; and in conjunction with the general prosperity this has resulted in making large sums of money for nearly everybody in the Street.

Here and there we have heard of losses, some of them fairly large, but in comparison with the general money-making these are hardly to be taken into consideration.

The last preceding boom that Wall Street had enjoyed was as different from this as it is possible to imagine. It had all the elements which this one had not. It centered about one man who stood out in the lime light clear and distinct. It kept the Stock Exchange in a constant state of ferment. It filled the newspapers with column upon column of sensational stories. It made millions for an army of retainers, on paper, and it kept the market jerking up and down for months.

Roswell P. Flower, ex-Governor of the State of New York, was the leader of the boom, and a more picturesque figure had never been seen in Wall Street, which is saying a great deal. Mr. Flower was an individual of a very plain exterior. He often used language that was noticeable more for its force, directness, and emphasis than it was for polish. He was rarely seen without a huge quid of tobacco that almost filled the left side of his mouth. Spittoons were an essential part of the furnishings of his office. His clothing hung on his person not unlike meal sacks. His hat was rarely brushed, and for days at a time, apparently, he forgot to shave. Altogether he was the last person, in appearance, who would be expected to lead in a district that is famous for its well-groomed men. His education was certainly not collegiate. All these factors the ordinary man would have judged to be handicaps, yet they were Mr. Flower’s strongest aids. The lack of artificial polish gave people confidence in his statements. His limited education enabled him to think clearly along certain lines without being hampered by mental digressions, which would probably have come with a higher mental culture.

As the administrator and manager of the estate of his brother-in-law, Henry Keep, he came into the Street about twenty-five years ago. He controlled a large amount of funds, which by conservative direction he increased very substantially. He scarcely ever figured in the speculative field to any great extent until after he had completed his term as Governor of New York State. When he returned to the Street from Albany he naturally came with a considerable prestige. Ex-Governors of the Empire State are not very plentiful in and about the Stock Exchange. He also brought with him a large political following. In both of the great parties in New York State there are many men of standing and influence who like to take a flyer in Wall Street. Almost to a man they associated themselves with Mr. Flower, who, during his term at the capital, had made hosts of friends with Republicans and Democrats alike. He also had close associations with most of the big capitalists.

After he had settled down to business, on leaving politics behind, Mr. Flower picked out several stocks as his specialties. Under his manipulation all these properties went up and soon began to show a big advance, unusual strength, and great activity. The bears made frequent assaults on his position and now and then pushed him toward the wall, but he always fought his way to the front again, and came out master in every encounter. When he had himself pretty well intrenched in the specialties he was handling, he suddenly plunged into Brooklyn Rapid Transit, and for months he kept things stirred up in a way that even Wall Street has seldom seen. He picked up the stock commencing at 6 and in an incredibly short time ran it up to over 138. Almost every politician in the State made a fortune on paper. Mr. Flower was immensely popular with the Wall Street news reporters, who helped his boom along through the glowing accounts they wrote from day to day.

Under the impetus of the swirl in Rapid Transit, practically every property in the Street went flying upward, until the end did not seem to be in sight. The bears were beaten to a standstill every time they showed their heads. The only result of their attacks was that Flower stocks would jump up a notch higher. The ex-Governor preached Americanism and confidence, until everybody believed that if a stock were only grounded, and the property located in America, you could buy it at any price and still be on the safe side.

That a terrible panic did not grow out of this boom was due only to one fact: Mr. Flower’s sudden death. Had he lived thirty days longer the bubble must have been pricked, and the result would have been disastrous. Mr. Flower went to the country for a day’s rest, ate freely of ham and radishes, and washed his frugal meal down with a copious supply of ice water. He died, a few hours afterwards, of an attack of acute indigestion. His death alone saved the Street.

The Rockefellers, the Vanderbilts, and his other wealthy friends rushed into the market with millions and sustained values. They were in a position to attribute the threatened reaction to his death, and pointed out the absurdity of letting such an incident affect the value of stocks. They discounted the break that must have come, in the natural course of events, under the forcing process that was going on. Reasoning such as this, spread broadcast through the papers, stopped the break. Where the bottom would have fallen out entirely there was virtually but a moderate break all along the line. The small speculators, operating on moderate margins, were of course wiped out almost to a man; but most of the big fellows were saved. It is probably the only instance on record where the death of a big operator saved a general smash. Those hurt were numerous politicians and small-fry operators who, instead of getting away with snug fortunes in the shape of profits, lost everything.

An interesting incident of the Flower boom was the way it was involuntarily helped along by young Joe Leiter. Leiter himself, although he had gone to the wall some time previously, had indirectly brought about certain conditions that served Mr. Flower’s purpose admirably. These conditions were the general release of hundreds of millions of dollars on mortgages on farm lands. When Leiter began to corner wheat it was ruling down in the neighborhood of sixty cents a bushel. He lifted it to considerably over a dollar before he went broke. This enabled thousands of farmers to realize on their crops at the dollar figure and above, which brought prosperity almost overnight to the wheat-growing belt. With the money realized from their wheat they paid off their mortgages to the extent of two or three hundred million dollars. These mortgages were generally held in the East. This released that much Eastern capital, causing a vast volume of money to seek investment. The men controlling this money were overjoyed when Mr. Flower made an opening for them through the Wall Street boom, and hence it was comparatively easy, for a time, to push up values.

Mr. J. Pierpont Morgan, now a noted character in the Street, was trained as a clerk in the one-time famous banking house of Duncan, Sherman & Co. Later he made a connection with Anthony J. Drexel, probably the wealthiest banker of his time in America. Out of this connection grew the house of Drexel, Morgan & Co., with Mr. Morgan as the managing partner in New York. When Mr. Drexel died, Mr. Morgan absorbed the entire business, and a few years later, when his father died, he became the head of the London house of J. S. Morgan & Co. as well.

This put him in a very prominent position. He soon thereafter demonstrated his influence by reorganizing the bankrupt Richmond and West Point Terminal Railway and Warehouse Company, changing its name to the Southern Railway Company. A number of small roads were added to it, many of which were in financial straits and practically all of which had been badly managed. He combined them into one system under one head. Mr. Morgan next turned his attention to the reorganization of the Reading and the Erie roads, which were in a bad way. He soon produced order out of chaos there, and that resulted in a boom in railroad stocks all along the line. He had several sharp tussles, however, with some of the big stockholders, who tried to stand out against him because they thought his plans too drastic.

The people who followed Mr. Morgan’s lead in these transactions generally made money.

A different sort of deal was engineered a few years before by Mr. S. V. White, popularly known as Deacon White, because of his position as a deacon in Plymouth Church. Mr. White is one of the oldest operators in the Street, and one of its most striking figures. He has made half a dozen great fortunes in speculation and lost them, but he is as undaunted as ever, and in spite of the fact that he is now over seventy years old he is still active daily in the market.

Probably one of the most unique stock deals ever carried out in the Street resulted from the transaction of Joseph Bannigan when President of the Rubber Trust. The history of this deal, which for a time resulted in a great boom in industrials, has never been told, and is known to but very few persons, most of whom, by the way, were its victims.

Bannigan was an uneducated Irishman. He began life in a New England rubber factory and conscientiously worked his way up from a wage of $1.50 a day to die worth $5,000,000. He was shrewd and bright and knew the value of money. He saved to such good purpose that when the Rubber Trust was formed he was at the head of one of the biggest factories in the country, located in Providence. His knowledge of the trade was so thorough that, despite the fact that he almost invariably used small “i’s” in writing a letter, he was made president of the trust, his holdings amounting to about 40,000 shares. When matters had been moving along for some time, Bannigan made up his mind that the other men in the trust, the big fellows, were not treating him right, and that the best thing he could do was to get out. So he packed his stock certificates in a gripsack, left Providence on the night boat, landed in New York bright and early, had his breakfast, and then made a bee line for a stockbroker’s office. He had assured himself in advance that this stockbroker was to be relied upon, and so he told him frankly what he intended to do.

“I want to sell out, bag and baggage,” he said. “I want to get rid of every one of my 40,000 shares. Here they are; put them on the market and sell them.” The stockbroker told him that that would never do. If he wanted to realize full value for his holdings he would have to go about it in a different way, for if he should throw his 40,000 shares into the market it would knock the bottom out of prices, and he would get little or nothing for his stock. Mr. Bannigan saw the point and asked what he ought to do.

“Buy,” said the broker.

“But I don’t want to buy; I have got more now than I want.”

“That is all right; buy anyway; that will make a market for the stock, and you can unload when the time comes.”

“How much must I buy?”

“Oh, about $250,000 worth.”

“But I have not got $250,000 in cash to go and buy rubber stock.”

“Well, you can borrow it; a man in your position, Mr. Bannigan, will have no difficulty in borrowing $250,000.”

Much against his will the old man was finally persuaded to do as he was told. About two weeks later the broker wrote to him that he must buy some more—this time $200,000 worth. Mr. Bannigan used rather strong language, but finally yielded as before. He borrowed $200,000 and turned it over. With this additional capital to work on, the broker continued to manipulate the market. The insiders soon discovered that some strong party was buying, but they did not know who, Bannigan having carefully kept himself in the background. His broker operated skillfully in the stock, one day buying, the next selling, to keep the stock active. The broker after a while began to borrow large amounts of the stock. This convinced the insiders that there was a big short interest somewhere, and they got together in order to squeeze the shorts. The inside holders who controlled most of the stock combined to squeeze “the shorts” out. In furtherance of this plan they put the price up to 61, and at about that figure Bannigan’s stock was all unloaded. Bannigan now found himself full of money, while the other fellows were filled up with his stock. They never awakened to the fact that the president had sold out on them until his shares were delivered against their purchases, as they thought, of “short” stock. Rubber broke and did not stop tumbling until it had gone from 61 to 16.

This deal had all the elements of a comedy-drama, and the playwright who can do it justice will find material there which will make him an everlasting fortune and reputation.

It is not often, however, that newcomers in the Street fare as well as this in the end. For a time they will go on merrily enough, and send things booming, but in the end most of them get the worst of it. At the risk of repeating myself, I will say here:

Mr. A. B. Stockwell is a good illustration of the truth of this. At one time he was worth many millions of dollars. His start in life was as a purser on a Lake Erie steamboat; his father, it is said, kept a livery stable in Cleveland. On one of his trips Stockwell was in a position to show considerable attention to Elias Howe, the inventor of the eye at the top end of the sewing-machine needle. Mr. Howe was accompanied by his daughter. Stockwell made himself agreeable to Miss Howe also, and with such good effect that he managed to win her affections, and soon thereafter married her.

When Mr. Howe died, Mrs. Stockwell came into possession of her father’s millions. With this nest egg Stockwell started in Wall Street, and before anyone realized what had happened he was the most talked-of man in the district. He put all his wife’s millions in Pacific Mail stock, secured entire control of the company and elected himself its president. He came into the Street as plain Stockwell. Then, as the news of his liberality and good-fellowship spread, he became Mr. Stockwell. After he got hold of the Pacific Mail he was Commodore Stockwell by common consent. Everybody bowed and scraped to him, and no man was so high and mighty that he was not proud to shake his hand.

Stockwell took hold of Pacific Mail at about 40 and sent it up to 107. It was at this period that he was worth on paper over $15,000,000. But he found, unfortunately, when it was too late to retreat, that though Pacific Mail was up to 107 it was not worth that figure when the unloading commenced.

He was landed high and dry with it all, and the Street told him he was welcome to it. He tried to sell, and found that there was no market. Then came violent demands on him to pay up his numerous call loans, and in order to respond he had to sell regardless of price, and thus a whirlpool was created which finally sent the stock down to the price at which he had begun his original purchases. In this one upset he lost all his paper profits and his wife’s millions besides. That was the most famous boom in the history of Pacific Mail, notwithstanding Leonard Jerome’s previous brilliant ups and downs in that property.

Leonard Jerome and his brother Addison had a good time with Pacific Mail for a while. They ran it up to high figures several times, but finally met with the same experience that Stockwell did. The two Jeromes, from being among the wealthiest and most dazzling operators in the Street, were in the end practically wiped out. Leonard Jerome, who was the father of Lady Randolph Churchill, had nothing left to bequeath his daughter except an equity in the house now occupied by the Manhattan Club on Madison Avenue, which yields an income of about $15,000 a year, of which Lady Churchill gets $10,000.

These are a few of the booms that have stirred up things in Wall Street at one time or another, as did the Keene, the Gould, and the Vanderbilt booms, and the rest I have mentioned.

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LXVIII. WALL STREET’S WILD SPECULATION, 1900-1904

MCKINLEY’S REËLECTION AND THE DEFEAT OF BRYANISM SET THE BIG BALL OF SPECULATION ROLLING ON THE STOCK EXCHANGE.—THE TREMENDOUS VOLUME OF SPECULATION BY BOTH LARGE AND SMALL CAPITALISTS.—THE RUSH TO INCORPORATE NEW COMPANIES AND CREATE INDUSTRIAL TRUSTS AND RAILWAY COMBINATIONS.—THE ENORMOUS CAPITALIZATION OF THE UNITED STATES STEEL CORPORATION AND OTHER COMPANIES IN EXCESS OF REAL VALUES.—THE RAPID GROWTH AND POPULARITY OF NEW AND OLD TRUST COMPANIES AND THE EFFECT OF THEIR COMPETITION IN FORCING BANK CONSOLIDATIONS.—THE BOLD AND RECKLESS SPECULATIONS IN RAILWAY STOCKS OF THE NEWLY ENRICHED WESTERN CAPITALISTS.—THE GREAT NORTHERN PACIFIC PANIC OF MAY 9, 1901.—THE CAPTURE OF CONTROL OF THE LOUISVILLE & NASHVILLE RAILWAY BY JOHN W. GATES, AND ITS REDEMPTION BY J. P. MORGAN & CO., ACTING IN THE INTEREST OF THE LOUISVILLE & NASHVILLE AND SOUTHERN RAILWAY.—THE SLOWING DOWN OF WILD AND RECKLESS SPECULATION IN STOCKS AFTER SEPTEMBER, 1902, THROUGH THE INFLUENCE OF THE BANKS AND CONSERVATIVE BANKERS, THUS AVERTING FURTHER INFLATION AND A GREAT CONVULSION.—THE LIQUIDATION AND DEPRESSION OF 1903 A NATURAL REACTION FROM THE INTOXICATION OF THE PRECEDING PROLONGED BOOM.—THE GREAT RISE IN COTTON AND THE COLLAPSE OF THE TREMENDOUS BULL SPECULATION LED BY DANIEL J. SULLY WHEN HE FAILED.—THE SUDDEN FALL IN THE IRON BAROMETER IN 1903, AND THE GENERAL SITUATION IN 1904.

Wall Street changed with almost magical suddenness from depression and apprehension to confidence and buoyancy with the defeat of Bryan and his silver heresy, and the reëlection of McKinley in November, 1900. Large capitalists all over the country began to buy stocks and bonds on so heavy a scale that prices shot up rapidly, like the celebrated Gilderoy’s kite, and very soon orders poured into the Stock Exchange from people of smaller means everywhere, and a tremendous bull market for stocks resulted, with too many men staking, or ready to stake, their bottom dollar on the rise.

The speculative capitalists and large operators of Wall Street, not of course excepting many of the active Standard Oil magnates and James R. Keene, naturally availed themselves of this state of affairs to manipulate stocks on a grand scale. Having loaded up with them early at low prices, they boomed them with vigor; and we witnessed the beginning of a carnival of speculation, and an unexampled rush to form combinations of industrial and railroad interests, or trusts, and generally to capitalize the concerns taken in for many times the amount of their previous capital or real value. The stock thus created, after being admitted to dealings in Wall Street, was made active and bid up by the promoters to high figures to catch buyers, while the public, which had become crazy to buy, took it in enormous amounts. It bought in haste to repent at leisure, for, I regret to say, most of the buyers have it still; and the aggregate loss its shrinkage in price represents is to be counted by very many hundreds of millions of dollars.

