Fifty years in Wall Street
Clearing House loan certificates attained its maximum—$22,400,000—on
October 20th. In the interval business was resumed on the New York Stock
Exchange on September 30th, after its ten days of suspension. While it
remained closed there was a curb market on Broad Street for stocks and
bonds, but sales for cash there could only be made at panic prices. The
crisis of 1873 was far more severe than that of 1907, and recovery from
it was very slow. The panic of 1884 extended far beyond Wall Street, but
was most severely felt there.
There was a stock market panic in 1890, due to the failure of Baring
Bros. & Co., in London, and heavy gold exports from this side to allay
the panic there, but it did not spread much beyond Wall Street, and was
soon over. The panic of 1893 was, however, severe and extensive, and
15,000 failures were attributed to it throughout the country. As usual,
it resulted from undue speculation and expansion in trade, stocks, and
new enterprises. But it was more immediately caused by the agitation of
the 16-to-1 silver heresy, which led to a run on the gold in the United
States Treasury till the amount of free gold held by it, at all points,
was less than twenty millions, while the amount in the Sub-Treasury in
New York was reduced to only about $8,700,000. It was then, in February,
1893, that President Cleveland made his famous gold purchase for United
States bonds from the Morgan-Belmont syndicate, namely 3,500,000 ounces
of gold for $62,312,500 of four per cent bonds. This, aided by the
syndicate’s efforts, stopped gold exports and replenished the supply of
gold in the Treasury, and so restored confidence. Therefore the run
ceased; and after that the largely increased customs duties gradually
swelled the gold belonging to the Government to a far larger amount than
it had ever held before.
Coming down to the panic of 1907, we are confronted by its causes. These
were cumulative, but, as in every preceding crisis, the main cause was
far too large a mass of credits—that is, of debts—for the amount of cash
in which they were redeemable. Trade and speculation had been long so
active, and too often recklessly expanded, that this disproportion had
become dangerous, and a menace to our safety, as I pointed out several
times months before the crisis actually came. I said that a serious
reaction, a serious revulsion, was inevitable unless we moderated our
pace and mended our ways in the matters that I have elsewhere referred
to and criticised.
From my knowledge of banking, and my personal experience of our previous
panics, dating from that of 1857, I could foresee that this vast and
growing disproportion between the volume of credits and cash would
finally lead to collapse. This disproportion is always large, and always
becomes larger in periods of activity in trade and speculation. But in
this country, and particularly among our speculative Wall Street
millionaires and promoters, it had become unwieldy, while, very largely,
liquid capital had been converted into fixed forms that were unavailable
in raising cash.
Yet the people generally did not see the danger and take alarm till, on
October 21, the New York Clearing House was notified by the Bank of
Commerce that it would not clear for the Knickerbocker Trust Company
after the following day; and simultaneously the Clearing House made an
examination of the Mercantile National Bank, and ordered all its
officers and directors to resign at once, preparatory to assisting it.
Then the public suddenly took fright, and the run upon the deposits of
the Knickerbocker Trust Company caused it to close its doors about two
hours after it had opened them the next day. This added fuel to the fire
of distrust, and the run on the Trust Company of America and its
Colonial Branch, and also on the Lincoln Trust Company, began; and six
banks and a trust company suspended in Brooklyn, and the Hamilton Bank
in Harlem, on the day following.
At the same time there was a heavy withdrawal of deposits from all the
banks and trust companies, and the money thus withdrawn was not
deposited in other institutions, but hoarded. Hence the severe monetary
stringency that ensued, which caused call loans on the Stock Exchange to
command as much as forty to fifty per cent per annum at one time, and
from fifteen to twenty-five till the end of the year.
The New York Clearing House saw the urgent need of promptly fortifying
the banks in the Association against the drain on their deposits, and,
on October 26, resolved to issue Clearing House certificates against
such satisfactory assets as they might deposit, these certificates to be
used by them instead of cash, in paying their daily balances at the
Clearing House. This gave immediate relief to the banks, and was the
signal for every other bank clearing house in the large cities to do
likewise, besides which many of the country banks issued checks of their
own, from one dollar up, in payment of checks against deposits.
The other principal features and details of the crisis I have given
elsewhere. But it must not be overlooked that, severe as it was in its
actual effects, it was very largely sentimental in the sense that it was
precipitated by fear—fear born of distrust. That is the immediate cause
of all panics, but without the superinducing causes this fear would not
exist. In our case it was the very seriously impaired credit situation,
arising from a multiplicity of contributory causes, which inspired the
fear that caused the runs on the banks and trust companies, and the
hoarding of the money withdrawn, as well as the withholding of other
money which, in the absence of distrust, would have been deposited. To
fill the vacuum caused by hoarding, we outdid all our previous efforts
by importing about a hundred millions of gold.
