Books: A Brief History of Panics
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Clement Juglar >> A Brief History of Panics
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The huge imports to take advantage of old tariff rates absorbed much
money, while the Baring liquidation and that of other houses identified
with South American enterprises, and the distrust bred by our Silver
Bill caused a return of our securities, necessitating such a curtailment
of credit that our panic took place. From July through December 31st,
money ruled high and fluctuating.
The year shows a decline in circulation to $123,000,000, a decline of
specie reserve to $178,000,000 with a subsequent rise to $190,000,000, a
decline in legal tenders to $82,000,000, and of deposits to
$1,485,000,000, while the banks increased to 3,573 with a capital of
$657,000,000, and a surplus and reserve of $316,000,000, and discounts
and loans rose to $1,932,000,000.
The year 1891 has exhibited the usual incidents succeeding a time of
reorganizations after panics and, after a period of selling and
settlement, a rehabilitation of affairs and the consequent advance in
prices of securities. The unprecedented abundance of our crops as a
whole, coupled with the almost universal shortage in European countries,
largely aided the rehabilitation. Bank balances reflected this
startlingly. On February 26, 1891, loans and discounts and over-drafts
amounted to $1,927,654,559.80. On May 4, 1891, loans and discounts and
over-drafts amounted to $1,969,-$46,379.67. On the former date capital,
deposits, surplus, and undivided profits amounted to $2,462,456,677.92,
and on the latter date to $2,567,288,143.45.
On July 9, 1891, discounts, loans, and over-drafts amounted to
$1,963,704,948.07, and capital, deposits, surplus, and undivided profits
to $2,522,609,679.78.
Confidence is restored and prices have advanced, and should advance
still further. There seem to be only three things that could check the
advancing market, and of those the two chief ones seem pretty surely
relegated to a fairly distant future. These latter two are, in the order
of importance: (1) a free silver law, _i.e._, a law making, say, 67
cents' worth of silver pass for an equivalent of a 100-cent dollar; and
(2) a very radical and abrupt change in our tariff law. The remaining
and very minor influence is the breaking out of a general European war,
which would at first induce a selling of our securities, and so lower
prices, but which finally and shortly would benefit us by a subsequent
returning flood of money exchanged for our various bread-stuffs, and
supplies, and even securities of different sorts.
It would be better for our future if the liquidation of the last panic
had been more radical in some cases, notably in land speculation. In
this liquidation has not been thorough, and, as far as these cases
influence the market, it has remained for a long time unsound, and even
now is not fully recovered.
The past twelve months have witnessed a continued settling of old
accounts, and the undertaking of new business, in a limited way, despite
a somewhat uneasy feeling about silver and the now accomplished
Presidential election. But the fact that an analysis of the bank returns
to the Comptroller of the Treasury shows that available resources
(capital, deposits, surplus, and undivided profits), as compared with
demands (loans and discounts), are good and growing, considered in
regard to the other signs indicating prosperity (see Introduction),
justifies the prediction of the steady development of a prosperous
period.
PANIC OF 1893-4.--It was early in 1893 that I wrote the last page of
_A Brief History of Panics in the United States_. Two of the three
checks to business prosperity to which I then referred, virtually
occurred very soon. The determined resolve of the "free silver" members
of Congress to continue the heavy monthly utterance of silver dollars
redeemable at par in gold kept many business men most disquieted. They
saw that the free gold in the Treasury was sinking greatly and steadily.
They knew, also, that there was semi-official assertion of the right of
the United States to redeem its silver dollars in Government notes. The
Free-Coinage Bill had been passed by the Senate in July. The House
defeated it. The legal fights against certain great railroad
combinations and frequent labor strikes put additional burdens on the
market.
In the United States and abroad the doubt of our willingness and ability
to redeem our obligations at par in gold on demand grew most rapidly.
Accordingly, exports of gold increased and hoarding of it began at home.
To all this was added the expectation of a severe downward revision of
our tariff laws if the Democratic Party should succeed, as was expected,
in the Presidential election in November.