But it was fortunate for both Wall Street and the nation that the inflation which ran riot till September, 1902, was then checked by the conservative action and warnings of the banks and men like myself, for if it had been allowed to continue for another half year it would have ended in a disastrous convulsion, a bursting of the bubble, which would have been felt all over the United States, and in every department of business, as in and after the panics of 1857 and 1873. I was one of the first to sound the alarm and call a halt in this dangerously wild speculation in my weekly letter dated September 13, 1902, in the following words:

“A man becomes an inebriate by getting himself into a condition where he ceases to recognize effect as following cause. Under the influence, at times, of the intoxicating beverage he will defy both law and order. This is due to the callous condition he has allowed himself to get into. The stock market of late has been productive of a similar condition of mind with a majority of people. They have been engaged now for such a prolonged period in buying, buying, buying, making profits on all their ventures, as to make them like the inebriate, callous to all adverse factors whenever they come up. High prices don’t frighten them; scarcity and high rates for money don’t frighten them; cautionary signals don’t frighten them; strikes don’t frighten them. Buying and holding on have simply become chronic with them. This may not unlikely continue to be the condition of the stock market until compulsory liquidation sets in, which the strain in the money situation will sooner or later produce. I recommend great caution on the buying side, and, better still, not buying at all at the prevailing high prices. I see no possibility of relief to the money market excepting through the importation of gold. The activity of business all over the country, together with the moving of the crops, is going to keep money thoroughly employed at high rates from now onward and all the way through the new year; therefore, those who buy stocks to carry hereafter, excepting on big concessions from present prices, may meanwhile be overtaken with discomfort from depreciation in values as well as from the difficulty of obtaining money at reasonable rates.

“HENRY CLEWS.”

The intoxication of the time having gradually given place to sobriety, and a slow but heavy downward reaction in prices, we escaped the violent and widespread panic that threatened us, and that would have been inevitable had we not “slowed down” in time. As it was, the decline was long-continued and severe, and impoverished or ruined hundreds of thousands of people, including a vast number of formerly very rich men. Both big and little speculators became the victims of the downward plunge of prices: but the country as a whole was saved from serious disturbance and depression—that is, from the effects of such a tremendous collapse and crash as menaced Wall Street during nearly the entire year 1903. This was very fortunate for all our material interests; and the conservative element in Wall Street is to be congratulated on having so successfully put on the brakes in time to prevent a collapse that would have involved and disturbed the nation from the Atlantic to the Pacific.

The year 1901 was the most remarkable in the financial history of the United States, and Wall Street was a theater of action whose performances astonished not only the entire country, but the world. Their like had never been seen before, not even during the great war between North and South. It would take volumes to fully describe and give retrospective clearness to the leading events of that extraordinary period which made the Stock Exchange continually the scene of wild excitement, daring manipulation, and unexampled inflation.

To say that Wall Street astonished the natives and made conservative business men stand aghast is no exaggeration. There were six influential factors actively at work in that year, namely, the consolidation of railroad and industrial companies at enormously inflated prices, including the disastrous Northern Pacific skyrocket “corner,” the restless sea of reckless stock speculation that swept the American people into its vortex, with all its razzle-dazzle extravagance, the transformation of this country from a heavy lender in Europe to a heavy and urgent borrower, the partial failure of the corn crop, the decline in prices for nearly all the staples except grain and iron, and the collapse in earnings and dividends of many new industrial combinations. These included The Amalgamated Copper Company, and the panicky decline in its stock, which impoverished or ruined many thousands of investors, it being first run up to 130 and then rapidly down to 60 by the manipulators, who sold out and then sold “short,” and who are said to have made more than fifty millions by the up and down movement. Subsequently even this low price was cut nearly in two, as the decline did not stop until 32½ was reached.

A mere recital of events as they occurred would be an eloquent serial story to those familiar with the alphabet of Wall Street; and there is no more interesting or exciting serial story than the stock ticker tells, from day to day, to those interested in the stock market, or one that often excites more joy or sorrow, or carries with it more weal or woe, prosperity or ruin. But the ticker, like Tennyson’s brook, will go on forever during business hours, for we shall never be without a stock market and speculation.

The transactions of the New York Stock Exchange in 1901 were so tremendous in volume as to excite wonder. But they only represented the speculative spirit, the intoxication of the time. The sales in the first half of the year aggregated 175,800,600 shares of stocks and $637,100,800 of bonds at par value, an increase of 109,906,300 shares and $346,900,700 in bonds over the same six months in 1900.

As prices soared the volume of speculation increased, and on January 7th the day’s total sales amounted to 2,116,500 shares, and then went on increasing till they reached 3,271,000 on April 30th. Then came the Northern Pacific bombshell, the panic of May 9th, when stocks came down even faster than Captain Scott’s coon, and the actual sales were still larger, but owing to the intense excitement, demoralization, and confusion that prevailed, it was impossible to keep track of them all, and the ticker registered only 3,073,300 shares.

This sudden catastrophe convulsed the stock market in a way that alarmed money lenders, destroyed confidence, and caused a general rush to sell stocks which brought them down with a crash, involving many thousands in ruinous losses. The revulsion of feeling, the change in the sentiment of the Street was as startling as a violent earthquake, and the consequences were fraught with grave disaster. Up to the very eve of this great convulsion in the stock market the dance of speculation had been fast and furious, among both “the big men” and the little, and its unlooked-for occurrence reminded one of Byron’s lines on the Brussels ball, given on the eve of the battle of Waterloo, when the sound of cannon unexpectedly boomed above the music:

“On with the dance! Let joy be unconfined; No sleep till morn when Youth and Pleasure meet To chase the glowing hours with flying feet. The lamps shone o’er fair women and brave men; A thousand hearts beat happily; and when Music arose with its voluptuous swell, Soft eyes looked love to eyes that spake again, And all went merry as a marriage bell; But hush! hark! a deep sound strikes like a rising knell, Arm! arm! it is—it is—the cannon’s opening roar!”

Fortunately, in the midst of the Northern Pacific panic, the financial belligerents combined to stop it. Their competitive buying for control of the stock had caused the “corner.” But the extraordinarily high prices to which it was bid up by those short of it were reached after the competitive buying had ceased for the want of sellers. The contestants saw the wisdom of coming to terms to restore confidence and check the havoc that was being wrought on the Stock Exchange, where prices had fallen from fifteen to fifty per cent. that day, while Northern Pacific common stock had sold up to $1,000 a share. So J. P. Morgan & Co., the bankers of the Hill-Burlington-Great Northern party, and Kuhn, Loeb & Co., the bankers of the Harriman-Union Pacific party, met in haste, and came to an agreement as to the Northern Pacific stock they had bought, the formal announcement of which caused a violent recovery of prices the next day, but not before the sweep of the besom of destruction had caused several Stock Exchange failures to be announced. The recovery was followed by a relapse of equal violence under a fresh rush to sell, which carried stocks nearly as low as in the panic, and then by a fresh recovery, a usual feature in a crisis where credit has been severely shaken and many have been crippled.

The outcome of this agreement between the two sides was the formation of the Northern Securities Company, practically as arranged for by J. P. Morgan & Co. and Kuhn, Loeb & Co., Mr. Morgan naming the directors by mutual consent. Into this repository, or holding company, the Hill and Harriman companies—that is, both sides to the controversy—put their Northern Pacific stock, as well as Great Northern stock, and the Northern Securities Company later issued its own stock to them in exchange for it.

But when, in 1904, the Northern Securities Company was held by the United States Supreme Court to be a violation of the anti-trust law, and it became necessary to distribute its assets, a new controversy arose. Its directors proposed to make an equal, or pro rata, distribution of the Northern Pacific and Great Northern stocks deposited with it, whereas President E. H. Harriman, for the Union Pacific, which deposited the lion’s share of the Northern Pacific, namely, $78,000,000, wanted all its stock back again; in other words, to eat his cake and have it, too. As this, if assented to, would have given the Union Pacific control of the Northern Pacific, President Hill, for the Great Northern Burlington system, naturally objected, and we all know of the litigation that followed, and in view of the glorious uncertainty of the law, it would have been rash to have predicted its final outcome.

On the Stock Exchange, April was the most active month of 1901, the sales aggregating 41,689,200, a daily average of 1,812,600. On April 24th no less than 652,900 shares of Union Pacific were sold. These specimen bricks furnish a practical commentary on the rampant speculation then in progress.

The new incorporations of the year represented an amazing amount of capital, the total being far in excess of any previous year, even that of 1899, when many of the large trust combinations were formed. The largest and probably the most heavily watered combination launched was the United States Steel Corporation, with its $508,478,000 of common stock, $510,277,300 of preferred stock, and $304,000,000 of bonds. The mania for organizing new companies and making combinations of old ones on largely inflated capital spread to every State in the Union, and the promoters of industrial enterprises, in particular, seemed to be trying to surpass each other in piling Pelion on Ossa in excessive capitalization. Their obvious purpose in most instances was to sell the stock to the public, and the poor public took the bait and suffered accordingly, for much of the stock in a great many of the new schemes became almost entirely worthless, both as collateral and in the stock market, and the rest experienced very heavy depreciation, and, figuratively speaking, like the shaky corporations it represented, went limping along with an uncertain gait and a ragged and down-at-the-heel appearance suggestive of reduced circumstances and hard times.

In every State there was a flood, if not a deluge, of new companies. In New Jersey, 2,346 were formed in 1901, with a capitalization of $4,773,702,000, against 2,181 in 1900, with a capitalization of $1,350,208,400; and in New York, Ohio, and Texas the incorporation mills were proportionately active in grinding out new companies with fictitiously large capital stocks.

Commercial and manufacturing corporations were practically unknown, that is, in any substantial form, in the United States till about 1850, and then they followed the development of the railways. In 1848 the first general corporation act, known as the Manufacturing Act, had been passed in this State, and companies began to be organized under it; but the law limited their capital and imposed other restrictions, whereas companies may now be incorporated for a thousand years with an unlimited amount of capital. The contrast between 1850 and this era of trusts marks the great and rapid progress of the country in the interval in population, commerce, manufacturing industry, banking, railway building, and general material prosperity.

The growth of trust companies has been the natural outcome of our industrial and economic development, and the freedom allowed by our laws in monetary affairs. In England, France, and other European countries the laws restrict corporation rights and privileges so rigidly that such companies would find it impossible to do business there as they do here. Hence trust companies have practically no existence except in this country. How immensely they have prospered of recent years the banks know to their cost. In 1882 the gross deposits of all such companies in the United States were $144,841,000. In 1892 they were $411,659,000; but after the new industrial combination era began, in 1897, they shot up with amazing celerity, and new companies sprang up like mushrooms in all our large cities, and here and there in small towns.

Being competitors of the banks they shared their business, and so prevented or limited their natural growth, and forced many of the bank consolidations that have since taken place. At the end of June, 1902, their deposits had mounted up to $1,525,887,000. Here was an increase of $1,114,228 in ten years to about half of the total individual national bank deposits of the country, for these on July 16, 1902, were $3,098,875,772. Moreover, in the city of New York the trust company deposits exceed, or did exceed, the individual deposits of the national banks, those of the latter on September 15, 1902, aggregating $603,565,374, while on June 30, 1902, the deposits of the trust companies, as shown by their semi-annual reports to the State Superintendent of Banking, were $760,776,124. This comparison is a very suggestive revelation of where the money goes and how the trust companies prosper at the expense of the banks.

In 1902, again, a few leading factors, or influences, controlled American finance, and shaped the real financial history of the year. These were the good corn crop, following the bad one, and other satisfactory harvests; the overstraining of American bank resources to supply the vast requirements of the new trust and flotation enterprises when the capital and currency of the country were required for its regular trade and ordinary business; the enormous increase in our foreign importations contemporaneously with a very heavy decrease in our exports; the great rise in the price of the raw materials used in our manufactures, as well as in the cost of labor; the strenuous efforts of large speculative capitalists to extend and hold permanent control of their respective railway and industrial enterprises and undertakings; the reckless and unprecedented Vesuvius-like eruption of speculation in railroad and other stocks by wealthy and newly enriched Western stock operators known as “the Chicago Crowd” and “the Pittsburg Crowd,” respectively, aided by heavy bank loans at high rates; and finally the refusal of the public to follow them any longer as buyers. This accords with what I have said about the influence of the conservative banks and bankers in calling a halt on the wild speculation for a rise which raged up to the latter part of September in that year.

The exploit, in 1902, of John W. Gates, backed by his speculative associates, in buying a majority of the Louisville & Nashville Railway stock, was his last successful venture to make a big haul of millions on the Stock Exchange. After that he and they met with very heavy losses in their continued efforts to boom stocks. But Mr. Gates was paid a profit of ten millions of dollars on his Louisville & Nashville purchases by J. P. Morgan & Co., a partner in that firm having made the bargain with him at the Waldorf-Astoria Hotel, at three o’clock in the morning, after it had been discovered that Mr. Gates had really bought control of the stock.

It transpired, in evidence, that Mr. Perkins had gone there at that hour for this purpose, and found Mr. Gates in bed. The object in giving him so large an amount above what he had paid for the stock he had just bought was to get him out of the way as a mischief-maker, for with him in control of the Louisville & Nashville, there was no telling what he would do to demoralize the Southern Railway system. He was looked upon as a bull in a china shop, to be coaxed and tempted out, regardless of expense, before he began to toss the crockery with his horns.

So when he said to Mr. Perkins, “As you want the stock so badly, to keep the Belmont board in control and protect the Southern Railway, I will let you have it if you will pay me ten millions more than it cost,” the proposition was promptly accepted; and the deal was closed on this basis. The Louisville & Nashville and the Southern Railway companies were supposed to have been jointly interested in the purchase, but the Gates stock was finally turned over to the Atlantic Seaboard Air Line.

Buying control of the Louisville & Nashville by Mr. Gates was a far bolder operation than President Hill’s purchase of the stock of the Burlington & Quincy for the Great Northern, or than the Moore Brothers’ purchase of control of the Rock Island and their subsequent great inflation of its stock and bonded debt, because Gates bought it merely as a speculation, without any desire to manage the road. He was fortunate in being able to sell it so easily to those he had frightened by his daring coup.

It is interesting to compare the leading influences, or principal factors, in Wall Street in 1903 with those of 1901 and 1902. Stock Exchange transactions in that year were very much smaller than in 1902, but not nearly as much so as the total in 1902 had fallen below those of 1901, the year of the greatest activity and excitement in this memorable speculative period. The sales in 1903 aggregated 161,099,800 shares, against 188,497,600 in 1902 and 265,945,700 in 1901. The largest total on any one day in 1903 was 1,539,000, against 1,996,000 in 1902 and 3,202,200 in 1901. The largest in any month in 1903 was that of January, 16,002,300, against 26,568,000 in April, 1902, and the smallest in 1903 was 10,731,000 in November, against 7,884,900 in June, 1902.

The barometer of the iron trade was still rising at the opening of 1903. Good crops had been gathered and were being sold at good prices; railway earnings were large, and railway companies were making heavy expenditures for new equipment and improvements, and every department of business and manufacturing industry seemed prosperous, with the iron trade enjoying its full share of that prosperity. So heavy, indeed, was the demand for iron and steel that the capacity of our works was unequal to it, and we were importing iron and steel largely, as we had been in 1902.

But in June the iron industry experienced one of its time-honored lightning changes. That barometer suddenly fell. The demand subsided with surprising celerity in all lines, and by November prices in some of these were fifty per cent. lower than in January. The boom in the iron trade which commenced in 1899 was at an end after lasting for four years. At the end of the year, however, the trade began to revive, and 1904 witnessed a slow but steady improvement in it, as the reports of the United States Steel Corporation’s earnings have shown. Consequently that highly inflated company, after being forced in 1903 to suspend dividends on its common stock, was encouraged to continue them at seven per cent. on its preferred stock. But this carried cold comfort to the hundreds of thousands who had been impoverished by buying these stocks at the high prices at which they were floated here and in Europe.

Before the end of 1903 liquidation on a large scale in stocks had run its course and exhausted itself, and the market quieted into comparative steadiness; and in 1904 we had, on the whole, nothing more than a dull trading market, with the outside public very largely absent. But there has been a general tendency toward slow improvement, although the net earnings of both railways and industrial companies have, on the average, shown a heavy shrinkage, a reflection of the reduced volume of trade and more or less industrial depression following the overstimulated boom of previous years. Just as 1901 was the year of the most unbridled and unrestrained inflation, 1902 witnessed a constant battle against the tendency to a downward reaction, and 1903 saw and felt the reaction, which was all the more severe because it had been so long delayed.

In the cotton market, however, as wild and extraordinary a bull speculation raged in 1903 and the early part of 1904, under the lead of Daniel J. Sully in New York, and William P. Brown and a Southern clique in New Orleans, as ever excited the Stock Exchange. Through their manipulation, helped by the statistical position of cotton and the prospect of reduced production, cotton rose, under an enormous and unprecedented volume of transactions, from about eight cents a pound here to seventeen cents, with frequent violent fluctuations, and Mr. Sully was avowedly planning to carry it up to twenty cents, when he found his resources insufficient to carry, on a falling market, the amount of cotton sold to him. So after going up like a rocket, he came down like the rocket stick, although his previous profits by the rapid rise had run into several millions. It was well that a halt was thus practically called to this excited speculation and excessive advance in cotton, for it had inflicted heavy losses upon spinners and caused the closing of many mills. Sully’s failure was the logical result of a too daring speculative campaign, and reminds us of that vaulting ambition which overleaps itself and falls on the other side.

