American finance: Part first.--Domestic

Book Ii.— Its Organisation

VI. ITS THREE BILLION DOLLAR CURRENCY . I19

VII. ITS NINE HUNDRED MILLION PAPER DOLLARS I43

VIII. ITS TWO THOUSAND MILLION "HARD" DOLLARS 165. IX. ITS TWENTY THOUSAND BANKS—

I. — THE STATE BANKS . . . . I81 X. ITS TWENTY THOUSAND BANKS {continued) —

II. — THE NATIONAL BANKS . . . 204 XI. ITS BANKING TREASURY . . .221 vi Contents.

Book Iii.— Its Creative Powers

XII. PRODUCTION ..... 247

XIII. TRANSPORTATION .... ^^0

XV. CAPITALISATION . . . . . 314

Book Iv.— Its Destructive Powers

XVI. ITS WASTE OF NATURAL RESOURCES . . 339

XVII. ITS "MILLIONAIRE MOLOCH" . . . 357

XVIII. ITS MUCH MISTRUSTED TRUSTS . . 370

XIX. ITS DELUSIVE GOLD RESERVES . . 385

AMERICAN FINANCE.

INTRODUCTION.

This book is written specially for American readers, the most appreciative and sympathetic that any financial writer could wish for. The American people are making financial history on the largest scale of any nation. It is natural, therefore, that finance should be to them a living, working interest. Their practical activity keeps their minds open and alert. They are wholly firee firom the Cobden fetish which has paralysed economic science in England. They have courage enough to hear both sides of a question, and they take the trouble to judge for themselves. Neither are they afiraid of honest independent judgment from others. Once on a time they were proverbially thin - skinned, but Jefferson Brick is as dead as Queen Anne. The Americans of to-day have become conscious of their national strength. They realise too well the greatness of the future that awaits them to be unduly sensitive to foreign criticism. Whether it be good or bad, friendly or unfriendly, they know how to estimate it at its true value.

This book must by its very nature be critical, and there is a good deal in it which American readers will dissent from. But the author has every confidence in its receiving from them just, and even indulgent, consideration. When they cannot accept his conclusions they will give him credit for the hard honest work that has been spent on them. No one could study a subject as he has studied American finance for a quarter of a century without feeling a genuine interest in it. He may flatter himself that he has seen something of it in all its aspects and bearings. As a journalist he has traversed the American continent north and south, east and west. As a financier he has seen most of its financial institutions from the inside. It may also have been of some advantage to him to look at these institutions from a safe distance. There are things to be learned about American finance in Capel Court that cannot be picked up in Wall Street itself. It is only a few years ago that New York was a financial satellite of London. How long will it be before London becomes a financial satellite of New York?

Nor is it merely from a business point of view that a student of American finance may find some special advantages in London. There may also be historical materials here, which, if they exist at all on the other side of the Atlantic, may not be so readily available. London has old libraries full of forgotten books and pamphlets relating to American affairs. If the archives of old City firms like the Barings were ransacked, many a curious relic might be found in them of American loans, railway schemes, and other financial operations. These were the seeds sown three-quarters of a century ago of what is now the greatest, the most vigorous, and also the most interesting organisation of human industry.

Economic America has just been discovered, or rather, it has just discovered itself. Till lately the idea prevailed that it was to grow in the ordinary grooves, and was to be like other countries, only much bigger. But that is not to be its prosaic destiny. It is to be a country of its own — a nation by itself, — a republic of a wholly new and peculiar type. Gradually it is breaking loose from all European models and precedents. It is building up a distinctive American life — larger, broader, and more strenuous than would be possible anywhere in the old world. It is developing a civilisation of vast distances, gigantic energies, immense resource, Napoleonic ambitions, Titanic rivalries, — and, may we add, terrific risks ? Could any nation have a more dazzling, but at the same time more hazardous, future? Could any writer desire a more fascinating or inspiring theme ?

No phase of American life, political, social, or financial, can be adequately discussed without an abiding sense of the momentous issues involved. The United States is manifestly destined to be phenomenal in all things — in prosperity and adversity, in its booms and its blizzards, in its virtues and its defects. It will have the biggest trusts, and the strongest anti-trust laws. It will array against each other stupendous combinations of labour and capital. Within its capacious bosom the Union will have room for the best and the worst forces of civilisation. The most public-spirited citizen will rub shoulders in it with the most grasping monopolist, the creator of values with the professional wrecker, the most conservative financier with the wildest gambler. Everything, good or bad, will be on a truly American scale.

