Fifty years in Wall Street
unfortunately the crisis gave industry a blow from which it has not yet
recovered, although conditions are steadily improving all over the
United States. The iron and steel industry received the hardest blow of
all, and from a feast you quickly passed to a famine, which is a way the
iron trade always had. It is proverbially, however, as quick to recover
as to collapse; so all we have to do is to keep up our courage and wait,
and we may feel assured there is a good time coming. But whether it will
come soon, or later, is a question about which iron-masters, financiers,
and trade doctors generally are much divided in opinion at present. It
is a good sign, however, that work has been resumed in fully
three-fourths of the entire Duquesne works of the United States Steel
Corporation in Pittsburg, although it is admitted that only 46 per cent
of all the Corporation’s works are running.
In September, 1906, when stock and bond prices were manipulated
abnormally to a 3½ 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 became quite
apparent it was not money that was too dear, but securities. At that
time I persistently advised every one to get out of stocks and out of
debt, and keep out for a prolonged period.
Since then security values went down prodigiously—$3,500,000,000 would
scarcely cover the depreciation at its lowest point of those dealt in on
the New York Stock Exchange alone. Our financial situation is vastly
different, however, from what it was in any of our previous great
panics, of which there have been a number, since that of 1857, which
began with the failure of the Ohio Life & Trust Co. at the time of my
advent in Wall Street. I have been in all the subsequent panics, and the
present conditions 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 of all nations. As a
matter of fact, our wealth-making developments have been so extensive
and 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 in 1906, dumping
their stocks at top-notch prices, amounting to at least $1,000,000,000,
upon weaker-backed people.
This unloading, together with the San Francisco earthquake disaster,
which wiped out $350,000,000 of property, 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 huge amounts of bonds, stocks
and short-term notes. These being offered to stockholders of record at
apparently tempting prices, were floated. But 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 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 another dinner at Delmonico’s immediately
afterwards—his wish strong but his capacity lacking.
What produced the panic was a number of adverse factors happening one
after another in rapid succession.
I summarize, briefly, the causes as follows:
FIRST.
The Boer war which left England in almost as bad a financial strait as
we were in through the culmination of a similar period of overdoing in
trade and speculation in new industrial ventures, together with an
excess of new issues of British Consols during the war period resulting
in a recent decline in the price of these prime securities to 81—about
the lowest price on record.
SECOND.
Germany was in fully as bad a condition owing to extravagant industrial
enterprises, rivalling our own, and which required the most careful
nursing to avoid a collapse.
THIRD.
France acted alone in financing Russian loans, and in the crisis of the
Japanese-Russian war was compelled unwillingly to supply new funds in
order to protect the French loans already outstanding. Hence France had
little or no money to lend except to the French.
FOURTH.
The Japanese-Russian war brought both of these countries forward for the
first time as prominent and important factors in the world’s money
market, and both are still, like Oliver Twist, crying for “more.” This
conflict and the Boer war combined wasted over $2,000,000,000 of
capital.
FIFTH.
Funds were almost unobtainable except at prohibitive rates at the time
of our recent crop-moving period, and for causes already mentioned we
could not look to Europe for help. Usually Europe discounts New York
securities bills for about $300,000,000 at this period, but last year
Europe said: “No; we have troubles of our own.”
SIXTH.
The California earthquake with losses of $350,000,000, and the Chili and
other earthquakes of less importance and severity in various parts of
the world were heavy blows at prosperity.
SEVENTH.
The compulsory unloading of very many millions of dollars of stocks and
bonds by large capitalists and operators, together with immense sales of
new securities by corporations and railroads, and the manipulation of
prices and stocks up to a 3½ per cent interest basis while time money
was loaning at 6 per cent, and above, on the best of collateral. Besides
which heavy, excessive and reckless operations in real estate and mining
enterprises having been made all over the nation, caused large amounts
of capital to lose its liquid quality and become fixed.
EIGHTH.
The investigation of the great life insurance companies and the
Metropolitan railroad, and the sad disclosures, followed by the absurd
fine of $29,400,000 by Judge Landis against a corporation with a capital
of only $1,000,000, had a demoralizing effect upon the public mind. This
preposterous fine savored of confiscation and alarmed investors.