Glancing at other countries, I find that Canada made more material progress in 1903 than in any previous year in her history, business increasing substantially in nearly every branch of trade and finance, stimulated by bountiful crops and 150,000 immigrants. But in England the continued decline of British Consols to the lowest prices in a generation reflected a low financial barometer, the legacy of the costly South African war. France, however, made the best showing of the year in Europe in finance and general prosperity, while in Germany a vigorous industrial revival lifted that country out of its previous depression consequent on over-speculation and bank failures.

One question of great interest in relation to our new industrial combinations is whether a proper readjustment of their hugely inflated capital and excessive charges will place them permanently in a condition of efficiency, productiveness, solvency, and prosperity, or whether they will ultimately drift, one by one, into the hands of receivers through their inability to make both ends meet, or become hopeless wrecks, like the Shipbuilding Trust. The same fate is liable to overtake many other large flotations into which there was a too copious flow of water, supplemented by chicanery and misrepresentation. Many of these have been organized in disregard and defiance of legitimate finance, and have exposed the stock market and all the monetary interests depending upon them to risks and disastrous disturbances inseparable from organizations whose foundations rest largely on wind and water and on prospectuses and book-keeping that often failed to tell the truth, the whole truth, and nothing but the truth.

It was well that a stop was practically put to the creation of such inflated industrial combinations, as well as to needless combinations and highly inflated stock issues among the railroads for power and profit and stock-jobbing purposes, by the course of the Wall Street banking interest, to which I have referred, in coming to the conclusion that the over-watering of new companies, the marketing of new stocks, and the rise of prices on the Stock Exchange had been carried beyond the point of safety, and that the outside public had bought more speculative industrial and railway stocks than they would be able to carry on a falling market.

They argued, therefore, that their buying power and their inclination to buy were nearly exhausted, and that the stock market had become largely a field of action for certain heavy and reckless speculators, each of whom had suddenly made many millions by the formation of new trusts and railway combinations. Some of these had become multi-millionaires through the early sale of the heavy amounts of United States Steel stock they received in exchange for their plants when that huge corporation was launched in its sea of water. In this they were like some others who enriched themselves by their industrial combinations in the West before they branched out in Wall Street.

Very large bank loans to the brokers of these big operators were gradually called in and fresh accommodations refused them. Without loans it was impossible for them to buy and run up stocks to inordinately high prices, as they had been doing. Therefore they found that, to a large extent, their occupation was, like Othello’s, gone. They were eagles with clipped wings.

The heavy liquidation by large and small operators in 1903 caused a heavy and almost continuous decline in prices on the Stock Exchange. Many rich men were compelled by this shrinkage and the calling in of their loans by the banks to sell out heavy lines of both railway and industrial stocks. Not a few of these lost practically all their capital, while nearly all the rest sold a large part of their best holdings to protect the remainder, which became unmarketable.

This period of liquidation and depression left Wall Street and the country at large in 1904 thickly sprinkled with poor rich men, capitalists with a good deal of property, real and personal, including stocks, but all unsalable in the market except at an almost ruinous loss. Their policy is naturally to hold on to what they have left till the tide turns, and if they are strong enough to be able to do this they will doubtless meet with their reward. History repeats itself in Wall Street as well as elsewhere, and with this prospect in view they can cheerfully say, as the old song says, “There’s a good time coming, boys; only wait a little longer.”

Meanwhile, those who were active in Wall Street during this eventful period of inflation and speculation must note, more than others, the vast change that has come over sentiment and opinion in Wall Street and everywhere else.

Both Wall Street and the outside public have lost the faith that they had in many of the stock-market leaders, the men who were once followed blindly in their schemes of inflation and regarded as omnipotent in their execution. The power and prestige of these leaders, for the present at least, have passed entirely away, and none are so poor as to do them reverence. The devotees of the Street no longer worship the old idols.

Wall Street and the public also lost faith in all new ventures and new railway and industrial bond and stock issues, as well as in the good judgment and good faith of the promoters and corporations concerned. The revelations of fraud, chicanery, and excessive capitalization that have been made in the courts and elsewhere, have undeceived even the dullest and most credulous believers in the schemes and schemers that took the country by storm in the days of Wall Street’s wild and pyrotechnical speculation.

Out of evil there cometh good, and this great change from blind credulity and inordinate inflation to discriminating distrust and severe contraction has exerted a wholesome effect in paving the way to a sounder, safer, and generally better state of things both in and out of Wall Street. But meanwhile one bad sign is noteworthy. The large corporations, being unable to market new bond issues, are borrowing heavily from banking syndicates at five to six per cent. on notes running from one to three years. There is danger in this, and the way of the borrower on these terms may, like that of the transgressor, be hard. But the end may justify the means; and the nation is still growing as rapidly and as grandly as ever in our history from ocean to ocean.

There is nothing to provoke pessimism in the magnificent strides we are making in the march of progress; Wall Street is always sure to reflect this progress and our growth in material prosperity, as well as any periods of depression we may encounter, for it is the great barometer not only of the country and the times, but very largely of the world.

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LXIX. REVIEW OF THE PANIC YEAR, 1903

The year 1903 passed into history with few pleasant memories. To a great number of individuals it was a year of disappointment and loss. To the very few it was a year of golden experience, demonstrating anew that real success only comes from rigid adherence to sound business principles and abstention from illegitimate speculation. Those who remained steadfast to well-established methods of finance and business weathered the storms of the year with little injury; while those who defied economic laws and ventured on the untried highways to success were, later, chiefly engaged in repairing battered fortunes and gathering together their scattered senses.

Nineteen hundred and three was chiefly conspicuous as marking the culmination and collapse of the great trust movement which began five or six years ago. The country had fairly gone combination mad, both capital and labor emulating each other in the furious race toward combination and monopoly. All consequences were blindly disregarded, only the advantages of combination receiving any serious attention, and no regard whatever was paid to the workings of these huge combinations. Whoever pointed out their inherent defects, their defiance of natural economic laws, their ineradicable opposition to human nature, their socialistic tendencies, their opposition to individuality, their inability to suppress competition—whoever was bold enough to oppose these tendencies on such grounds was swept aside with contempt and indifference. This phase of the movement, however, was by no means the end of the trust mania. It received an enormous stimulus from Wall Street, where the clever promoter quickly discovered in the increased profits and power of these combines something new to capitalize. These forced profits, together with the premiums paid to original owners for control of good will and for promoters’ commissions, were the basis of an enormous overcapitalization, the new concerns frequently being capitalized at several times their real value. Not less than $6,000,000,000 of these new creations was made within a few short years, forming the basis of a colossal speculation, backed by unequaled financial power and launched upon an unprecedented industrial boom. It is not the purpose of this brief review to cite instances of failure. Fortunately, the losses resulting from inability to unload on the public fell chiefly upon those best able to bear them, the panic being strictly financial and, fortunately, not commercial or industrial. For the original shareholders in these combinations who failed to sell, the losses were chiefly on paper; but they were sufficiently heavy to seriously cripple many rich men whose fortunes had been locked up in these enormously inflated new creations. Syndicate after syndicate was formed to finance these organizations; some made fabulous profits, but others were closed out with heavy losses, bringing the country to the verge of the greatest panic in history. Fortunately, the country’s general prosperity was only slightly impaired by the tremendous strain thus imposed on Wall Street. The storm was finally safely weathered because of the prudence of our bankers and the strength of our national resources, as well as the continued prosperity of the farmer, who once more proved himself the backbone of the nation. These experiences have effectually killed the trust mania, and its revival is exceedingly improbable. Big corporations, it is true, will remain, for the reason that they are the best known means of doing the world’s work; but the era of excessive capitalization of good will, promoters’ fees, monopoly profits, and the delusions of visionary economists is happily at an end. Whether the final days of reckoning for the trusts have been seen or not is a question that must be left until the ultimate test of business adversity is applied, which we sincerely hope is still far distant. At best, the future of the industrials is dubious. Along with, and as a natural sequence of, the trust movement came the labor movement. The power of combination once discovered was as badly misused by labor as by capital; even worse, for the demands of labor were pushed to such extremes of extortion and injustice as to throttle business and arouse popular indignation among those who still preserved some ideas of individual freedom.

Next to the trust movement the most potent influence in the business world was the simply phenomenal boom in the iron and steel trade. The world had never seen such rapid development before. This was based principally upon the enormous demands of American railroads, which have been practically reconstructed in order to meet the tremendous rush of traffic which the nation’s growth has imposed upon them. The big car and the big locomotive necessitated heavier rails, new bridges, and new terminal facilities; so that hundreds and hundreds of millions were thus expended, very largely out of current earnings, but in many cases, also, by the creation of new capital issues. It is probable that the heaviest portion of this work has been done, yet much remains to be completed, and railroads will be heavy buyers of steel to continue projected improvements. Another powerful stimulus to the iron trade was the use of the steel frame building for office purposes. This meant a revolution in office buildings, and the business centers of all our large cities are undergoing a process of reconstruction which is far from complete, and was brought to an abrupt halt by the extortionate demands of labor. In addition to these two great sources of demand the uses of iron and steel are steadily extending with the progress of invention, the cheapening of their cost, and the high price of lumber. The iron trade’s pace was too rapid to last, and the reaction came with unexpected severity in the latter half of 1903, precipitated, of course, by the financial reaction, which, along with the labor agitation, discouraged all new enterprise.

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Chapter LXX

LEADING WALL STREET EVENTS UP TO THE FALL OF 1907.

The natural result of the panic of 1903, and the long period of depression in Wall Street, was that an unprecedentedly large surplus reserve was accumulated by the New York banks in 1904, reaching its maximum in August. This was still further swelled in 1905, when speculation for a rise again assumed formidable proportions, and new high records were made in the stock market. Both bank loans and deposits reached a magnitude never before known, and the activity on the Stock Exchange, combined with that in trade, and land, mining, and other speculations outside of Wall Street, caused the clearing house exchanges to greatly exceed those of any previous year.

Our foreign imports also increased till they made new high records, although our exports failed to keep pace with them. This large import trade reflected both the rising fortunes of the rich, who had suffered severely during the depression of 1903, and the general prosperity. Our imports are the barometer of the times. When these are good, they are large; but in bad times they shrink enormously, for a large percentage of them represent luxuries, and we are a luxury-loving people, and, in comparison with Europeans, our manner of living is expensive, not to say extravagant.

Before the end of 1905 the banks of the rest of the country followed those of New York in reporting deposits and loans larger than ever before, whereas in the early part of it their only high record was in the amount of their cash reserves. This showed the great demand for loans and discounts to meet the requirements of the rapidly increasing volume of trade and speculation.

The amount of money available for loans was largely reduced in the early part of 1905 by our heavy exports of gold. But it was subsequently increased by the issue, up to December 1st, of sixty millions in National Bank note circulation, which was so much fuel added to the fire of speculation, not, however, in Wall Street, as much as in the interior, where there was a rage for new enterprises of all kinds, mostly speculative. Everyone with money enough to make a venture seemed to be seeking a short cut to wealth.

This inland speculation and business activity, particularly in the West and South, caused the exchanges or clearings of the banks all over the country, except in New York, which was comparatively dull, to reach larger totals than ever before. Our iron production and foreign imports, at the same time, made new high records.

The gold in the United States Treasury, owned by the Government, increased under the tariff on imports from $193,072,614, early in 1905, to $291,258,135, near the end, and the total amount held by it, including that held against outstanding gold certificates, increased to $816,354,352, the largest in the Government’s history, and also the largest held by any government or institution in the world. The next largest sum ever held elsewhere was $591,600,000, by the Bank of Russia, in 1898. Yet on January 31, 1895, the total amount of gold held by Uncle Sam—that is, by the Treasury—was only $97,353,776, and on February 12th this had dwindled to $41,340,181, owing to the run on the Treasury through fear that the Government might be forced to suspend gold payments. But President Cleveland’s prompt action in selling bonds for gold—to the Morgan-Belmont syndicate—averted this possibility.

Before glancing at more recent events, it is well to refresh our memories by looking back at the most conspicuous features of the stirring period in Wall Street’s history, extending from the beginning of 1901 to 1906. In 1901 we had a year of extraordinary developments, including new company organizations and old company amalgamations, wild and reckless speculation by the outside public, heavy borrowing of European money to carry on this speculation, the failure of the corn crop, and, except for corn, a heavy fall in the prices of our products.

In 1902 Wall Street was flooded with new bond and stock flotation schemes, all clamoring for bank loans, although the activity of trade called for all the loanable capital available. Coincidently, there was wild and reckless speculation in stocks by newly made industrial millionaires with large bank resources and enormous loans at their command. The outside public, however, were not tempted by the bait they offered. Hence, the banks had an excessive burden of loans, all the greater because of the determination, at any risk, of the speculative capitalists to carry out their flotation schemes so as to control great industrial, railway, and other corporations. Meanwhile, there was an immense increase in our foreign imports and a decrease in our agricultural exports, and a great rise in raw materials and the cost of labor. But, fortunately, the year gave us a good corn crop and other satisfactory harvests.

Then came 1903 with its train of disasters. Investors took alarm at the masses of new securities thrown upon the market, and withdrew from it. The securities consequently became unsalable, and prices declined rapidly. This forced liquidation in bonds and stocks of all kinds, particularly the better kinds, to save the poorer from sacrifice by the syndicates, corporations, firms, and persons who were over-extended and unable to respond to the calling in of loans by the banks and other money lenders. Wall Street was full of “undigested securities,” on which it was impossible to borrow any longer. So multitudes of holders had to sell them for what they would bring. Then came a heavy decline in iron and steel, among other things, an equally heavy reduction of the profits of industrial corporations, with many corresponding reductions in dividends, and a very sharp contraction in our before greatly expanded foreign imports owing to the hard times. We had a rich man’s panic, and plenty of poor rich men. But, again, we had abundant grain crops, although the cotton crop was very short, which resulted in our shipping more cotton to Europe in the autumn than ever before, while its price was abnormally high.

In 1904 we saw one effect of the depression of 1903 in the abnormally large surplus reserves of the New York banks, when money on call for about eight months loaned largely as low as one per cent. Only four times before had these reserves been exceeded. Then came the largest gold exports ever made by us. In June the stock market began to recover under spirited speculation for a rise, together with much buying by investors. But reckless professional speculators carried prices so high that the market collapsed in December. During the year there had been a slow yet general revival of trade, in the face of extremely high prices for cotton, resulting from a short crop and a bull movement, which paralyzed the cotton manufacture, and caused many mills to close both here and in England. But happily this was followed by the most bountiful cotton crop we ever had, owing to the high price of the staple having stimulated cotton planting all over the South. A heavy fall in the price of cotton resulted, in which the bull leader failed. But the grain crops met with disaster, and were the smallest since 1900, which resulted in the highest prices since 1898, and the smallest exports to Europe since 1872. The presidential campaign in the meantime passed without creating a ripple in the tide of Wall Street.

In 1895, simultaneously with much discussion of the world’s increasing gold product, we saw both here and in the Old World, especially in the latter part of the year, unexampled monetary stringency with very high rates for money. The surplus reserve of the New York banks was wiped out twice, that is, they twice fell below the dead line of the required twenty-five per cent. reserve on their deposits, while the Bank of England’s condition was the lowest since 1890, and the Bank of Germany’s the lowest since 1897. Yet we had a very active and excited bull speculation in stocks, just as Germany had, despite the high rates for money, and its abnormal scarcity consequent on its vast employment in trade and speculative enterprises outside of Wall Street.

That the world’s increased gold product largely stimulated speculation for a rise, both by adding to the amount of gold in circulation and the amount of paper money issued by the banks against it, is certain. Its effect has not been seen in lowering rates of interest, but in lowering its own value, or purchasing power, by reason of its increased supply or, in other words, by raising the prices of stocks, commodities, labor, and whatever else money buys. So the increased supply of gold has only quickened the uses for it by fostering speculation, and the demand for speculation has outrun the increased supply of gold—that is, money—and correspondingly raised interest rates, as well as prices. In 1905 our national prosperity was crowned with abundant harvests, the corn crop having been the largest on record, and that of wheat the second largest. This gave a fresh impetus to trade and speculative enterprise, with increased railway and industrial earnings, and production, especially in iron and steel products, at a higher pitch than ever before. Dividends and reserves also increased in proportion. Russia’s disastrous war was waged without causing any national disturbance in Wall Street, and her largely reduced crop of wheat helped us to secure better prices for our own surplus wheat in Europe. So it is an ill wind that blows no one any good.

