Fifty years in Wall Street
carefully guarded against in the future.
The very severe and extensive liquidation that we have witnessed, not
only in Wall Street but all over the country, has made the financial
situation sounder and therefore safer than it has been for several
years, for it must be confessed that many of our speculative captains of
industry and finance passed far beyond the bounds of conservatism in
their operations, and invited the crisis we experienced by their
reckless assumption of inordinate risks and liabilities.
It was a fitting retribution when some of them were engulfed by it.
Especially culpable and dangerous to the public were those speculative
capitalists who sought and gained control of chains of important
national banks, and then used their resources to extend their own
hazardous speculative schemes. These men were really the immediate cause
of the crisis, and they are now deservedly paying the penalty for it.
But this is a small consideration in comparison with the enormous amount
of havoc they created. One good thing, however, has come out of so much
evil, and that is improvement in our banking condition, by the exposure
and eradication of this unsound banking that prevailed in New York, and
to some extent elsewhere.
We shall, in this generation at least, have no more such speculators
stepping into control of large New York banks and using them pretty much
as if they, their assets and deposits, were their own property. Those
responsible for this unsound banking were public enemies, and we are
still feeling the effects of their reckless and illegal proceedings. The
fact that several of them are now under indictment for their offences is
a reminder that the way of the transgressor is hard. Their elimination
from the banking world removed a source of great danger, which might, if
allowed to continue longer, have resulted in a far worse state of things
than they actually created before their career was brought to a close.
A salutary effect of the panic is the check it has given to extravagance
and waste in living expenses, and the practical lesson in economy that
it has taught very many, for economy is wealth. To reduce expenses after
business reverses is the best way to recuperate, and a little adversity
is not without its uses among us, for we are beyond question the most
extravagant people in the world. This extravagance in living has been
the prime cause of much of the “graft” evil that has lowered the tone of
our business and political life, to say nothing of abuses of power,
embezzlements, corporation-looting, and other forms of dishonesty.
President Roosevelt in his war against illegal and dishonest corporate
practices has certainly worked for the good of the country and to raise
the standard of business morality; and the life insurance, railway and
other corporate scandals that we are all familiar with have shown how
much reform and purification were needed even in high places. Let us
never forget, as the Bible tells us, that “Righteousness exalteth a
nation” however great may be its material prosperity.
That there is a very large amount of money lying idle and available for
investment in first-class bonds was conspicuously shown by the result of
the sale by the City of New York on February 14th of fifty millions of
four and a half per cent bonds, when three hundred millions were bid
for, at an average price of about 104¾. This oversubscription of six
times the amount offered came from people who would not have touched any
but gilt-edge securities.
Of course, the present cheapness of money accounts for much of this
large New York subscription, as apart from investors, banks and bankers
are seeking safe employment for their surplus, in securities that can be
promptly marketed on the Stock Exchange whenever necessary. The latter
is an indispensable condition with them, particularly now in view of the
national banks being enormously indebted to the Government in the shape
of Treasury deposits, and also in view of the future needs of the
Government calling for their return. This is already giving a hardening
tendency to time money.
Although trade is largely prostrated through inactivity, it is safe to
say, notwithstanding what is bad in the situation, that fundamental
conditions are generally sound, and therefore recovery while gradual
will be the easier for it. Meanwhile with inactivity forced upon us, let
us be masterly in our inactivity, and make a virtue of necessity. There
is much in knowing when to stop and when to go ahead; when to ’bout ship
and when to take in sail, and double reef the mainsail and the topsails,
or heave to, and when to sail under bare poles or a full spread of
canvas. Skillful navigation is necessary to success.
With regard to bank reserves, it is especially important during this
period of depression that they should be kept exceptionally strong and
as much as possible, within reasonable limits, above the required
percentage. Twenty-five per cent of reserve against deposits in the
central reserve cities, and especially in New York, is not always
sufficient, as we have seen, from time to time, to enable the banks
there to weather a storm.
The Bank of England maintains an average reserve of nearly twenty-five
per cent larger than that; and it is guarded from suspension in times of
panic by a suspension of the bank act by the Government, which allows it
to issue its notes ad libitum without any compulsory reserve. Here are
two elements of safety. The stronger in reserve the banks keep
themselves, the more confidence in them and in the situation will be
strengthened, and the stronger confidence becomes, the more enterprise
can build upon it. So the banks by their conservatism should do all they
can to encourage confidence as the prime requisite in recuperation.
