Fifty years in Wall Street
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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CHAPTER 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,