In 1905, too, we witnessed the stormy upheaval in the Equitable Life Assurance Society, begun by the acrimonious duel between President Alexander and Vice President Hyde, which led to the general exposure of the waste, extravagance, graft, and corruption in life-insurance management, through the investigation of the New York Legislative Committee. The loss of new insurance business, caused by the popular distrust of the companies exposed, had its principal effect in Wall Street in their reduced power to buy bonds; and the prolonged stagnation in the bond market after they ceased to be large buyers was largely attributable to this cause. But the exposure was much needed and did great good in correcting abuses of power and turning the rascals out.

Our exports of domestic merchandise kept pace with our tremendous industrial prosperity, and these more than doubled in the ten years ending with June, 1906. Raw cotton, provisions, and iron and steel manufactures were exported in the fiscal year 1906 to a value exceeding $300,000,000, iron and steel showing the largest increase, and seventeen articles, or classes of articles, had an export value of from ten to forty-two millions. While iron and steel have taken third place, raw cotton still holds the first, and provisions the second, and copper manufactures have advanced from the eleventh to the fourth place. But refined mineral oil, that was third, is now the eleventh, and flour has dropped from fourth to seventh, although showing an increase of seven millions, and wheat from seventh to thirteenth.

On the other hand, our exports of agricultural implements were five times as great in 1906 as in 1896, which advanced them from the twenty-third to the fourteenth place in the list. Our cotton manufactures, too, advanced in value from twelfth to eighth, that is, from $16,750,000 to $53,000,000. There is, however, still room for a great increase in these, and the outlook favors a large and growing demand for them in China, the Philippines, and South America. We have become a great manufacturing and mining, as well as agricultural, nation, and a lower tariff on raw materials would swell our exports enormously. That will come in time; but at present politics stand in the way.

In 1906 we saw a continuation of the same big bull speculation in stocks that, with varying fortunes, had been progressing since June, 1904, with Edward H. Harriman, president of the Union Pacific Railway system, and James J. Hill, president of the Great Northern Railway system, the most conspicuously dominant figures in the railway world, and, incidentally, in the world of Wall Street. Prices on the Stock Exchange, and the rates for money, both on call and time, were abnormally high, and still tending upward, till both frequently exceeded six per cent. in August, and, in some instances, jumped as high as thirty per cent. early in September, the excess above six, in the case of time loans, being represented by a commission. This, on the eve of the usual drain of money westward and southward, to move the crop, caused much anxiety for the future, as it was entirely without precedent in that month. But the Secretary of the Treasury, through bank deposits and gold imports, was relied upon to relieve the stringency when it became more acute later on, under the actual drain of money West and South. He did so by renewing his offer, made in April, to deposit gold with national banks when secured by bonds, to the amount of any gold they wanted to import, the deposits to be returned when the gold arrived. Thus they were saved loss of interest in transit, and gold was imported largely.

The money market seemed to have no terrors for the great speculative capitalists in control of the stock market. Prices were still bid up boldly, and the Harriman and Hill stocks, in particular, were marked up to figures never before quoted, just as Reading and the other anthracite coal stocks had been long before and have been since.

The chief sensation of the year 1906 in the stock market was produced by the Harriman announcement on Friday, August 17th, that the semi-annual dividend on Union Pacific had been raised to five per cent., or from a six-per-cent. per annum basis to ten per cent.; and that an initial dividend of two and a half per cent., or at the rate of five per cent. per annum, had been declared on Southern Pacific. These unexpectedly large dividends and the delay in making them known, after they had been acted upon by the directors on Wednesday, and finally on Thursday, greatly excited and disturbed Wall Street. They were dividends that staggered the bears and astonished the bulls, and caused an advance of sixteen per cent. in Union Pacific and five per cent. in Southern Pacific stock that day. They also made the whole market run into a wild bull speculation, stimulated by a rush of “shorts” to cover their contracts, and a sudden influx of fresh buyers from the outside public. Reckless buying by these made it easy for the bull leaders to run prices up sharply, especially as it was expected or feared by many that the example set by Union Pacific in dividend raising would, or at least might, be followed by certain other large companies, both railway and industrial, whether the increase was justified by actual net earnings, or only intended for stock-jobbing purposes.

The criticisms of President Harriman and his associates to which these sensationally large and peculiarly announced dividends gave rise, were too trenchant to bear quotation or description. But Mr. Harriman was said to have added ten millions to his personal fortune by the rise in Union Pacific and Southern Pacific stock, which preceded and followed these very generous distributions to the stockholders.

The fact that Mr. Harriman, the son of a quiet country clergyman, should have been able to come into Wall Street and climb the ladder to wealth and power as he has done, and with such amazing celerity, shows the unlimited possibilities of the Street as a gold mine, for the Union Pacific Railway system, like the other great railway systems whose stocks and bonds have always been dealt in here, was practically born and financed in Wall Street. His rise to a position of such prominence and vast power is far more wonderful even than the career of Russell Sage as a Wall Street money maker; for Russell Sage never had any power but his money, whereas Edward Henry Harriman represents and controls thousands of millions’ worth of other people’s property, employing tens of thousands of persons. He is a moving spirit in dozens of banks and other corporations, including the Wells Fargo Express Company, outside of the Union Pacific and Southern Pacific system of railways and steamships. The great stock market struggle between Harriman and Hill for the control of Northern Pacific in 1901 was a battle royal on a grand yet disastrous scale, that will always be memorable in the history of Wall Street.

When Russell Sage died in July, 1906, within a few days of his reaching ninety years, leaving not far from a hundred millions of money, he left a will which reflected his sagacity as a money saver, for he left all he had, except a few unimportant bequests, to his wife. He did so, I infer, instead of distributing his great wealth himself, because he knew that the State inheritance tax would only be one per cent. on what he gave her, while it would be five per cent. on what he left to such relatives as he had surviving, as well as to all others.

It was, to a certain extent, “the ruling passion strong in death,” for, of course, he knew that his wife had no use or desire for so much money. Although his bequeathing it to her was a tribute to her goodness and a symbol of their happy married life, she would probably have preferred to shoulder a much lighter load of wealth. Its distribution will be no ordinary task, although it will doubtless be a labor of love with Mrs. Sage.

Russell Sage, in his manner of life, all now agree, set a good example of frugality and industry in an extravagant and pleasure-loving age, and hence he is held by many to have been a public benefactor. His unusually economical and plain habits, together with his great wealth and great age, naturally made him conspicuous and also a target for the wits, and in this way he became better known through caricature than matter-of-fact description. But that was one of the penalties of publicity. He passed from poverty to great wealth entirely of his own creation without being spoiled by it, and remained one of the plain, unpretentious people till the end.

He owed all he had to Wall Street, and his career illustrated, more than any other has ever done, how fertile a field for fortune making Wall Street may prove to a sagacious man, of untiring industry, who knows how to cultivate it, and can see and avail himself of its splendid opportunities. His rise from extreme poverty to immense wealth, through his own unaided exertions, shows how one man, single-handed, may do wonders and turn all he touches to gold, and that, too, in Wall Street. We are living in a stirring and rapidly progressive time, and the great and growing importance of the New York Stock Exchange was reflected by the rise in the price of a membership in it in 1906 to not very far from a hundred thousand dollars.

The year 1906 was one of immense activity and prosperity in trade. Prices were high and still advancing, and profits large, particularly those of industrial corporations. At the same time a mammoth bull movement was running its course on the Stock Exchange, and the grain crop turned out larger than ever before in our history, while enormous issues of new securities were announced by both railway and industrial corporations. These new issues severely taxed the resources of the money market, already being too heavily drawn upon by the “big men” of the Street to promote their wild bull campaign in stocks, and spasms of stringency were frequent. Indeed, the year 1906 from beginning to end witnessed a continuation of those inordinately heavy demands for money from Wall Street and corporations, and these led to the disturbed monetary conditions which were first felt in September, 1905. It was an eventful year, a year of immense activity on the Stock Exchange, in which much that was unprecedented occurred. It was a year in which the stock market, after touching high record prices and violent ups and downs, went gradually, in an excited speculation, from bad to worse, in a limited sense, or from one critical stage to another, till it reached the year’s end. Then it averaged only nine per cent. below the highest prices. But it became, in spite of the boldest bull manipulation, gradually weaker and more demoralized. The bull movement at length met its Waterloo in the spring of 1907, because the plunging millionaires who had been bidding them up found no buyers for their stocks. So they had to liquidate heavily, like the rest. It was another rich man’s panic.

From a slow and irregular decline stocks good, bad, and indifferent passed into the rapids of a bear market, with the bears, emboldened by success, recklessly aggressive, and on March 14th prices broke from ten to twenty-five per cent. under their fierce attacks, and relentless hammering, supplemented by an avalanche of long stock forced for sale under stop orders that had been reached, or through weakened and exhausted margins, or by holders unwilling to take any further loss.

Yet enormous as was this paniclike fall in prices on that disastrous day, many stocks went still lower in the breaks that followed the sharp rally that succeeded it. So March, 1907, ended as it began, in gloom and depression, which was followed by comparative dullness but little recovery in April and May. In June, however, it became evident that liquidation had exhausted itself, and all unfavorable factors had been discounted by the decline. Hence, although the market was almost entirely professional, with the outside public as apathetic as ever, it began to develop an upward tendency, notwithstanding the sharp rise in grain and cotton due to the extensive damage done by an unusually cold spring, and the fact that we shipped $15,000,000 in gold to France in June.

This vast and thorough liquidation had been mainly by the bull pools and richest speculative capitalists in Wall Street, and involved tremendous losses. These leaders of the bull movement had been caught overloaded with stocks, carried over from the previous boom that they had recklessly engineered. They were forced to sell because the banks were either calling in their loans, which they were unable to replace, or calling from time to time for more margin to offset the decline in prices. Thus their cash resources were being constantly impaired.

Meanwhile, money loaned at abnormally high rates, and five times in the spring, autumn, and winter of 1906 the New York banks showed a deficit in their reserve. Money, therefore, was very hard to borrow, because these giants of speculation had overtaxed the banks’ resources by borrowing too much. Coincidently the outside public held aloof from the stock market, owing to the great activity of trade and the wild speculation in land, mines, building, and other new enterprises all over the country.

This speculation from Maine to California absorbed an immense amount of money, of which Wall Street saw nothing, and it left the large speculative holders of stocks without any market for them, except among the professional traders. No wonder they staggered, and finally, in the spring of 1907, succumbed under the heavy loads they were carrying, which they had mistakenly bid up to excessively high prices in a vain attempt to bring in the public as buyers. Wall Street was then the only blue spot on the map of the United States.

To relieve the pressure for money there, and so help to bull stocks, the large interests in Wall Street, excepting J. P. Morgan & Co., imported from Europe $40,000,000 of gold in the spring of 1906 and $45,000,000 in the autumn.

This last great importation caused the Bank of England to raise its minimum rate of discount from three to four, then to five, and then again to six per cent., the highest since the Boer War. The rate, it was intimated, would have been advanced to seven per cent. had we taken any more of the yellow metal. The purchase of so much gold in England was made possible only through the Secretary of the Treasury, Mr. Leslie M. Shaw, practically advancing the means for importing it by lending gold to the banks, secured by collaterals, the loaned gold to be returned when the imported gold arrived.

The spring gold importations followed the great San Francisco earthquake and fire, on April 18th, involving an estimated loss of $250,000,000. Most of this, however, fell upon British, German, and other foreign fire-insurance companies, which relieved this country financially to a corresponding extent, although New York shipped more than $50,000,000 of gold to San Francisco to fortify the banks in that city.

After the stock market had been sold to a standstill and its weak timbers eliminated, by May, 1907, it was only natural, in view of its previous drastic liquidation and heavy decline, that with good crop weather following the backward spring, stocks should advance. The keel of a future bull market of large dimensions had been laid by the disastrous liquidation that had occurred, and we subsequently witnessed its development on a rapidly ascending scale. It is a law of nature that action follows reaction.

This reminds us that Wall Street easily passes from one extreme to another, and that very often the dawn is nearest when the night is darkest, in finance as well as nature. Moreover, Wall Street is always with us, just as the poor are, and the stock market is a serial story that never ends.

In July, the improvement in the stock market, and especially the Harriman stocks, was very decided, with the indications favoring a wider and more active speculation, for as yet it was almost entirely professional. In this movement the Standard Oil and Harriman party were the bull leaders, with Union Pacific the leading stock. Notwithstanding their vigorous efforts, however, the outside public remained entirely apathetic, and there was growing anxiety as to the future of the money market. This was increased by our having, unexpectedly, to ship gold to Europe, nearly all of it to the Bank of France, as well as by depressed monetary conditions there, with much disturbance, under heavy liquidations, in London and Berlin. Even British Consols declined from week to week, till they touched 81, the lowest price recorded since 1848, the year of the Smith O’Brien rebellion in Ireland, when they sold down to 80.

Then came an angry and threatening contest, and stormy litigation, between the States of North Carolina and Alabama and the Southern Railway Company, involving also other Southern States and railways. The main conflict was between the States named and the United States Courts on the 2¼ and 2½ cents a mile rate law. This went so far as to cause a revocation of the license of the Southern Railway to operate its lines in Alabama. The situation for a time was extremely critical, but a truce was at length arrived at, the Southern Railway agreeing to obey the State law, and leave the ultimate decision to the United States Supreme Court.

While this disturbing controversy was at a white heat, the $29,240,000 fine inflicted by Judge Landis, of the United States District Court, at Chicago, on the Standard Oil Company of Indiana, fell like a thunderbolt upon not only Wall Street, but investors all over the country. This was on Saturday, the 3d of August, and it looked so like confiscation, and so alarmed the large speculative capitalists, who had been supporting the stock market, that they at once withdrew their supporting orders and, for self-protection, became heavy sellers themselves of the stocks they held. They foresaw the effect of this disturbing decision, and the course of the Southern States towards the railways, upon investors, in causing liquidation. Simultaneously, a threatening report from the Bureau of Corporations added fuel to the fire of distrust.

Day after day, for twelve business days, following the opening of the stock market on Monday, the 5th, there was an almost uninterrupted and very heavy decline in prices for both railway and industrial stocks, the best and highest priced being the heaviest sufferers, and falling from ten to twenty-five per cent. The scare among holders of stocks increased as prices declined, and demoralization in the market carried these generally below the lowest in the panic of March. It was very largely another rich man’s panic, due to fears as to what might come next to disturb confidence in the value and future dividends of both railway and industrial stocks. The worst of it was, the innocent were, as usual, made to suffer with the guilty. But after a storm there cometh a calm, and so it was in this case, and perhaps all’s well that ends well. But the ordeal was a very severe one, particularly for the large holders of stocks, and made the year 1907 still more memorable than before.

Rumors of impending Wall Street and industrial corporation failures, as usual in times of disturbance, filled the air, but only one important industrial failure and one unimportant Wall Street suspension occurred in August, and the gradual return of confidence caused a gradual improvement on the Stock Exchange, although the semi-annual dividend on Southern Railway preferred stock was reduced from 2½ to 1½ per cent., and the dividends on Erie’s first and second preferred stocks were declared payable in four per cent. scrip warrants instead of cash. Toward the end of the month the Secretary of the Treasury announced that weekly deposits would be made in the national banks till October 15th, and this at once began to ease the money market and further strengthen confidence.

Early in September, however, there came a relapse in the stock market, and another Stock Exchange failure. This recurrence of disturbance and depression was partly due to stagnation, followed by demoralization in the copper trade, both here and in Europe, which caused a reduction in the price of copper by the selling agency of the Amalgamated Co. from 25 cents a pound to 18 cents, and not long afterwards to 15 cents.

Meanwhile the Calumet and Hecla, the Quincy, and other copper companies had reduced their dividends, owing to the small demand for copper, and Amalgamated copper stock declined rapidly to 57½, against 121 in January. In Boston, also, the copper stocks broke in the same demoralized way under heavy liquidation.

Railway shares sympathized with this extreme weakness of copper and the copper stocks, but not as much as American Smelting, the U. S. Steels, and other industrial stocks, and gradually the copper crisis ceased to dominate them. At the same time the general market for both railroad stocks and bonds was strengthened by the great success of the $40,000,000 issue of 4½ per cent. bonds by the City of New York, the loan being five times over-subscribed. This showed there was a large amount of money in the country awaiting investment in good securities. Yet, later, new low records were made for sundry railway and industrial stocks, including Southern Railway common and preferred, and the stock market, in its nervous and irregular fluctuations, told of the timidity of the bulls and the boldness of the bears, consequent on shrinkage in the iron trade, and uncertainty as to the business future.