The New York banks, holding as they do largely the reserves of other
banks throughout the country, should hold a reserve nearer to that of
the Bank of England, which is also the depository of the reserve of
other banks, but in a much larger proportion. If the New York banks had
held thirty per cent reserve last October, when the Knickerbocker Trust
Company failed, there might have been no necessity for issuing Clearing
House certificates, and in that case there would have been no hoarding
of money and little or no panic. But the banks are naturally desirous of
making money by keeping their loans and discounts at high figures, so
they are apt to look upon reserves above the legal limit as money
wasted. The legal limit, however, is too low in the central reserve
cities. My remedy is to raise it. It ought, in my opinion, to be at
least thirty per cent instead of twenty-five per cent, and apart from
any legal requirement, the New York Clearing House should adopt a rule
requiring the banks in the Association to keep a reserve of thirty per
cent. The banks would lose a little in profits by this change, but they
would gain in safety, and reduce our liability to panics. Their
experience during the crisis, when for ten weeks, until the end of
December, currency loaned at a premium ranging from two per cent to five
per cent, should make them anxious to avoid another such ordeal, and an
ounce of prevention is better than a pound of cure.
One unpleasant part of the aftermath of the panic in New York was the
failure in one week, at the end of January, notwithstanding that they
held five millions of loan certificates, of four banks belonging to the
Clearing House, because of runs on their deposits, and the refusal of
the Clearing House to give them further assistance. Whether or not any
of these will be able to resume is still undetermined. Yet, in sharp
contrast with the excitement and alarm that prevailed for weeks after
the Knickerbocker Trust Company failed, the public regarded these
failures with apathy, and the recovery in the stock market which was
then in progress, chiefly under the covering of short contracts, was not
even checked by it, so much had sentiment changed in the interval. These
failures had been practically discounted, large as they were, by what
had gone before, including the decline in stocks. Yet collectively they
had more than twenty-one thousand depositors. These may eventually be
paid in full, but it is very uncertain when that will be, for the law is
a slow coach, especially when a permanent receivership is fastened upon
a bank, largely owing to the long wait usually necessary for the
conversion of slow assets into cash. Moreover, the expenses of
liquidation eat up a large part of the assets under the system of fees
for receivers and their counsel, which have always been much too large
for the work done, and consequently they involve injustice to the
creditors. Laws should therefore be passed substituting for fees fixed
rates of compensation, per diem, for both of these, that is salaries;
and meanwhile the courts should, under the existing laws, reduce their
fees to reasonable amounts, and so correct this evil of extravagance in
the cost of liquidation, which in some instances has been so excessive
as to practically amount to robbery of the victims. This is a needed
remedy that should be urged upon State legislatures.
Two of these failed banks are expected to resume within six months,
while the other two will be wound up, and probably pay depositors forty
per cent or fifty per cent of their claims within about that length of
time.
Very fortunately, however, the crisis of 1907 was much less prolific of
bank failures than that of either 1873 or 1893. In 1893 no fewer than
one hundred and fifty-eight banks suspended, and of these sixty-five
went into permanent receiverships, while eighty-six resumed within the
year, and seven later. But few of these banks had a capital of half a
million or more, their average capitalization being only $169,000. The
banks generally in the fourteen years interval had gained immensely in
strength as well as in number, and their power of resistance to the
effects of the crisis, when it came, had been correspondingly increased.
While the profits of trade and manufacturing have been dwindling,
prophets as to the future of business and prices have increased
enormously, and they were never more numerous or more divided in opinion
than they are now. Some of them point to the fact that with the single
exception of steel, in the hands of the United States Steel Corporation,
prices have declined, and they argue that unless demand increases they
will, like stocks and wages, naturally go lower, and that the Steel
Corporation will be forced, by the reductions already being made by the
independent steel makers as well as by the heavy decline in iron, to
follow suit. These also look for somewhat prolonged depression. But many
other prophets are sanguine that we are already seeing the worst of it,
and that commodity prices are about as low as they are likely to go. The
true prophets are probably the conservatives who steer between these
conflicting opinions and avoid both extremes. But whatever may come, on
the ebbing or rising tide, of our business life, we should, as
Longfellow says, “Learn to labor and to wait, with a heart for any
fate,” and at the same time hold ourselves always ready to make the best
of our opportunities as they arise, and, as America is pre-eminently
rich in opportunities, we shall not find them waiting long. In any
event, the wants of eighty-four millions of our people must be supplied,
and we are the most progressive nation in the world. I therefore
ask—Who’s afraid?
I am quite of the opinion that the time has arrived for calamity howling
to cease; there is now no occasion for undue anxiety. Caution, however,
may be necessary, especially in commercial operations. The worst of the