Fifty years in Wall Street
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.