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LXXI. THE GREAT CRISIS OF 1907

The worst forebodings of September were far more than realized in October, when the monetary disturbance, and distrust of credits, spread from the Stock Exchange and Wall Street to the banking interests, and involved the whole country in a panic that will always make the year 1907 memorable in our history.

Until the collapse in the “Curb” market of the stock of the United Copper Co., followed, on the 17th of October, by the failure of the two Stock Exchange firms that had been manipulating this Heinze specialty for Heinze interests, the panicky conditions of the year had been practically confined to the stock market and the interests directly affected by it. But that collapse, involving those Heinze failures, fell like a bombshell not only on the stock market, but on the banks of which F. A. Heinze, the president of the United Copper Co., had, not long before, purchased control. The fact that two of his brothers were members of one of the failed firms—Otto Heinze & Co.—caused heavy withdrawals of deposits from these banks, and particularly the Mercantile National Bank, of which he had become the president.

The New York Clearing House Committee took alarm the same day and examined the Mercantile. The result was that it demanded the resignation of all its officers and directors that night, as a condition preparatory to giving it any assistance. They complied, President Heinze among them, and the bank was assisted to pay its clearing-house balances for several days. But these were so large that further assistance was then refused. Thereupon one of its old directors succeeded in bringing in new capital and new directors on the day following, Sunday, so that the bank was enabled to continue business without a break.

But meanwhile the contagion of distrust was spreading, and there was a run on the deposits of not only the Heinze but the Thomas and the Morse banks, the Thomases and the Heinzes having been equally prominent with Morse in buying control of banks for speculative purposes. The Clearing House Committee took them all in hand, and demanded the resignations of their officers and directors. In this way they stamped these bank promoters out of the banks they had managed to get control of. Then the banks were assisted.

Suspicion soon fell upon certain trust companies with speculative affiliations, more or less connected with the same promoters. Suddenly a heavy and spectacular run upon the Knickerbocker Trust Company, the second largest in New York, with more than sixty millions of deposits, caused it to close its doors on the first day of the run. This was on Tuesday, the 22d of October. The immediate cause of the run was the resignation, on the previous day, of Charles T. Barney, its president, coupled with the notification to the banks of the National Bank of Commerce, on the same day, that it would not clear for the Knickerbocker Trust Co. after the following day. So, this being published in the newspapers, the depositors rushed to withdraw their deposits.

The Clearing House and Mr. J. P. Morgan, when appealed to, refused to assist the Knickerbocker on the ground that they found it was not solvent. The collapse of the Knickerbocker was immediately followed by extensive runs on small banks and trust companies in New York and Brooklyn, as well as on the savings banks, and about a dozen of the former, including seven in Brooklyn, closed their doors. But the savings banks took advantage of the sixty and ninety days’ time allowed them by law for the payment of deposits after notice.

Following these minor banking suspensions there were long-continued runs on the Trust Company of America and its Colonial Branch, and the Lincoln Trust Company, with all-night lines of waiting depositors. But, finally, after a hard struggle, these were examined by Morgan committee experts and found solvent, whereupon, in the banking conferences held for a number of days and nights at the residence of Mr. J. P. Morgan, it was agreed to provide them with all the money necessary to meet the run. To Mr. Morgan great credit is due for the arduous work he undertook to better the banking situation in this critical period of storm and stress.

New low records for stocks were made meanwhile under very heavy liquidation, Union Pacific touching 100, and Amalgamated Copper 41¾, on the 24th of October, and all others sinking to lower depths in about the same proportion, while the abnormal scarcity and high rates for money caused trading on margins to be generally suspended by brokers. Transactions were, of course, largely curtailed by being placed on a cash basis, but the buying of odd lots for investment was very heavy all through the crisis. The decline in Amalgamated was accelerated by copper selling down to 12 cents a pound. But much of the liquidation in the stock market was caused by the banks and trust companies calling in their loans on stock collaterals, and thus forcing the borrowers to sell.

The hoarding of money, and the withdrawal of deposits from the banks and trust companies, became so extensive that these institutions had little or none to lend, and for several days call loans were made on the New York Stock Exchange at rates ranging from 50 to 100 per cent per annum, and in exceptional instances as high as 125.

The United States Treasury came to the relief of the money market by making—under the personal direction of Secretary Cortelyou—unusually heavy deposits in the National banks of the City of New York, as well as in other cities which were drawing heavily on their New York balances. But still the banks and trust companies continued to lose their ordinary deposits rapidly, and the money thus withdrawn by the timid and distrustful was taken out of circulation by being placed in safe-deposit boxes, tin boxes, wallets, and other receptacles. This hoarding was foolish, as well as harmful and un-American.

New York had to deal with a banking crisis. So, on Saturday, the 26th of October, the members of the New York Clearing House met, and resolved to issue, on and after that date, Clearing House certificates—bearing six per cent interest—to be used by the banks of the Association in paying their daily balances at the Clearing House, instead of currency. These the Clearing House at once began to issue, when called for by any bank, to the amount of 75 per cent of the value of any acceptable assets it might deposit with the Clearing House. This gave immediate relief to the banks, and especially those whose reserves of currency were most largely depleted, for they immediately availed themselves of their issue.

At the same time they saw that, in addition to the government deposits, large importations of gold were necessary to replace, at least in part, the hoarded money, and aid in restoring confidence. The Clearing House certificates, by releasing much of their gold and legal tender notes, enabled them, through “cable transfers,” to purchase gold in England for shipment to New York, and by the end of the first week in November $50,000,000 had been purchased by banks and bankers for shipment to the United States, and nearly half that amount had already reached New York. But some of the importing banks were in other cities, including Chicago, Philadelphia, Boston, Pittsburg, and San Francisco.

These heavy importations, however, disturbed the London money market, and on Thursday, the 31st of October, the Bank of England raised its minimum rate of discount from 4½ to 5½ per cent, to check the outflow of gold. This not proving sufficient, it raised it to 6 per cent on the Monday following, and to 7 per cent on Thursday, the 7th of November, a higher rate than had been reached since 1873, the year of the great panic in this country and in Germany, when the Bank of England rate was advanced to 9 per cent. But once, in 1866, it went up to 10 per cent.

The Bank of France also, on the 7th of November, 1907, raised its rate from 3½ to 4 per cent, owing to the drain of gold to this country; and such an advance is very rare in France. For seven years, up to the spring of 1907, it had stood at 3 per cent. The Bank of Germany also advanced its rate to 7½, and the Bank of Belgium to 6 per cent. These rates showed how severely the loss of this gold was felt in Europe. By November 16 our gold purchases aggregated $70,000,000.

In the interval the clearing houses in all the large cities of the United States had, in self defence, followed the example of New York in issuing clearing house certificates. Currency, too, had been selling at a premium ranging from 2½ to 5 per cent for certified checks, owing to its great scarcity. At Pittsburg the Stock Exchange was closed immediately after the announcement of the failure of the three Westinghouse companies there. Other failures were very numerous.

In Pittsburg, Chicago, New Orleans, and many other cities, the local clearing houses printed clearing house checks of small denominations, from 25 cents or one dollar up, to be taken out and paid out by the banks instead of currency, when found necessary. Several of the Western Boards of Trade closed, owing to the demoralization in the grain market, caused by the heavy decline in prices under the rush to sell in order to raise money, while many banks all over the country issued their own cashiers’ checks for both small and large amounts, instead of currency or clearing house certificates, in payment of depositors’ checks. The banks were in a partial state of suspension from Maine to California.

The extent of the drain on bank reserves may be inferred from the fact that the statement of totals for all the New York associated banks for the week ending on Saturday, November 2, showed that they were collectively $38,838,825 below the dead-line of 25 per cent reserve on their deposits, without counting Government deposits, which had been very large. The detailed statement of each bank’s condition was not published on that date, and continued to be withheld till after the crisis had passed into history.

This large deficit of the New York banks caused much uneasiness and a further sharp decline in the stock market, but the frequent day and night conferences of leading bank officers with Secretary Cortelyou and Mr. J. P. Morgan, to devise ways and means of relieving the extreme stringency and distrust of the monetary situation, were productive of much good. This was especially the case in bringing the trust companies together to act as a unit through a committee, of which Edward King, President of the Union Trust Co., was made chairman. This committee was organized in the office of J. P. Morgan & Co., which, indeed, was the headquarters for all banking relief outside of the Clearing House.

Unfortunately for Europe, our purchases there of so many millions of dollars’ worth of gold, within three weeks, seriously unsettled the London, Paris, and Berlin stock exchanges, and a continuous decline in stock and bond prices attended its export to this country. But, notwithstanding the relief we obtained from this great source, the banks here still continued under a heavy strain. An indication of this was found in the statement of the New York Clearing House, giving the totals for the week ending on Saturday, the 9th of November, the third week of the acute stage of the crisis.

It showed that the deficit of the associated New York City banks, in their legal reserve, had increased $13,085,800 over that of the week before, making their total deficit $51,921,625. But as the Clearing House statements are made up on averages for each week, and not on the actual condition of the banks at the end of the week, the gold imported was only credited from the dates on which it was received by the banks. Moreover, this statement was made on rising averages, that of the week before on falling averages.

A conspicuously important feature of the arrangements made at the Morgan conferences for supplying the needs and taking care of the Trust Company of America was the sale, at par—$100 a share—of the majority of the stock of the Tennessee Coal, Iron and R.R. Co.—which had been largely hypothecated with it—to the United States Steel Corporation, payment for the stock to be made in its 5 per cent sinking fund bonds at 84. This exchange of Tennessee stock for the Steel bonds was promptly made through J. P. Morgan & Co., on and after November 7, thus adding another large property to the many other subsidiary properties of the U. S. Steel Corporation.

This transfer was one of the most notable events of the memorable panic year—1907—the wreckage of which it will take a long time to clear away. But meanwhile the country will have started on a new career of prosperity, and with eighty-four millions of people to develop its boundless resources, we need have no fear but that its recovery will be rapid, and its future as great and grand as we could desire. Moreover, it will be all the better and stronger, and all the higher in its business standards, for the severe yet purifying ordeal through which it has passed.

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LXXII. THE CAUSES OF THE CRISIS OF 1907.[2]

Footnote 2:

An address by Henry Clews, LL.D., delivered at Cooper Institute, New York City, February, 1908.

The wiseacres in Wall Street and elsewhere had to take many sledgehammer blows in this panic year. They had become like Tom Toddy—too big-headed for their bodies. When a man knows it all, then his danger commences. My advice is, never follow such a leader, but wait patiently and the time will come when you can safely copper him.

In September, 1906, when stock and bond prices were advanced abnormally to a 3½ to 4 per cent basis, while six months’ money was loaning at 6 per cent, it was evident that one or the other was too high; and considering the growing demand for the use of money it was quite apparent it was not money that was too dear, but securities. At that time I persistently advised everyone to get out of stocks and out of debt, and keep out for a prolonged period, only making quick turns meanwhile.

Since then security values have gone down prodigiously—$3,500,000,000 will scarcely cover the depreciation of those dealt in on the New York Stock Exchange alone; so those who took my advice and got out at top prices can well afford now to buy back their stocks, if dividends are not reduced. No one can foresee changes in these. But everything that is good is fairly cheap and below intrinsic value, based upon present returns. Our financial situation is vastly different to any previous one after great panics, of which there have been many, since the one of 1857 brought on by the failure of the Ohio Life & Trust Co., at the time of my advent in Wall Street: so I have been in all these panics.

The conditions now differ from those of all the other great financial storms because the wealth of the nation has become so vast as to make it the richest in actual wealth and productiveness, per capita, of all nations. As a matter of fact, our wealth-making developments have been so excessive as to have forged ahead of our banking facilities. This has had much to do with our recent setback. Wise and sagacious capitalists saw the handwriting on the wall in Wall Street and elsewhere, and those who did unloaded their securities last year, dumping their stocks at top-notch prices, amounting to at least $800,000,000, upon weaker-backed people.

This unloading, together with the San Francisco earthquake disaster, wiped out, in prices, $350,000,000 of property, and struck the staggering blows which did more than anything else to pave the way to the recent panic conditions. The selling out by big holders was followed by all the large railroad systems in the country selling bonds, stocks and notes. These, being offered to stockholders of record at apparently tempting prices, were floated. This great mass of new securities coming on the market was an indigestible one and absorbed the capital of a very large number of the rich men of the country and put it in a fixed form: and most of these heretofore very rich men have ever since been in the position of a man who, having had a “Sherry dinner,” is urged to accept the hospitality of a friend to take a “Delmonico dinner.”

What produced the panic was a number of adverse factors happening one after another in rapid succession. The first was the unloading by sagacious holders of securities at high prices; the second was the immense creation and selling of new securities by the railroads for improvements; the third, the revelation of scandals started by Mr. Hughes, the investigator of the life insurance companies. We all know what happened in that connection. Then came the Interstate Commerce examination of Mr. Harriman as a witness and his revelations under oath; then the $29,400,000 fine by Judge Landis on the Standard Oil Co. of Indiana, and finally, the insistence by Governor Hughes, against overwhelming opposition, of the passage of the Utilities Bill, under which the investigation of the Metropolitan Surface Railroad was started and which unearthed what really caused the shares of that great company to fall from their high price of $127 per share to $20 a share—about the present price. This was the straw that broke the camel’s back and caused an entire breakdown of confidence; which is usually the major part of the foundation of credit. The undermining of this caused the closing of the doors of the Knickerbocker Trust Co. Then a state of chaos ensued and bedlam broke loose, and almost everybody in Wall Street stood aghast wondering what would happen next.

As I have faithfully presented my side of the case to you, in a crude way, I ask you, as though you were impaneled on a jury, the question: Why should all the blame of producing the recent panic be laid to President Roosevelt? The real causes of all the trouble can be summed up as follows: (1) The high finance manipulation in advancing stocks to a 3½ to 4 per cent basis, while money was loaning at 6 per cent and above, on six and twelve months’ time on the best of collaterals; (2) capital all over the nation having gone largely into real estate and other fixed forms, thereby losing its liquid quality; (3) the making of injudicious loans by the Knickerbocker Trust Co., hence suspension; (4) the unloading by certain big operators of $800,000,000 of securities, following which were the immense sales of new securities by the railroads; (5) the California earthquake, with losses amounting to $350,000,000; (6) the investigation of the life insurance companies; (7) the Metropolitan Street Railroad investigation; (8) the absurd fine by Judge Landis of $29,400,000 against a corporation with a capital of $1,000,000; (9) the Interstate Commerce Commission’s examination into the Chicago & Alton deal and the results thereof.

These were substantially the causes which led up to and really brought about our present disastrous condition. Did President Roosevelt do any of these things? Not one of them. But Governor Hughes was the brilliant investigator of the life insurance companies, and also unearthed the Metropolitan Railroad scandal through being the author of the Public Utilities law. Yet Mr. Roosevelt is condemned by many, while Mr. Hughes is praised by the people all over the country. I ask on this showing if there is any justice in putting the entire blame for the present disturbed state of financial affairs upon President Roosevelt’s shoulders, without including Governor Hughes, as both have been equally engaged in the same reform movement.

I am not willing to affirm that either is to blame, for both have simply done their duly in enforcing the laws, and exposing wrongdoing. How in my opinion the market will turn permanently when the big men of Wall Street commence to take back what they sold, which they can already do at a difference in prices of from 30 to 50 per cent. With the $70,000,000 of imported gold here and on the way from Europe, together with an increase in bank notes, there will soon be no lack of money in this country. What is now wanted is more confidence to increase credits. To import more gold will embarrass London and other foreign money centers. This should be avoided by stopping further gold imports. Cheap money alone will not of course put up stocks. The governing factors will be the state of trade, and net earnings, and the “big men” will be governed by these.

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LXXIII. RECENT MEN OF MARK

CHARLES M. SCHWAB.

Born in Pennsylvania, May 30, 1851; rose, from the bottom, to be President of the Carnegie Steel Company, then, on its incorporation, became President of the United States Steel Corporation, but resigned, and later became President of the Bethlehem Steel Company; has large mining interests, especially in Nevada; he travels much, but resides on Riverside Drive, New York, in one of the largest houses in the city, built as an exact copy of a historical French château near Paris.

DANIEL GRAY REID.