NINTH.
The Interstate Commerce Commission’s examination of the Chicago & Alton
deal and the consequent developments further undermined the confidence
of investors.
TENTH.
The making of injudicious loans by the Knickerbocker Trust Co. and the
chains of banks, both in Manhattan and Brooklyn, which caused the
suspension of the institutions and arrest of officials on criminal
charges intensified public distrust, while the collapse of the Copper
market unsettled the metal markets all over the world and resulted in a
reduction of dividends on copper shares, and a serious break in the
price of all that class of securities.
LASTLY.
A gross abuse of our credit system and the consequent inflation of all
values, stimulated by loose banking and promoting methods, proved the
climax in a series of events which culminated in the sharpest though not
the severest panic the present generation has experienced. The main
cause of the panic was that of general overdoing. Credit was
over-extended; speculation was reckless and ill-advised; expansion of
every sort was being carried to excess by over-confidence, until finally
the country’s floating capital was practically exhausted through being
turned too rapidly from liquid to fixed forms. We have only to glance at
the demands upon new capital during the last year or two to realize this
fact.
Some idea of the congested state of the stock market may be obtained
from the fact that during the last five years the total amount of new
securities authorized was $6,800,000,000; the eleven months of 1907
alone accounting for $2,000,000,000 of this total.
During the latter period our railroads authorized $1,400,000,000
securities, of which they were able to issue only one-half, owing to
money market conditions. Of industrial securities less than $500,000,000
were authorized, but nearly $400,000,000 of these appear to have been
issued.
These figures take no account of the issues of municipal securities, and
those of many other business concerns of a minor character, but they are
quite sufficient to indicate the extraordinary demands upon the money
market during the last two years, demands which in connection with huge
speculative borrowings imposed an unbearable strain upon the banks and
precipitated the March, August and October collapses in the stock
market. Other influences have undoubtedly been at work to cause the
breakdown, but no single factor compares in importance with that of the
excessive issues of new securities and obligations during the past two
years which the country was utterly unable to assimilate.
In discussing the cause of the recent panicky contraction and
disturbance in the business and financial world, nothing, however, could
be further from the truth than to charge it all to the great corporation
exposures and prosecutions.
As I have said, there were many other things that contributed to bring
about last year’s depression and disturbance, and to cast over the
bright sky of business prosperity the heavy clouds of distrust, reaction
and panic.
The recent clouds in the financial sky can remotely be attributed in a
large measure to the effect of the tremendous railroad, industrial and
commercial development of the last ten years, which brought about
capital requirements in excess of the ability of the country to supply
them.
Naturally and necessarily, this resulted in precautionary steps being
taken by bankers and others to limit demands that capital could not
supply.
This conservatism and consequent contraction of the overwhelming volume
of business will, it is believed, prove the strongest force in averting
further trouble and disaster.
In an effort to meet the demands of the enormous business offered them,
the great railway and industrial corporations sought to enlarge their
equipment at vast expense. In this they acted unwisely. They overtraded.
It was perhaps excusable not very long ago, when confidence was in its
zenith and credit superabundant, to attempt the financing of mammoth
undertakings. But unexpectedly and like a bolt out of a clear sky, came
the startling insurance and other exposures, and gradually timidity took
the place of confidence.
Then capital, which is always more timid than usual at such times, began
to contract, and many railroad and industrial corporations found
themselves unable to borrow the large sums needed to meet their
extraordinary expenditures.
The banks, in many instances, having already over-extended credits, were
unable to provide the necessary funds, and new securities, owing to
excessive supplies and other causes, ceased to find the ready market
that they had enjoyed for so long a period. Investors took wing.
Curtailment, therefore, in every direction became a necessity; President
Roosevelt can no more be blamed for the recent depression and panicky
disturbance than he can be credited with all the great prosperity that
preceded the crisis.
That this reaction, culminating in a panic so severe, came just at the
time it did, is largely if not wholly coincidental. It cannot be denied,
however, that the startling disclosures of wrongdoing on the part of
many of the great railroad and industrial corporations disturbed the
confidence of the public to the core, and paved the way to it.