But it does not follow that the United States is to rule the world simply because of its being the strongest and richest world power. Such, no doubt, is the hope and the ambition of many patriotic Americans. But these sentiments misconceive the true conditions of the case. The United States may be economically strong at home without being proportionately formidable abroad. It may, and most probably will, have an economic sphere of its own in which it can secure itself against foreign competition. But the more exclusive that sphere is made, and the more impenetrable it may be from outside, the more closely will the United States be shutting itself up inside it. Nations that would be industrial world powers cannot have it both ways. They cannot hope to dominate home and foreign markets at the same time. The policy which renders their home market invulnerable is pretty sure to hamp>er their foreign trade, and still more their foreign finance. This is only poetic justice, otherwise what remnant of a chance would be left for the old world?

That the United States is, and probably always will be, a country by itself is particularly true of its finance. Its whole financial organisation is, with few exceptions, racy of the soil. It has been said, with a certain amount of historical truth, that the founders of the Repubhc borrowed their politics firom France and their finance fi-om England. Their successors, however, have changed all that van,- considerablj'. The political and financial doctrines of 1789 have both undergone many vicissitudes. Even our gold standard, the adoption of which in 1792 was a sort of pjirting compliment paid to the mother country, was not persistently adhered to. Manj' and varied experiments were made to improve on it before it was finally adopted, just a centur}- and a quarter after the revolution.

There was more excuse for the \-aciIlation shown on the banking question. The two attempts made to acclimatise an adaptation of the Bank of England were foredoomed to fiailure. They originated in a mistaken idea that the banking system of an old country, small in area and densely populated, would suit a young country of vast area but sparse population. Though both the first and the second Bank of the United States fell victims to political passion, it may be doubted if they ever could have realised the ideal of their founders. No central bank, however strong its political supporters, and however capable its management, could have achieved the position in the United States that the Bank of England holds in this country. An American banking system had to be created, and would have ultimately emerged even in the teeth of the greatest obstacles and difficulties. Whether the national banks will completely satisfy all the future requirements of the case is doubtful, but at all events they are thoroughly American.

Alongside of the national banks, and not always working in perfect harmony with them, is the most distinctive of all factors in American finance — the independent Treasury. This has no counterpart in the old world, and can hardly be imagined flourishing anywhere but on its native soil. When a central national bank was found to be impracticable, there was no alternative but for the Government to do its own banking. The verdict of American opinion upon it is still far from unanimous, while from foreign opinion it has received very scant attention. It may have all the weaknesses and disadvantages with which

Introcbiction. 7

its critics are continaally apbiaiding it, but its strong points are even more obvious and undeniable. In financial or commercial crises a great reserve power, like the independent Treasury, standing calmly outside of the storm and ready to assist the shipwrecked, may be a veritable bulwark. Against the service it can render in perilous times, the money it may divert from banking and commercial channels should be a very moderate o£feet. Moreover, the amount of the balance that should be carried by the Treasury is a detail always open to discussion in relation to existing circumstances.

No review of the public finance of the United States would be complete without some reference, however brief, to the remarkable history of the national debt. It also has its American peculiarities. In the rapidity of its growth it startled the world, but the world was even more astonished at the rapidity of its liquidation. In the first overwhelming shock of the Civil War, American statesmen had to bow to the inevitable, and raise money as they could in any and every possible way that suggested itsel£ But when the crisis was over and they had recovered their nerves, they lost no time in getting back to normal conditions. Fortune favoured them in showering prosperity on the country. The people were able without a murmur to submit to heavy taxes. Thej- literally swamped the Treasury vrith revenue, and unprecedented surpluses enabled the

Government to redeem millions of dollars of debt every year.

All this was a new and strange development. The readiness, and even eagerness, of the people to pay taxes contrasted strangely with their old antipathy to the tax-collector. In the revolutionary war — as in the war of 1812 and for many years after — they would borrow at any price rather than be taxed even in moderation. These were the days when "shin-plasters" and all sorts of rag-money passed from hand to hand as the popular alternative to taxes. In the end they proved very costly alternatives. But the greenback experiment during the civil war was such an object-lesson that the American people never needed another of the kind. From their old anti-taxation, anti-banking, anti-honest dollar craze, they rushed to the opposite extreme and became ardent admirers of a full and overflowing Treasury. It is now one of their proudest boasts that they are the largest holders of gold in the world.