Born in Richmond, Ind., August 1, 1858; became Vice-President of Second National Bank there; then went into the tin plate industry, and in 1895 became one of the organizers of the American Tin Plate Company, afterwards merged in the United States Steel Corporation; removed to Chicago in 1897, and to New York in 1899, and was one of the Executive Committee of the United States Steel Corporation when organized in 1901; also became a director and leading spirit in the Rock Island Railway Company in association with the two Moore brothers, William H. and James Hobart, the Chicago reorganization lawyers. All three are now residents of New York.

THOMAS FORTUNE RYAN.

Born in Virginia, October 17, 1851; came to Wall Street in 1870 from Baltimore and the drygoods trade; became prominent in the consolidation and extension of metropolitan street railroads, and also gas and electric light systems here and in Chicago, and in the American Tobacco Company, and later bought control of the stock of the Equitable and the Washington Life Insurance companies; has been director of many other corporations, and is also Vice-President of the Morton Trust Company.

JOHN WARNE GATES.

Born at West Chicago, Ill., 1855; kept a hardware store there; then became salesman in Texas for barbed wire; later established the Southern Wire Company in St. Louis and Braddock Wire Company near Pittsburg; after absorbing two other companies, sold out to Federal Steel Company, which was then absorbed by United States Steel Corporation. He thus acquired great wealth, and became a large operator in Wall Street, and organized the firm of C. G. Gates & Co., now dissolved. After buying control in the open market of the Louisville & Nashville Railway, he sold it to J. P. Morgan & Co.

AUGUST BELMONT.

Born February 18, 1853; son of the late August Belmont, and head of August Belmont & Co., bankers, and New York representatives of the Rothschilds; is President of the Interborough Rapid Transit Company and other corporations; also of the Coney Island Jockey Club and other turf organizations, and keeps up a large racing stable, is also a director in a number of banks and railways and other companies, and politically, like his father, a leading Democrat; is a member of many clubs and associations; graduated at Harvard in 1875, and has a New York residence at 44 East 34th Street, but lives much of the year at his country home at Hempstead, Long Island. He is well known, too, as the financial director of the Belmont Tunnel, across the East River, between New York and Long Island City.

WILLIAM H. MOORE.

Born in Utica, N. Y., October 25, 1848; located in Chicago with his younger brother, James Hobart Moore, in 1873, and both were admitted to the Illinois bar, and practiced as W. H. & J. H. Moore, making a specialty of reorganizing corporations; reorganized the Carnegie Steel Company, and formed the four corporations in “the Moore group” that were absorbed by the United States Steel Corporation; later controlled the Rock Island and other railway and industrial corporations, partly in conjunction with Daniel Gray Reid.

ANTHONY NICHOLAS BRADY.

Born at Lille, France, August 22, 1843; came to the United States with his parents when a child; opened a tea store in Albany in 1864, and afterwards other tea stores there and in Troy; became a promoter and director of gas and electric light corporations in Albany, Troy, Chicago, New York, and other cities, and, later, of street railway companies in Brooklyn and elsewhere; acquired a controlling interest in the People’s Gas Company of Chicago and a very large one in the Brooklyn Rapid Transit Company, into which he merged his Brooklyn companies; is also a large stockholder in the American Tobacco Company and many other industrial companies; resides at 411 State Street, Albany, but his office is at 54 Wall Street.

STUYVESANT FISH.

Son of the late Hon. Hamilton Fish, Governor of the State of New York and Secretary of State in General Grant’s Cabinet. Born June 24, 1851, at New York, N. Y. Educated at Columbia College, New York, graduated 1871. Entered railway service October 1, 1871, after which he, up to June 20, 1872, became clerk in the Illinois Central Railroad, New York office; June 20 to October, 1872, secretary to president of same company; November 1, 1872 to December 31, 1874, clerk with Morton, Bliss & Co. at New York, and Morton, Rose & Co. at London; January 1, 1875 to March 15, 1877, managing clerk Morton, Bliss & Co., holding their power of attorney; December 14, 1876 to March 6, 1879, member New York Stock Exchange; March 16, 1876, elected Director Illinois Central Railroad, and appointed treasurer and agent for purchasing committee New Orleans, Jackson & Great Northern Railroad; November 8, 1877, elected secretary Chicago, St. Louis & New. Orleans Railroad; and March, 1882, vice-president Chicago, St. Louis & New Orleans Railroad; January 7, 1883 to April 2, 1884, second vice-president Illinois Central Railroad; April 2, 1884 to May 14, 1887, vice-president; May 18, 1887 to November 7, 1906, president same road; President American Railway Association April 27, 1904 to April 25, 1906; Chairman Seventh Session International Railway Congress, Washington, D. C., May, 1905. Elected Director of the National Park Bank, March, 1883, and so remains; elected a Trustee of the Mutual Life Insurance Company of New York in the year 1888 and continued as such until February 23, 1906, when he resigned. What Mr. Fish did for the Illinois Central Railroad Company while its President, is shown in the following extract from the London Statist, and also in the Annual Reports of the Directors of the Company, which make a marvellous exhibit of Mr. Fish’s able and sagacious management during his long régime:

The Illinois Central is the most important of the systems running north and south between Chicago and the Gulf of Mexico. At one time its prosperity chiefly depended upon the cotton crop; but although this crop still gives it a large traffic, its prosperity has been built up by the acquisition of a large share of the grain and maize traffic. In the old days corn, or maize, was sent through the Western States for shipment via Boston, New York, and Baltimore, but the Illinois Central has now succeeded in diverting a vast portion of it to New Orleans. It now derives its revenue from carrying a large traffic at low rates in competition both with the Eastern lines and with the water transit of the Mississippi; In recent years the Company has built extensions which now enable it to participate in the coal and iron ore traffic required by or originating in the Birmingham iron district. The Illinois Central has always enjoyed good management. In its early days, when the accepted principle of railway working was to charge high rates and to carry very little traffic, its policy conformed to that of other well-managed undertakings. For the past twenty years its policy has changed; it has sought to render to the public the maximum of service for the lowest possible rate. The success of this policy has exceeded all expectations. In the twelve months to June 30th last the Company carried traffic at a lower rate than ever before, and yet obtained a record profit, both actually and relatively to its capital expenditure. This success has resulted from good management, economy of operation, and economy of capital expenditure.

GOVERNOR HUGHES AND WALL STREET.

In respect to the present agitation at Albany, as recommended by Governor Hughes, to investigate Wall Street methods, I do not hesitate to say that as the head of the firm of Henry Clews & Co. I am perfectly willing at any time to allow a representative, appointed by either the Federal or State authorities, to examine the books of my firm, as the result of such an examination can reflect nothing but credit on our business methods. I should, however, object and refuse to show, in any instance, the names of our customers, as our relations with them are confidential and will not be betrayed. Ever since our firm was established we have made a practice of issuing notices of purchases or sales to clients, giving in each case the name of the broker from whom bought, or to whom sold. This is now, I believe, the custom in other offices, and is a guarantee that brokers execute the orders on the floor of the New York Stock Exchange.

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LXXIV. NEEDED PUBLICITY AND REFORM IN CORPORATIONS

Years ago I saw the inevitable end of the methods of some of the unscrupulous managers and manipulators of corporations, and began to agitate the employment of certified public accountants to examine into, and report to the stockholders, the true condition of the companies involved. Had my suggestions been adopted there would have been little cause for the recent investigation by the government officials, as the reform now sought would have been accomplished long before the present stringency of money became a disturbing element all over the world, and would not have led to the semi-panicky conditions which prevailed so disastrously in 1907. An address on “Publicity and Reform,” which I delivered before the Wharton School of Finance, University of Pennsylvania, in April, 1906, includes my urgent adoption of the policy I have referred to, and reads as follows:

We live in a progressive age, and we are at present passing through a period of salutary business reform. This reform means improvement, and business men of all kinds should help and not retard it. The banking, railway, and insurance communities should, in particular, do all they can to promote it and invite the fullest publicity as to their transactions and methods of doing business. In this connection the opposition developed in the New York Legislature to the investigation of the banks was a mistake of judgment, because it was calculated to excite distrust, whereas willingness to submit to thorough investigation would allay it.

This opposition drew more public attention to the agitation for a general bank department examination than would otherwise have been attracted to it, and the unwillingness to submit to it suggested that there was a screw loose, or something to conceal in connection with some of the State banks; and that they were therefore vulnerable to attack, or at least open to criticism. This suspicion those concerned should have avoided by not only boldly facing the legislative music, but inviting it and leaving everything open and above board. Corporations and banking and mercantile firms that become at all objects of suspicion should, in their own interests, speedily clear themselves, by inviting the fullest examination and publicity. Unsoundness and irregularity, if such existed, would thus be exposed and weeded out, instead of being nursed in secret, and so doing harm and impairing confidence in corporations and firms perfectly sound and regular in their methods and practices. The sound concerns would stand better than ever after passing through this ordeal of publicity. The New York Legislature, as well as the Legislatures of the other States, should respond to the popular agitation for publicity by passing laws requiring all corporations, including banks and trust companies, to make at least semi-annual reports of their condition, certified to by registered public accountants, with power invested in the State Superintendents to order special examinations by such accountants, at any time, when deemed necessary; that is, whenever they were suspected of being unsound or irregular in their business methods. This should be done for the protection of others as well as to clear them of suspicion and restore their credit, if found to be sound and straight. Only the insolvent and the crooked would have anything to fear from this wholesome publicity.

In this way disaster might be averted and impaired confidence promptly restored. I lay stress upon the employment of skilled accountants because the certified results of their examinations would be accepted as conclusive of the actual conditions being as they stated or described. They would speak with authority. It should be made a felony for an accountant to make a false or misleading report, and he should ever after be disqualified from practising.

To meet the growing demand for them, every college and university should have a department for the special training of accountants, who on graduating should receive a diploma or degree, as in the medical or legal profession. Already the position held by certified accountants is high, but it should be raised still more by the action of the universities and colleges. Some of these have established departments for accountants, where the students undergo thorough training by men who have had practical experience in the profession, but all institutions of learning ought to have them and maintain them in a high state of efficiency in view of their importance to the business community. The opposition to publicity shown by the New York State banking interest, as represented in the Legislature, where it has choked off probing, has thereby aroused fresh suspicions and much adverse criticism. It is not surprising that many are led to suspect that there is much concealed that ought to be revealed.

The strong desire for secrecy in the management of corporations, especially with life insurance companies, is obviously in defiance of public sentiment, and the Legislature should now make the house-cleaning thorough while it is about it. If it does less it will fail in its duty.

It is indeed very surprising, under the circumstances, that the officers and trustees of the great life insurance companies should have supposed that anything short of complete cleansing and purification would satisfy their policyholders and the public.

The bankers of the country are, more or less, intimately concerned in seeing this Augean insurance stable thoroughly cleaned out, for, unless it is, distrust will linger, and the life insurance taint will, more or less, continue to extend to the banks, bankers, bond dealers, and trust companies, with which the life insurance companies necessarily have to do business.

For the banking interests to virtually ignore the past, and say to the life insurance companies, “Go, and sin no more,” would be pusillanimously evading the requirements of the situation. The cloud that drifted over Wall Street from the insurance investigation must be entirely dispersed by the fullest investigation and publicity and the establishment of a new regime in insurance management and its banking methods and affiliations.

It is the duty of life insurance trustees to co-operate to this end, and for them to refuse to do so is to imply consciousness of their own inability to stand the searching ordeal. If such there be, owing to their purchases or sales of securities, in connection with their respective companies, or any other doings that cannot bear the light or are open to criticism, they should be ventilated and exposed without fear or favor.

The efforts to smother further life insurance investigation, which had their counterpart in the opposition to the proposed banking department investigation, should be frowned down by public opinion, both in the interests of morality and good business practices. The banks and the banker should, like Caesar’s wife, be above suspicion, and not less so the life insurance manager and trustee.

Turning to the railways, we find the need of stricter laws in matters that favor a few at the expense of the many, as, for instance, in the giving of rebates. To prevent these, not a mere fine, which can be easily paid, should be imposed, but the offence should be made a misdemeanor, punishable with imprisonment. Railway officials would then, with the danger of an indictment and a term in prison before them, hesitate to violate the law. For their own reputation, as well as for the sake of their families, they would be likely to avoid that secret and unlawful rate-cutting, disguised by the payment of rebates, which has done so much in the past to foster unholy monopolies and crush competition to the ruin of thousands.

In the lime-light of publicity the irregular rebate practices of the railways, for the benefit of large and favored shippers, would be impossible; and equally so would have been the go-as-you-please and extravagant management of the life insurance companies as revealed by the insurance investigation. Under the new order of things, regulated by stricter laws, it should be made impossible for these irregularities ever to occur. The death-knell should also be sounded by these stricter laws and reforms of much of the “graft” that has been epidemic in political and business life. Publicity of accounts would be a protection to all solvent concerns and expose and eliminate the unsound and the fraudulent that would otherwise be a menace to them, and it should be welcomed by all who have nothing to fear from such publicity.

We are passing through a reform—yea, a revolutionary period in business affairs. But good will come out of it, for with our improved business methods will come a higher sense of responsibility and a keener perception of duty, which cannot fail to inspire correspondingly greater confidence and produce more certain results. We shall thus have more conservatism in business and fewer speculative hazards and crookedness than before.

Therefore, let the march of reform be unimpeded, for it will lead us to a higher financial and commercial eminence than even that on which we already stand, and hasten the time when this country will be the world’s greatest financial and commercial centre.

It would seem that many need more conservatism and prudence in their business ventures, and they would be the better for having the lime-light of publicity thrown on them. When the sky-rockets of the business world fall they are not the only sufferers, for they injure others who are perfectly sound and conservative by creating distrust of all.

The accounting and publicity I advocate would expose, check, and prevent the irregularities and the one-man power abuses that have ended in so many collapses. The one-man control of large corporations must come to an end. An ounce of prevention is better than a pound of cure.

Corporations, too, should show that they have souls by not neglecting the welfare of their employes. They should promote their health by giving them healthy surroundings where they work, and also by making graduated provision for old age service, or pensions in case of disability, after long service. This, or giving them a share in the profits of the business, would do much to narrow the gulf between labor and capital.

The one-man power in large corporations, with a lot of dummy directors subservient to it, should also come to an end. Dummy directors are no better than so many decoy ducks that mislead the public. They are directors who do not direct, and are not expected to direct by those in control who selected them for election. They are consequently a false pretence. No man ought to accept a place as director or trustee of an institution, or corporation, particularly in a banking, railway, industrial or life insurance company, who does not fully appreciate the responsibility of the position and the care and vigilance it demands, and intend to faithfully and conscientiously perform its duties. To intentionally become a dummy director is reprehensible, and directors in dealing with the officers of their corporations should have opinions of their own and not be afraid to express them. They are not alone responsible for their own errors or wrongful acts, but for failure to expose and put a stop to the wrongdoing of the officers or employees under their control, and they should not assume such duties when they cannot properly attend to them.

I once knew a man of very great business renown, who during the last thirty years of his life was much sought after because he possessed the qualifications necessary to make him a most satisfactory dummy or dumb director. Hence he was connected with a very large number of companies. He was a man of wealth, retired from business, and had great capacity, but it was of the avoirdupois kind. His chief qualification consisted in his always attending punctually all the meetings. He came early and stayed till the end. He watched closely to determine which way the majority vote was going and always went with it. He was never known to open his mouth, except when the luncheon was served after the directors’ meeting had adjourned. He was much lamented by corporation managers when he died. He was their favorite director, on the ground, as claimed, he gave no trouble and was perfectly satisfied with the result of every meeting. When he was handed his five-dollar gold piece for attendance it caused him to go home rejoicing. I cite him as a specimen brick among dumb and dummy directors.

Directors should make it their business to learn all that is going on in the corporations and institutions that they direct, so that they may qualify themselves to act intelligently, instead of in a blindfolded way, as is too commonly the case. They should assert their rights, and direct in fact as well as in name, but of course necessarily leaving all the details to the officers. They, too, should avoid grinding axes of their own at the expense of their companies, and co-operate with both State and Federal officials in the strict observance and enforcement of the laws, and never connive or wink at their evasion.

All these influences for the better would promote public confidence in our ways of doing business, and indirectly also contribute to the stability of our monetary position. What we greatly need is a more stable money market in Wall Street. Such erratic changes in the rates for Stock Exchange loans that we sometimes see would create a convulsion in Europe if they were possible there. But as they are not possible there, why should they be here? We are destined to ultimately become the monetary centre of the world, but that cannot be till we acquire the stability of the Old World in interest rates.