This hoarding, and consequent stringency, apart from the issue, in all,
of $81,000,000 of Clearing House loan certificates, was responsible for
the premium on currency, which at one time was quoted at four to five
per cent, for it practically forced the banks to a partial suspension of
payments involved in requiring checks to be made payable through the
Clearing House, except in cases where they were willing to accommodate
depositors with small amounts of currency. But fortunately the premium,
which had dwindled to ¼ @ ⅜ on the 31st of December, disappeared at the
beginning of 1908. Meanwhile, all through the crisis, large employers of
labor had found great difficulty, and incurred much expense, in
obtaining currency enough to pay wages; and in Pittsburg and other
labor-employing centers, wages were paid largely in scrip issued by the
banks or employing corporations. This scrip was so generally issued that
in Pittsburg all the street car lines accepted it for fares.
No wonder that these conditions seriously checked buying of all kinds,
and caused demoralization and semi-paralysis in industrial corporations,
and that hundreds of thousands of operatives were thrown out of
employment by the stoppage or curtailment of work in mills and other
manufacturing establishments. But the storm being over, and the money
market again easy, there is every prospect of gradual, if not rapid,
recovery to a normal standard of prosperity in our trade and
manufacturing industries. It was not till January 11, 1908, that the
Clearing House reported the deficit in the bank reserves wiped out, and
a surplus of $6,084,050 accumulated against a deficit of $11,509,550 on
January 3d, and at one time of $81,000,000.
It should not be thought, because we imported a hundred millions of gold
from Europe to relieve the monetary stress produced by the crisis, that
we thereby placed this country under obligations to any other country.
The gold we imported we bought and paid for from our own resources,
equivalent to cash, in the shape of exports of cotton, grain, petroleum,
copper, and other American produce.
These commodities were even more necessary to Europe than the gold we
purchased there was to us. So the transactions on both sides were mere
matters of bargain and sale, no favor being shown on either side.
Indeed, both England and France did all they could to restrict our
importations of gold. The extraordinary advance of the Bank of England
rate to seven per cent, and its retention there till we discontinued our
purchases of gold, furnished practical proof of this. This was
justifiable, of course, as a defensive and protective measure for the
bank, but none the less it was an obstacle placed in our path.
Its proclaimed purpose was to prevent our taking gold from Europe as
much as possible, yet in the face of this heavy handicap we bought and
paid for and imported all the gold we wanted, and it was not till after
we had stopped buying that the Bank of England lowered its rate to six
per cent. This showed that we controlled the Bank of England more than
the Bank of England controlled us. We were not assisted; we assisted
ourselves, and neither asked nor received favors.
This important fact testified to the strength and wide sweep of our
resources, both financial and commercial, and also to the solidity and
soundness of our business position, and the foundation on which it
rested. The firmness, too, with which we bore the enormous strain of the
crisis, and the good order and condition in which we emerged from it,
were equally eloquent in testifying to the same effect, and showing that
ours is indeed a great country—the greatest of all nations in its
material resources and acquired wealth.
The advantage of this is largely shared by us with the rest of the
world, both in our enormous foreign trade and the vast amount of money
spent every year by American tourists in Europe. If the hundred and
fifty millions of dollars spent by them there in 1907 had been kept at
home, it might have obviated the necessity of our importing gold to
relieve the crisis. Europe has good reason to return thanks for all it
gets from us; and what would the trade and commerce of Europe be, in
this progressive age, without the United States of America?
The strength, the resolution, and the courage with which the country, as
a whole, bore the brunt of the crisis of 1907 augurs well for a rapid
recovery from its effects, and paves the way to renewed prosperity and
progress; and there is every probability that it will recuperate more
swiftly from the great and trying ordeal than it did from the memorable
panics of 1812, 1837, 1857, 1873, 1884, and 1893, for its wealth,
population, and general resources are now so vastly greater than they
were at any of those periods that comparisons are out of the question.
The growth of our banking system alone since 1873 is indicated by the
fact that in the very severe panic of that year the New York Clearing
House issued only $16,000,000 of Clearing House certificates to the
banks belonging to it, whereas in the panic of 1884 it issued
$21,000,000, in the panic of 1893 $41,000,000, and in this last panic of
1907 no less than $81,000,000. The crisis was severe but it was
purifying, and eliminated a vast amount of unwholesome and dangerous, if
not dishonest, speculative elements from the management of many of our
banks and large railway and industrial corporations, and left in its
place the legacy of a higher standard of business morality than we had
before. Hence, perhaps we may say, with Shakespeare, all’s well that
ends well, and, with the Bible, out of evil cometh good. At least we
have plucked the flower Safety from the nettle Danger.
This view of our country, and the situation, is shared by the banking
community of the Old World, who also absolve President Roosevelt from
blame or responsibility for the crisis. In this connection a leading