The financial institutions of the United States, beginning with the independent Treasury and descending through a long series of sub-treasuries, mints, national banks, state banks, private banks, and finance houses to Wall Street, exhibit two general characteristics. They have all had a more or less chequered history, and most of them are still in a state of flux. The forms they may ultimately assume are still very problematical. All that may be safely predicted of them is, that they will in any case be distinctively American. European experience has been of comparatively little help to them in the past, and it wUl have even less influence on their fiiture. The many changes and new developments that lie ahead of them will, it is to be feared, carry them farther and farther away from European models. They may not, however, be always gainers by that, nor maj- Europe be always a loser.

For example, the extraordinary hold that the Americans had a few years ago on European markets was not cdtogether a healthy sign for either party. It was too one-sided to last long. Had it truly represented the relative power of the two industrial s}"stems which were ranged against each other, there would have been nothing left for Europe but to bend its head to the American yoke. But international competition, whether political or commercial, is fuU of surprises. A good many of these may be awaiting the Americans in the sphere of international finance. When their Western states cease to be the granary of Europe, when their mineral resources begin to feel the terrible strain of prodigal demands on them, when their home consumption begins to trench on their exportable surplus, and when their imports of foreign luxuries and other articles they cannot produce at home begin to disturb the favourable balance lo Introduction.

of trade which they regard with so much complacence, — then it will be time enough to speculate on their proper place among the nations.

In its fundamental outhnes the domestic future of the United States may not be difficult to forecast. So long as its physical resources continue to appear practically inexhaustible, there will be ample material for all its industries, skilled and unskilled. While the character and the energies of its people remain as they are, its industries are bound to prosper. While the country overflows with prosperity it should be easily governed. With ordinarily good government there should be no rushing to violent and reckless extremes. The anarchy of excessive wealth may be as carefully restrained as the anarchy of excessive poverty. With clever management the two hUes noires of the social menagerie may be kept from each other's throats. But if weak or corrupt administration were to allow either of them to get the better of the other, the United States might soon be as uncomfortable a place to live in as Russia itself.

The keystone of all modern administration, imperial, national, or municipal, is finance. The richer, more industrious, and more advanced a country is, its finance will be of greater importance to it. To the United States it is all-important. Nearly every interest it has turns on good finance. And nowhere can bad finance do greater harm. Nowhere is there more urgent and continuous need to watch financial developments. The Treasury has to keep a vigilant eye on its receipts, especially when they seem inclined to droop. The banks have to be thinking all the time of their accruing liabilities and their reserves. Wall Street has to read between the lines of the weekly bank returns, and to trim its sails accordingly. Chicago has to keep one eye on wheat and the other on money. The speculator, in fact, speculates in money as well as in wheat or stocks. Even the land-boomer in the North- West is an accident of the money-market. He and all his kind have been rendered possible by a highly developed system of credit which may one day break down, and crush them by the thousand.

So far as the normal everyday business of the country is concerned, the United States has little to fear hereafter. Its current production and consumption are both so immense, that there must always be a big home market for the producer and a big home supply for the consumer. Whatever surplus there may be at any time has generally an ample choice of outlets abroad. The financing of this current trade is an easy matter. A Chicago banker once very truly said that advancing money on grain certificates was the safest kind of banking imaginable. Nearly if not quite as much safety might be claimed for advances on other staple produce. But in every case an important qualification is necessary. Such banking is only safe and healthy while it is confined to the bona, fide movement of produce. When it takes to financing speculative sales of imaginary produce then the safety ends, and something quite different takes its place.

The test question as regards this class of American finance is, What proportion does the fictitious part of it bear to the substantial part ? However gigantic the staple crops of the United States may be, a comparatively moderate amount of money would suffice to market them, if they were allowed to proceed from farm to market without any speculative interference. It is the huge fabric of gambling and manipulation piled up on them by the way that calls for boundless supplies of currency, of credit, and of banking facilities. If the bond fide marketing of produce could be separated from the speculative marketing, there would be general surprise at the small amount of finance it would require.

In the case of securities the distinction between bond fide trading and mere gambling is still more striking. A very small percentage of the stocks bought in Wall Street are taken up by the purchaser, and conversely a very small percentage of the stocks sold are delivered by the seller. If all transactions were followed by actual transfer, their volume would contrast absurdly with the million and a half shares per day, proudly recorded at times in Wall Street reports. This, of course, is not peculiar to New York. It holds equally true of the London Stock Exchange and of the Continental bourses, though on a much smaller scale. To some extent speculation is rendered necessary by the conditions of modern commerce, and however objectionable it may seem, it cannot be altogether avoided. National temperament may also have something to do with its excesses, but be these large or small, they are incidents of modern life which must be accepted as inevitable. We may regulate and even restrain it, but in order to do that we must first recognise and understand it.