A freak money market, jumping up to absurdly high rates and then down again, is as dangerous as it is intolerable. It is inimical to the proper transaction of legitimate business, and a disturbing factor that should be made as impossible in New York as it is in London, Paris, or Berlin. What we need, among other things, to prevent it is more care and conservatism in banking circles. In the European money centres the rates for money rise and fall in response to supply and demand, just as they do here, but within narrow limits beyond which they never pass. There is no good reason why it should not be so with us.

It is to be hoped that the eminently well qualified members of the committee appointed by the New York Chamber of Commerce—consisting of Messrs. Vanderlip, Conant, Straus, Claflin, and Clarke—will reach a solution of the problem of the money market and define how far its vagaries and irregularities are owing to a want of sufficient currency, capital, or credit, or sudden and excessive demands for loans, consequent on excessive activity in speculation, or unwillingness to lend in times of distrust and panic.

In European countries monetary stability can always be relied upon; and that element of stability, which our money market now lacks, must exist here before we can command the confidence of the world as the world’s financial centre. But we are now rapidly taking steps in the right direction, and the reform movement in business and legislation can come none too soon for our national welfare. Let the good work of reform go on and prosper, for from it we shall reap an abundant harvest in the future.

There was no good and sufficiently sound reason why money, on call, should have loaned in Wall Street at rates ranging from 100 to 125 per cent. per annum—as it did in December last, when in other cities all over the country it loaned no higher than six per cent. These money spasms, while local in their actual effect, exert a disturbing and demoralizing moral influence which is far-reaching. Such pernicious activity in the money market is not natural. It is due to artificial causes and ill-regulated methods affecting our local supply and demand.

For the rates of interest to be leaping wildly up and down, in the loan crowd of the Stock Exchange, and changing violently every few moments, according to the shifting bids and offers of the excited borrowers and lenders, would seem to be absurd and laughable enough for opera bouffe. But in the banking and Stock Exchange business it is a serious evil, involving large results.

Such an abnormal money market is, of course, not very often seen, but it occurs often enough to make it important for us to study its causes and seek a remedy for such monetary excesses. It is indeed a topic so serious as to call for the gravest consideration. Yet neither the stringency nor these minute to minute, or hour to hour, fluctuations were caused by any fluctuation going on in the volume of the currency or any except local influences.

What we have to guard against and prevent is these occasional spasms. Against the slow general rise and fall of interest rates for money of from, say, 2 to 6 per cent per annum and vice versa, there is nothing to be said, for the movement is a legitimate one, a natural result of the varying supply and demand. We see it in the Old World, as well as the New World, but such rocket-like soarings, and such eccentric ups and downs as Wall Street has experienced from time to time, are peculiar to itself. It must, however, outgrow them, and the sooner it does so the better. It is not my purpose in this address to show how the end in view may be best accomplished, but that it can and will be accomplished within no long time is certain. The fault is not so much due to the want of elasticity in our currency system as to our local methods of doing business in stocks and lending and borrowing money to carry them.

The causes of general monetary stringency are always apparent, but the cause of the local scarcity of cash that sends the money rate up 5, 10, 20 or even 50 per cent in an hour or so among a small group of borrowers and lenders in the Stock Exchange, could evidently be avoided, as it is in Europe, and it is the business and duty of both borrowers and lenders here to avoid it.

One thing tending to produce occasional local stringency is that our money market has to contend with the evil effects of the New York Sub-Treasury, or rather the Sub-Treasury system, that locks money up that ought to be kept in circulation. Every Sub-Treasury acts practically as a Government bank, just as the old United States National Bank in Philadelphia did, and takes in all the money it can get, but pays out none, except on Government vouchers. So it does not perform all the functions of a bank, and we should have a more elastic currency if the Sub-Treasury system were abolished, which it doubtless will be in time. Theoretically, we have no United States National Bank, yet practically we have one in every Sub-Treasury. Until Congress amends the Sub-Treasury and National Currency laws, the banks and trust companies could by a united understanding prevent extreme money rates, by agreeing not to charge in excess of 10 per cent interest; or, what would be better still, 7 per cent, on call loans during periodical money strains. While they would lose some immediate profits, they would be abundantly compensated later on by making New York a greater, safer, and stronger financial centre, which would materially increase their business.

In Germany, emergency currency may be issued by the banks in times of stringency. This, in effect, releases them from the limit on reserves, just as, in panics, a Government order in council releases the Bank of England from the limit placed on its note issues, and allows it to issue its notes to an unlimited extent. The consequent inflation of the currency under both the German and English systems, and the revival of confidence produced by it, brings relief in the money market.

But our only way of obtaining similar relief is for the Secretary of the Treasury to order Treasury deposits to be made in National banks on the security of United States bonds, or if he is willing to accept them, first class State or city bonds. Assuming the banks to have the bonds, the Treasury may not always have the money to spare for this purpose beyond its proper working balance, and at the best it is a make-shift expedient.

That we need a more elastic currency is indisputable, and also such changes in our custom of borrowing and lending money on collaterals on the Stock Exchange as will secure stability in rates of interest there, even in times of stringency. The time will come when the circulation of the National banks will be based on gold, instead of United States bonds, and in that way our monetary system will more closely approach that of the principal European nations. But we need not prepare to cross the bridge until we come to it.

With regard to the other matters referred to, it is always well to strike while the iron is hot, and at present the reform movement in legislation affecting life insurance and banking concerns is at white heat, not only in the State of New York, but elsewhere, and it should be pressed forward until all the results aimed at are secured.

In the first place, to accomplish this the life insurance and bank investigations already in progress, or proposed, should be carried out to the fullest extent, and, through the employment of expert and independent book-keepers and accountants, made so thorough as to leave nothing hidden or in doubt. The results in detail should then be promptly published, and in a form that all could understand, so that the public would know the plain, unvarnished truth. In this way rumors and suspicions of underhand doings, bribery and corruption, graft, fraud, deficiencies in accounts, misappropriation of funds, and concealed insolvency, would, if not confirmed, be contradicted and swept away, thus leaving the concerns before under suspicion in all the better credit and standing.

Not only should all this be done now, but the State Legislature should be equally prompt in passing the laws necessary to maintain this high standard of publicity in the future, and making it mandatory upon the banking and insurance departments to order frequent examinations into the condition of all State banks and banking and insurance concerns by expert accountants, and publish their findings. All opposition to such investigation and publicity is of itself calculated to excite suspicion, whether it comes from banks, trust companies, life insurance officers, and trustees, or other concerns, or parties in interest. Industrial and other corporations of all kinds, including railways, ought also to be made, by mandatory laws, subject to stricter supervision and periodical examination as to their financial condition. Hence the Attorney-General of this and other States should be invested with new powers to this end, and the provisions of the laws should be made mandatory upon them. They should call for verified statements of earnings, profits, expenses, capitalization, indebtedness, dividends, property valuations, liabilities and assets, so that large corporations would cease to be blind pools, and fraud and misrepresentation would be checked by being exposed; and it is exposure and publicity which is most dreaded by those who prefer crooked ways to open and above board business methods and integrity of purpose. But those who have nothing to hide have much to gain from it, and should welcome the lime-light of this new era of publicity. Secrecy is only the defence of the weak.

The recent decision of the Supreme Court of the United States in the Tobacco and Paper Trust cases, that corporations cannot take refuge in secrecy, but must give testimony as to all their transactions, when required, even where it is self-incriminating, is a great victory of the people. It marks the beginning of a new departure in corporate management by enforcing existing laws, and requiring that publicity of accounts, which large industrial, railway, and other corporations, and most notably the large industrial trusts, have hitherto so strictly guarded against and avoided, after the blind pool fashion.

The decision is that the law as it stands, giving a witness the constitutional privilege of refusing to give testimony tending to incriminate himself, does not extend to or cover his refusal to produce books and papers that would incriminate his, or any other corporation, the immunity being wholly personal. He cannot, therefore, assert it either in behalf of a third person or a corporation, yet strange to say this clear and convincing reasoning has never been put forward by lawyers opposing the trusts. But it will make the way of the corporation transgressor harder in the future.

It opens the door and clears the way for a thorough, complete, and public examination of the affairs and accounts of the trusts. It removes the first loophole for their escape from the consequences of their unlawful acts, and from the exposure of their methods of opposing and crushing competitors. They will, therefore, become liable to prosecution under the Sherman Anti-Trust Law, and all unlawful combinations, schemes, and conspiracies will be effectually and permanently broken up.

This decision is pf such vast and far-reaching importance, not only to all directly concerned, but to the whole country, that its legal effect and its moral influence can hardly be overestimated. It will probably become as famous in the history of the Supreme Court as the Dred Scott decision; and it will prevent in future the miscarriage of justice for want of evidence against corporations, which has so frequently occurred in the past. It will also raise the moral tone of corporate management by enforcing publicity before refused, for the decision not only applies to all railway and industrial corporations, but banks, trust companies, and insurance companies of all kinds. It shows that a rigid enforcement of existing laws is alone necessary to correct many abuses of long standing.

The temptation that secret acts and secretive general management present to those disposed to wrongdoing and chicanery, malfeasance, misappropriation, and graft can easily be imagined; and it can also be as easily inferred that such management is apt to give rise to suspicions and rumors detrimental to the interest of the corporations concerned, and indirectly injurious to others. Honesty is not only the best polity, but a moral duty, and should be as much the watchword of corporations as of individuals, and no man should betray his trust for either love or money, whether acting in or out of a corporate capacity.

There is more permanent prosperity, as well as honor, to be secured by honest than dishonest means, and to quote the Bible, “What does it profit a man if he gain the whole world, and lose his own soul?” Yet unscrupulousness in high places of trust is often forced upon public attention. This should all be swept away as a debasing element in business life, for dishonesty, like the upas tree, casts a blighting influence wherever it is.

The corruption of judges and juries and the bribing of legislators should be more abhorrent than larceny itself to every captain of industry and all corporate officials, who should have equal respect for the truth and their own honor. Great wrongdoers should be no more exempt from punishment than small offenders and mere millions should furnish no protection to them.

Great fortunes accumulated by monopoly and oppression, and other dishonest means, are no credit to their possessors, but really a reproach, and the abuse of power by them is a great national evil. Every business man should take pride not only in his regard for honesty, truth, and fair dealing, but in his own personal honor, whether he is acting for a corporation or himself. We are now on the highroad to the correction of a multitude of abuses and the country is to be congratulated upon this salutary movement for improvement and reform in our business methods. Our great remedy is PUBLICITY, and the enforcement of the law.

The immensity and grandeur of our national progress and achievements justify us in looking forward to a still greater and grander development in the future and still more splendid triumphs of mind over matter than we have already accomplished. I do not say with the spread-eagle Fourth of July orator:

“No pent up Utica controls our powers, But the whole boundless continent is ours.”

Yet it cannot be ignored that no other nation has such a magnificent career of expansion, development, and progress before it as the United States, united as it is by telegraph and telephone and our vast network of railways, from the Atlantic to the Pacific, and Maine to Florida, in unbroken continuity.

With the growth of our population, which even now exceeds eighty millions, we shall grow more and more in national importance and wealth, not only in material wealth but in the higher products of an advancing civilization, in the arts and sciences and literature, and all that embellishes and glorifies mankind. Therefore we should, as we go along, constantly endeavor to correct errors, shortcomings, and abuses, and prune away rotten and unsound timbers in our public and business life, and make the whole machinery of business and activities of all kinds—trade, banking, insurance, manufacturing, legislative, and the various professions and mechanical industries, work as legitimately, honestly, smoothly, and harmoniously as possible. The way to do this can be best paved by promoting public spirit, and sweeping away the opportunities for business wrongdoing in secret, such as rebating, by wise laws properly enforced, and backed by public opinion, yet laws not oppressive, unjust or too inquisitorial. This would compel the “crooks,” “grafters,” “rebaters” and “competition crushers” of the business world, who have schemed in darkness, and shunned the light, to come out into the open view, and this publicity alone would be a perfect cure for many great evils. So let us have more light—the light of PUBLICITY.

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LXXV. THE MONETARY SITUATION AND ITS REMEDIES.[3]

Footnote 3:

An address to the West Virginia Banking Association at their 13th Anniversary Meeting, at Elkins, West Virginia, June 19, 1906, by Henry Clews.

The rapid growth of our population, the great activity of all our industries, the general prosperity of the country, apart from the terrible calamity at San Francisco, and the immense speculation going on in land and mining ventures, especially in the West, are the underlying causes of the severe monetary stringency that New York has lately experienced. These influences have kept money to a much larger extent than usual active in the interior and prevented its concentration not only in New York and the other Eastern monetary centres, but at the Western centres.

Chicago in particular found that money, instead of returning there from the interior in good volume, as it usually does in January, February, and March, continued this year to be sent to the interior by the banks there at an average rate of $12,000,000 a month during these three months. This movement was not so much owing to the land and mining boom as to the immense absorption of money in the various manufacturing, mercantile, and other expanding business interests all over the West and South. So great was, and still is, the activity in these directions that speculation in grain, provisions, and stocks has been more neglected in the West than for several years, as the narrowness of the markets there has shown.

To show more precisely the effect on the money markets of this unusually great speculative and industrial activity it is only necessary to say that, during this first quarter of the year 1906, the Chicago banks steadily and heavily lost in deposits, while their loans kept increasing. A comparison of the condition of the national banks in that city on April 6th, as reported to the Comptroller of the Currency, with their condition at the date of their previous report on January 29th, showed an increase in their loans of $8,625,237 (or 4.11 per cent) and a decrease in their deposits of $6,773,490 (or 2.11 per cent) and a decrease in cash resources of $14,628,960, or 10.38 per cent. These figures explain why money was so scarce in New York. The West had none to send us, although there is more money in circulation than ever before. If we go back to the condition of the same Chicago banks on March 14th, 1905, and compare it with their report referred to, we still find that their deposits decreased $8,687,117 and their cash resources $7,970,318, while their loans increased $1,599,774; and in their reduced cash resources the Chicago banks reflected the condition of the banks in all the other large cities of the West, Northwest, and Southwest. There has been a rapidly rising volume of trade and land and mining speculation there for more than a year, and enormous activity in new industrial enterprises. In the Southwest, particularly, the growth of banking has been not only unprecedented but enormous. I include in this designation the States of Missouri, Arkansas, Louisiana, Texas, and Kansas and the Territories of Oklahoma, Indian, New Mexico, and Arizona. The last decade has witnessed in this section of our country more extensive and rapid material development than was ever before seen anywhere, either in the United States or elsewhere, and this expansion in banking was in response to that material development, and therefore had a legitimate foundation in business requirements. American spirit and enterprise, and Western push, overcame all obstacles in spreading civilization and creating trade, especially in the new settlements.

In the five years ending with 1900, 101 new national and other banking institutions were established in these nine States and Territories—with a consequent increase of $94,500,000 in individual deposits and $150,300,000 in aggregate resources, and in the next five years ending with 1905 no fewer than 1,415 new banks and banking institutions were added to the number—a resulting increase of $73,400,000 in capital and surplus, $383,750,000 in individual deposits and $670,350,000 in aggregate resources. Thus, in ten years, there was an increase of 1,516 in the number of banks, of $137,000,000 in capital and surplus, of which $79,000,000 was surplus, of $478,000,000 in individual deposits, and of $820,750,000 in aggregate resources.

This enormous banking development reflected and stimulated the enormous development of the country, and aided trade fully as much as trade helped the banks. The one kept pace with the other, and marvelous progress in both was the result; and this progress continues, and will continue indefinitely long under the stimulus of the rapidly increasing population of that still sparsely settled section.

This banking development is of incalculable benefit, both locally and generally, for its influence is far-reaching. The drain of money from the outlying districts, including New York, to move the crops, is reduced as banking facilities in the West and South increase.

In the South, during the same period, there has also been very great commercial and banking development, with the banks and trade going hand in hand to help each other, as in the Southwest. The South was never before so active and prosperous; and, rapidly as it is progressing, it will go on prospering with unabated vigor and enterprise, for it has entered upon a new era of prosperity and immense development of its material resources awaits it. In manufacturing and mining, as well as agriculture, immense opportunities are open to it; and before long the natural increase of its population will be largely added to by the white immigration that it needs. So the South has a bright and magnificent future.

This vast industrial and mercantile activity—this general business enterprise, this land and mining speculation, or boom, has extended, in various degrees, all over the United States, and the influence it has had on the money market in large cities, and particularly in New York, was only a natural and easily foreseen result. It has produced a corresponding activity in money, because of the greater demand for its use; and the real estate speculation, the vastest we have to deal with, is still increasing.