Nowadays, so completely do the parasitical varieties of finance overshadow the natural forms, that the financial organisation of nearly every country is adapting itself more to the former than to the latter. The dividing line between what used to be called legitimate trading and speculative trading has become so faint as to be almost indistinguishable. Wherever there is business there must be speculation, for the one grows out of the other. Futile attempts have been made to draw ethical distinctions between them. Ordinary speculation diSers from ordinary trading only in the larger degree of risk attending it. There are many lines of business in old and settled countries which can be carried on with a minimum of risk. In every young country there are necessary enterprises that can only be carried hrough under speculative conditions. Nothing more precarious could be imagined than agricultural pioneering in the Canadian North- West, but money and human life are being staked on it with enthusiasm.

All pioneering, agricultural, industrial, or commercial, is in its very nature speculative. As the new field is opened up, business settles down into regular grooves, and speculative risks are eliminated. Then speculative methods should also be eliminated, but, on the contrary, they tend to multiply and to grow more complex. It is during the transition from pioneering to permanent industry that the speculator has his finest opportunities and makes the boldest use of them. This is the stage through which Canada is passing now, and through which the American North- West passed ten or fifteen years ago. One fine morning a newly settled province wakes up to find that it has suddenly come into a fortune, — that its dollar-an-acre land is worth five or six dollars, that its buried iron and copper ores have had a magician's wand waved over them, that its hitherto bankrupt railroads are earning handsome dividends, and that local credit has gone up two or three hundred per cent. A golden glamour descends upon it, and the speculative moths come fluttering round it.

Two parallel developments generally take place in such cases, — a large increase of trade and a still larger outburst of speculation. This kind of speculation has very little in common with the gambling of the wheat pit and the stock market. It rests on a substantial basis of hona fide business, while wheat and stock gambling may be mere fooling with market prices. The United States has had much experience of both these kinds of speculation. It has had its genuine El Dorados in the West, and its fictitious El Dorados in New York. A very safe gauge of an American boom is the proportion of Western solidity there may be in it as compared with the Wall Street gas. That, as a rule, will depend on the age of the boom. In its infancy the solid West may predominate, but as it grows older Wall Street is pretty sure to get the upper hand. This almost invariable tendency was particularly marked in the McKinley boom of 1896-1901 — the most brilliant chapter in American financial history. Its origin, its hard fight, and its final triumphs are equally unparalleled. In the collapse of 1893 values of aU kinds had been, as they say in the prize-ring, knocked senseless. Two-thirds of the railroads had been so drastically reorganised, that no one except perhaps a few of the professional reorganisers could guess what the new securities were worth. Property of every kind — land, produce, minerals, merchandise — was down to zero. A single word changed the whole situation, — ^values went up and up, and the higher they rose the more eager were the buyers. At last the boom overreached itself, and came perilously near a general smash. But it was skilfully steered through the breakers, and started again in smooth water. In 1902 it had another smart check, but after a few months' rest it rallied for a third campaign, which has eclipsed all the others in audacity and brilliance.

Here we have phenomenal prosperity combined with still more phenomenal inflation. Both developments are distinctively American, and cannot be imagined as happening in any other part of the world. No other country could furnish the speculator with such an immense basis of hona fide trade, and nowhere else could so giddy a fabric of artificial values have been built up on it. There is a certain harmony and proportion between the two gigantic movements. For an ordinary country with, say, half the population of the United States and less than half of its producing power to have attempted the stupendous combinations which have been engineered in New York during the past decade, would have meant speedy disaster. A series of English, French, or German billion -dollar trusts would soon meet with the fate of the South Sea Bubble. Like it, they would be inverted pyramids with their centres of gravity at the top.

It is not suggested for a moment that skyscraping finance is more justifiable in New York than it would be in London or Berlin. We only point out in extenuation of its extravagance the large substratum of solid indisputable prosperity that underlies it. Without that it would be obviously mad, and even as it is, its sanity may be open to doubt. If speculation has any ethical rules at all, — ^which many people deny, — one of them is that speculative markets should have genuine markets behind them, and that a safe healthy balance should always be maintained between the two. The application of such a rule would vary in every country. Where the hona fide production and distribution are small, speculation should be correspondingly limited. And where, as in the United States, hona fide production and distribution are huge, the area of speculation will of necessity be correspondingly enlarged. The whole question is one of relative basis. Speculative operations that would be absurdly top-heavy in London or Paris, may easily balance each other in New York or Chicago. But when all due weight has been given to these qualifications and distinctions, the sinister fact will remain that speculative finance is to be the future peril of the American people. It may continue to expand while its natural basis contracts. A time may come when the American wheat trade will shrink so greatly in volume as to allow Chicago little more scope for dealing in futures than Liverpool has now. If Chicago should ignore the change and keep the " wheat pit" going at high pressure, something would have to give way. A time is also approaching when Wall Street will have a much-diminished supply of counters to gamble with. Bona fide investors will take away the good stocks, and one or two

B financial blizzards may sweep away the rotten ones. What will Messrs Harriman, Gates, & Co. have to gamble with then ?