The boom is almost entirely in land and mostly in vacant plots, or lots, suitable for building purposes; but there is also a very active speculation in improved property, and much speculative building. The amount of money practically locked up in this land speculation is much larger than is generally supposed.

Statistics of 29 of the largest cities of the United States show that in the month of May they issued permits for the construction of 13,712 new buildings, to cost $55,074,761, against only 12,036 in May, 1905, to cost $50,791,738, an increase of 8 per cent, and a similar increase was shown in each preceding month of 1906. The May increase was greatest in cities remote from the Atlantic Coast; in Portland, Oregon, it was 309 per cent; in Tacoma, 111 per cent; in Seattle, 30 per cent. But the San Francisco catastrophe was evidently the main cause of the large increase in Portland and Tacoma. Yet the increase in Omaha was 75 per cent, in St. Paul 49 per cent, in Duluth 110 per cent, in Louisville 50 per cent, in New Orleans 47 per cent, and in Chicago 39 per cent. These figures, dry as they may seem, are eloquent in their suggestiveness of the extent of the demand for money from this one source, the land and building boom.

Gold and silver mining speculation, too, last year began to assume the dimensions of a boom in Nevada, and all the old metal and mineral mining camps, and many new ones in other States, are, like the Lake Michigan copper regions, scenes of active speculation in properties, as well as busy with mining, and hosts of speculators are their own bankers, carrying large amounts of currency in their pockets.

The money that usually returns to the money centers is thus widely scattered and too busily employed to return. So we have to deal with a period of prosperity and industrial activity that is something more than normal. But—without referring to the heavy drain of cash for the relief of San Francisco, which was offset by gold imports—although money was scarce in New York, owing to this enormous activity and general prosperity that kept it moving from hand to hand, it was not scarce enough to justify the excessively high rates we often witness on the Stock Exchange. These were serious and hurtful, and to guard against such vicissitudes in our money market every member of the Stock Exchange and every banker and bank officer should use his influence.

How far the Chamber of Commerce Committee on the Reform of the Currency will succeed in providing remedies for the monetary situation remains to be seen. But from the twenty-seven questions it has sent to bankers and others it is apparent that it contemplates no fundamental change in our currency system. Inferentially, it will not interfere with United States legal tender notes, nor with United States bonds as a basis for the circulation of the national banks. Yet both bases are indefensible on sound economic principles. The issue of greenbacks was merely a war measure, and intended to serve only a temporary purpose; instead of which we have made it permanent, so keeping the Government in the banking business with its war currency system.

There can be no question as to the false bottom on which the national bank currency rests; for paper, that is, paper money, should not be secured by, or redeemed in paper, even when that paper is as indisputably good as United States bonds. All our paper money ought to be based on readily convertible assets and redeemable in gold. Bonds, even United States bonds, by which national bank notes are now secured, are only evidences of debt, and the time will come when these will be liquidated, and the sooner the better.

The committee probably thinks that the existing order of things, notwithstanding its fundamental errors, is too deeply rooted and strongly fortified to be materially changed without danger of the remedy proving worse than the disease. It consequently favors more national bank currency on the present basis. Branch banks and rediscounting for small banks by large banks are also favored. The committee’s questions indicate, however, that it favors the abolition of the Sub-Treasury system, and to that result it should resolutely bend its energies. At present the Sub-Treasuries are practically banks, like the old United States Bank at Philadelphia, with the important difference against them that all the money they take in remains locked up in their vaults till paid out on Treasury drafts. The evil effect on the money market, and particularly on Wall Street, of thus withholding money from circulation in periods of stringency has been too often felt. It was more than usually conspicuous and severe during the late tight money ordeal, owing to the Treasury receipts very largely exceeding its disbursements. This greatly aggravated the scarcity of money in New York, due to other causes, and resulted, in Wall Street, in the rates for call loans ranging at times, within the last six months, with rapid and eccentric fluctuations, from 15 to 30 per cent, and on one occasion touching 125 per cent. We have here a phenomenon entirely distinct from ordinary monetary conditions.

These extremely high and highly fluctuating rates are, it is true, peculiar to the New York Stock Exchange, but they are none the less a great evil, and they acquire national and even international importance from the fact that New York is the financial center of the country and the New York Stock Exchange the barometer of financial values for the whole United States.

However much our commanding position may in other respects fit New York to be the world’s financial center, it cannot aspire to and secure that position of power so long as it is the scene of these violent fluctuations in the rates of interest for call loans on the Stock Exchange. Measures should therefore be taken not only to prevent them, but to make their recurrence impossible; and how this can be best and most efficiently accomplished is a matter for very serious consideration.

That it can be accomplished is evident from the entire absence of any such violent rate oscillations in the money markets of Europe. There the rates of interest fluctuate slowly within a reasonably narrow range, generally between 3 and 5 per cent, the extremes being 1 or 2 above, or below, these figures. Such unreasonable eruptions in the money market as we have sometimes seen in the loan crowd of the New York Stock Exchange were never seen, and would be impossible, in London, Paris, Berlin, or any other European capital. Why, then, should they ever occur, or be possible here?

In response to questions propounded by the Chamber of Commerce Committee I would say that, as the Sub-Treasury system is a disturbing factor in the money market, provision should be made by Congress for the regular deposit in national banks of surplus Government money above its regular working balance of fifty millions, the banks to pay interest at 2 per cent per annum thereon.

Bank notes, in my opinion, are a form of bank obligation the same in principle as bank deposits, payable on demand, and these notes, as the most convenient form of credit, should be released as much as possible from restrictions not necessary to secure their safety, acceptability, and redemption in gold, or United States legal tender notes, for so long as the latter may be kept outstanding.

In seeking increased flexibility for our currency I would not suggest anything that would impair the value of United States bonds as a basis of circulation; but it deserves consideration whether new currency might not be issued by moderately increasing, above the par of the bonds but not above their average market value, the amount of notes to be secured by them. Then, too, why should not national banks be authorized to issue a fixed proportion of circulating notes upon their general resources, these to be secured by a guaranty fund? To induce the retirement of these notes when not needed, owing to money being superabundant at low rates, this asset circulation could be made liable to a graduated tax. The proportion of notes to capital that should be allowed, and the amount of the tax, are matters upon which bankers differ, but I favor strict moderation in both. This asset currency, under moderate restrictions, for use under ordinary conditions, would be far preferable to any emergency circulation, ISSUED UNDER A HIGH TAX, although Secretary Shaw recommended it in his report for 1905.

As the taxes collected upon the circulation of national banks from 1864 to the end of June, 1905, amounted to $96,220,997, and the failed banks, during that period, had outstanding only $17,295,748 of notes, and the dividends paid on their claims averaged 77.95 per cent, it follows, at the same ratable proportion of loss, that the deficiency on account of their notes would have been only $3,813,712, or 22.05 per cent of their total circulation. So in the light of this experience I see no great risk in a guaranty fund, consisting of the taxes paid upon circulation, nor do I see why it would not be sufficient to redeem all the notes of failed banks.

I would make the asset currency a first lien upon the assets of the issuing banks, and allow the banks to redeem their notes at appointed redemption places in the large cities. This would save the trouble and delay of sending them to Washington, and by facilitating redemptions when money was easy, give more ebb and flow to the currency and tend to prevent excessive speculation in times when there is a glut of money. Under the Canadian banking system there are several central redemption cities for bank notes; but I would not, as is the case in Canada, limit the right to issue notes to banks of not less capital than $500,000. There is safety in numbers, in regard to banks as well as other matters. Then, too, it would be well to make all the Sub-Treasuries in the country useful as national bank note redemption points, because it would contribute to the elasticity of the currency in the same way that it does in Canada, and doubtless Congress would favor such a measure.

The proposition to establish a new bank in Wall Street with $50,000,000, or even more, capital, or to increase the capital of an existing bank to that extent, to serve the purposes of Stock Exchange borrowers, and regulate rates of interest, after the manner of the Bank of England, is deserving of no consideration whatever. It would merely excite and provoke the jealousy and opposition of other banking institutions, and create a sort of monopoly with special privileges, without securing the end in view. A Bank of Banks is not what we want, nor do we want a revival of the old United States Bank.

Such a bank as the Bank of England, or the Bank of France, could not be created here, either in a day or a generation, for those time-honored institutions are the growth of ages. They are very much older than any of the other banks there; and, under the control of their respective governments, they have grown up with their countries and become practically, although not by ownership, government institutions. Hence their prestige and power, and the impossibility of other banks superseding them.

It may, however, deserve consideration whether the New York Clearing House might not exert power in regulating rates of interest similar to that exercised by the Bank of England, providing the banks belonging to it would unite to give it that power; and is there any reason why they should not? Even without any formal or concentrated action in this direction, outside of the Clearing House Committee, it could appoint a committee to name every week, or oftener when necessary, as the Bank of England does, a minimum rate of interest on call loans and discounts. It could also fix a maximum rate for each. This need not be compulsory; but even only as a recommendation it would have a powerful moral effect, and the Wall Street banks, if they approved of the innovation, would conform to it. The Clearing House could, indeed, after the formal approval of this regulation by its members, enforce its observance under penalties, if deemed necessary. In this alone, in my opinion, a practical remedy would be found for the high rate evil on the Stock Exchange.

But, at the same time, greater elasticity could be given to our national bank currency if Congress would amend the law so as to permit of currency being issued against specified bank assets, subject to the approval of the Comptroller of the Currency. This is a feature of the banking system of other countries, which has always worked very well and to the satisfaction of all interests; and what our currency urgently needs is greater elasticity.

Strictly speaking, according to economic principles, we cannot expect a perfect currency, with all the resiliency and elasticity possible in a currency, so long as bonds instead of gold are used as the basis of our bank circulation. Yet for security the bonds are, under present conditions, just as good as gold; and there would be more elasticity in the bank circulation based upon them if the restrictions imposed upon their redemption by the Act of 1882, which are now unnecessary, were removed. Indeed, the inability to promptly retire bank notes is one of the worst faults of our system, and Congress should repeal the restrictions without delay. If this obstacle in the way of resiliency were removed, and the unlimited retirement of bank notes permitted, we may rest assured that free expansion, when demanded, would quickly follow curtailment, and this ebb and flow of the currency would obviously be an elastic movement.

As it is, there is a great waste of banking power in our treatment of national bank notes and reserves. We have $544,765,959 of national bank notes, and only $337,130,321 of United States legal tender notes, and, setting gold aside, the redemption of the former in the latter is obviously absurd and inconsistent with sound finance and good banking. We see in the present system this $544,765,959 of banking capital absorbed and represented by non-reserve currency. The capital is perfectly safe, but it is locked out of any other use, and rendered inefficient for any other purpose. This calls for a remedy. The percentage of reserves to loans in national banks has decreased from more than 20 per cent in 1898 to less than 15 per cent. Hence the bank reserves require to be increased.

The law relating to the redemption of national bank notes in United States notes, or greenbacks, was passed when the greenbacks very largely exceeded the bank notes in amount, but the reversal of these conditions reminds us that the tail is now wagging the dog. This alone makes it clear that the law should be amended.

But beyond all this we should open our money market more to the rest of the world by establishing a new factor, which would always afford prompt relief in times of stringency, by giving us cable transfers of gold, instead of gold shipments, and of itself prevent abnormally high rates. Through this medium we could, instantly, practically draw gold from Europe whenever wanted, and Europe could do the same from us, when needed there. I refer to the establishment of an International Gold Transfer System, or Clearing House, to supersede and dispense with what I may call the old-fashioned gold see-saw. Gold in circulation is doing good work, but gold see-sawing across the ocean is going to waste. The custom of shipping gold from one country to another, in response to the ups and downs of the market rates for foreign exchange, not only reminds me of the forward-and-back movement in a quadrille, but suggests that, as the precious metal is rendered practically useless while in transit, it should not be used in a dance of that kind across the ocean. The subject may not seem to be very important, but it really is so, for “tall oaks from little acorns grow”; and it is surprising that in the march of modern improvement this method of settling international balances has not been superseded by a shorter, quicker, and cheaper cut to transatlantic adjustments. Bankers, in both hemispheres, are absurdly behind this progressive and electric age, in transporting gold from the New World to the Old, and vice versa, to adjust balances between them, whenever the rates of exchange show a profit in the transaction. That they could profitably dispense with it is obvious, as they could easily establish this transfer system, this international clearing house for gold, at very small expense. Thus the risk, and loss of time, involved in the old-fashioned method would be eliminated, while the new arrangement, being under their own control, would beyond peradventure serve every necessary purpose of the shippers, combined with perfect safety.

The disadvantage of shipping boxes or kegs of gold to and fro between America and Europe is apparent when we consider that it is a time-wasting see-saw performance, which involves the expense of packing, cartage, freightage, insurance, and loss of interest while in transit, and still greater loss due to abrasion consequent on sea transportation, to say nothing of bankers’ commissions, and risk of partial or entire loss by robbery, accident, or marine disaster; ignoring, moreover, the restraints it imposes upon our foreign trade.

All these disadvantages could be obviated and this handicap upon our commerce removed by a mutual-interest arrangement, between the leading banks in the United States and Europe, to deposit a sufficiently large amount of gold on each side of the Atlantic, and issue international clearing-house certificates and draw bills of exchange against the deposits. This gold could be counted as part of their reserve, if in their own vaults; or the Bank of England, in London, and the United States Sub-Treasury in Wall Street, could be used as the gold depositaries. We have a clearing house for bank checks in each of the large cities, and one also for the transactions of the New York Stock Exchange. London, too, has its bank clearing house. Why, then, should the clearing house system not be extended to international transfers of gold, so as to make them possible at any moment by cable-telegraph instead of the slow process of six-days transfers? In this way our international dealings would be quickened and extended and our financial and commercial relations become more intimate.

There is no good reason why we should unnecessarily treat gold as we do, when we can save time, money, and risk by keeping the metal where it is, and issuing certificates of deposit against it, and the use and transfer of which would serve as well as gold shipments.

The present custom becomes a ridiculous “chasse” across the Atlantic, when we see the same gold shipped to Europe, then shipped back to America within a few days after reaching its destination, without being unpacked, owing to sudden intervening changes in the rates of exchange, making it profitable for the former gold exporting country to import the metal. Such wasteful shilly-shally procedure would be likely to excite mirth in opera bouffe, but bankers who ship gold are very serious about it, and seem to be without enough perception of the ludicrous to see anything funny in its coming and going, although they feel the shoe pinch in its costliness in both time and money. As the world’s gold production increases the urgent need of this over-sea change will become more and more conspicuous, and its adoption will accord with the generally progressive spirit and methods of our telegraphic and telephonic age.

Had such an international gold clearing house existed the sagacious but unprecedented action of the Secretary of the Treasury, to relieve the money market by making deposits, as secured loans, in certain banks, to encourage and cover their prospective gold importations from Europe, the same to be returned on the arrival of the gold, would have been unnecessary. While this expedient has well served a temporary purpose, it is not to be relied upon as a permanent source of relief during monetary stress, and it involves a stretch of authority under the law that is open to grave objection. But, as it happened, the Secretary’s action, which was taken just before the San Francisco disaster occurred, proved particularly fortunate, and probably prevented a very serious aggravation of the stringency in the money market, owing to the heavy remittances to California. It was a piece of good luck that seemed almost providential, and the end justified the means. But it should always be regarded as only a fortuitous circumstance and temporary expedient, not as a permanent source of relief; and it emphasizes our need of a new international gold transfer system. Moreover, the benefit Europe would derive from it would be equal to our own.

The Secretary, under the circumstances, acted wisely in also increasing the Treasury deposits in the national banks, while the Government’s receipts were largely in excess of its disbursements, so as to offset, as far as possible, this preponderance of receipts, and lessen the drain of money into the Sub-Treasuries. But this method of relief is, too, only a temporary expedient, to remedy the evils of the Sub-Treasury system. While the Sub-Treasury system lasts Congress should authorize the Secretary to deposit customs, as well as internal revenue receipts, in the national bank depositaries, in time of stringency, when the Government’s receipts exceed its disbursements, and it has more than a sufficient working balance. The Government should, as a compensation to it, require the banks to pay interest at, say, two and one-half or three per cent per annum on such deposits, these not to exceed, in amount, 25 per cent of their paid-up and unimpaired capital, and to be returnable on demand, but without requiring these special deposits to be secured. They should, however, be made a first lien upon the assets of the banks.

If the changes above suggested were made, I am sanguine that they would prove to be remedies for the evils and disadvantages under which we now labor, and so increase the stability of our money market and improve and fortify the machinery of the whole monetary system, while giving more elasticity to the currency.

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