We hope to show the reader that American finance has a very interesting and romantic past, which, however, pales before its momentous and mysterious future. It is a fascinating riddle for the statesman, the financier, and the scientific economist.

Book I. Its Evolution

BOOK I.-ITS EVOLUTION.

Chapter I. Its Fouxders

Whek an institation has stronglj-marked features we may safely infer that they have not been fonned in a few 5-ears or even a few generations. If there be in the world an institation vrith strongly-marked individuality, it is American finance. It exhibits national characteristics which may be traced back through many generations of lawyers, poUticians, and financiers. Some of them, in fact, are older than the RepubUc itself. The fathers of the Repubhc were to no small extent the founders of its finance. In F ranklin, Alexander Hamilton, and even in Jefferson, there may be detected curious bits of family likeness to typical Americans of our own day.

Robert Morris, "Superintendent of Finance" to the Confederation, were he to come to hfe again, would find a natural and congenial place among the leaders of Wall Street. It demands little effort of imagination to picture Dr Franklin as chairman of a modem Committee of Ways and Means. Alexander Hamilton, the organiser of the Treasury, might walk into the Treasury building to-day and see methods still in operation which he devised at the end of the eighteenth century. For Gallatin, who was Jefferson's first Secretary of the Treasury in 1800, and Gage, the most resolute opponent of paper money, and all the early Finance Ministers, living counterparts might easily be found.

And one general characteristic on which American finance prides itself to-day — its rapid development — was already evident in those days. At the Declaration of Independence in 1776 the Americans had neither financiers, nor financial resources, nor financial machinery. In the most literal sense they might have said, with a distinguished English statesman, that " they were perfect children in those matters." They would have been as little at home at the Treasury as was Lord Bute himself, of whom it is recorded in the Grenville Papers that he made the following confession to a friend of his unfitness for that uncongenial office. The King, he said,

had urged him and compelled him to take first the seals of Secretary of State, and afterwards to come to the head of the Treasury : that he had been heartily tired of the first, and was now still more weary of the second, not knowing the language he was to hold or the manner of dealing with the monied people and the merchants.

The foundations of American finance may be said to have been laid in three stages, each of which is symbolised by a typical American. The first stage was that of the Continental Congress, which steered the revolution through its first five critical years — 1776 to 1781. Its historical representative was Franklin, who, though no financier, had in spite of himself to take an active part in its financial measures both at home and abroad. The second stage was that of the Confederation Congress, so-called, which came into existence with the Articles of Confederation in 1781, and was superseded in 1789 by the first Constitutional Congress. At this point a completely organised and equipped republic takes the place of the previous makeshifts.

For the representative financier of the intermediate period, Robert Morris is entitled to be selected. Though not a prominent politician like Franklin or a statesman like Hamilton, he was in his way a greater financial power than either of them. They were theorists, while he was a man of business. He handled money while they wrote about it. As to the man who best symbolises the third and last stage there can be no question. Alexander Hamilton's title to that distinction can never be challenged. He, more than any other leader of the revolution, has impressed himself on its economic and financial side. His share of the foundation -lasang was more skilfully, resolutely, and successfully performed than any other, next to Washington's own.

Taking these three founders of American finance in their historical order, we begin with Franklin. The most notable fact in his financial record as a member of the Continental Congress is his tacit support of the original issue of credit notes, which ultimately became the greatest monetary rubbish the world has ever seen. What survived of it when Hamilton produced his funding scheme of 1790 was contemptuously offered one dollar of new six per cent bonds in exchange for every hundred dollars of paper. It may be said in Franklin's excuse that as a New Englander he had been brought up on paper money, and had carried on business with it for many years without experiencing any serious accident or inconvenience. But he was not a soft-money man in principle. He preferred hard dollars to soft ones when they could be got ; and he drew the line at legal tender. If he spoke as strongly against that in Congress as he wrote against it in his later correspondence, he must have helped greatly to stave it off.