Business was scared and slowing down and, therefore, using less and less
of its working capital. The false ease of increasing loanable funds in
the custody of the banks lulled many into a specious confidence. But
gold was exported in increasing quantities. Should the Government issue
bonds in exchange for gold for the purposes of redemption? The
Philadelphia & Reading receivership occurred. Easy money led to many
consolidations of transportation properties and to very many large
commitments. Money tightened. In March, it loaned at 60% per annum.
Would President Cleveland call an extra session of Congress in March to
repeal the silver law and to issue bonds in order to replenish the free
gold in the Treasury? The Stock Market showed a great decline in
quotations.
In April, 1894, Secretary of the Treasury Jno. G. Carlisle forbade the
further issuance of gold certificates for gold deposited in the Treasury
under Act of July 12, 1882, whenever the gold in the Treasury "reserved
for the redemption of United States notes falls below $100,000,000."
This further alarmed the business world, which was not reassured when on
the 20th Carlisle announced that the Treasury would pay gold for all
Treasury notes so long as he had "gold lawfully available for that
purpose." President Cleveland, that stalwart man, uttered this high and
firm pronouncement on April 24th: "The President and his Cabinet are
absolutely harmonious in the determination to exercise every power
conferred upon them to maintain the public credit, to keep the public
faith, and to preserve the parity between gold and silver and between
all financial obligations of the Government." Very good, thought
business, but how and when will you act accordingly?
Lack of business confidence increased greatly. Money rates advanced.
Security values fell; imports greatly exceeded exports. Silver
certificates were at 83. Something was about to snap in the general
business machine. National Cordage broke from 57 to 15-1/2 on May 1st,
receivers were appointed, and the panic of 1894 had declared itself and
grew worse on the 4th and 5th. Call money rose to 40%. June witnessed
great distress in business circles. On the 27th the Government of India
stopped the coinage of silver for individuals and decreed the exchange
value of the rupee at 16 pence. This lowered the exchange value of our
silver bullion certificates to 62. President Cleveland helped matters
somewhat by announcing that Congress would be convened early in
September. In early July the panic increased somewhat despite the
President's call for Congress to assemble on August 7th. Time loans were
hardly obtainable. Conditions in August grew worse. Business was almost
at a standstill, and failures were very frequent. From August 7th until
the affirmative action on the 28th by the House of Representatives as to
the repeal of the Silver Act, there was great concern.
Then hope revived; but hoarding of currency increased. Great banking
interests in New York helped the situation mightily by importing over
$40,000,000 gold. September was an anxious but more hopeful month as the
prompt adoption by the Senate of the Free-Silver Bill was anticipated.
However, the weary debate dragged on in the Senate. President Cleveland
demanded the unconditional adoption of the House measure. Certain
compromisers, led by Senator Arthur P. German of Maryland, suggested
that during each of the following fifteen months the Government purchase
the minimum amount of 1,000,000 ounces of silver, and then stop all such
purchases against which silver certificates had to be issued. This plan
for speedy action President Cleveland and the Secretary of the Treasury
opposed as worthless unless concurrently there was an issue of
$100,000,000 of Government bonds to replenish the gold in the Treasury.
They asserted that new legislation must be had before any such bonds
could be validated. So the business world continued to suffer.
Let me here state the fact, that without any fresh authorization,
Secretary of the Treasury Carlisle did in January, 1895, issue
$50,000,000 of Government bonds to replenish the free gold in the
Treasury, and that an injunction suit against their sale was dissolved
by Judge Cox at Washington on the 30th of that month. Gorman had been
right. The credit of the country would not have suffered by the
additional issuance of some final $60,000,000 (?) of silver certificates
if the gold in the Treasury had concurrently been upbuilt to the extent
of $50,000,000 to $100,000,000; but an immensity of business loss would
have been averted.
But to resume the orderly recital of those times. October dragged along
its weary length, while the Senate debated and business withered.
Finally, on the 30th, the Senate accepted unconditional repeal of the
Free-Silver Act. On November 1st, it became a law. The fear of
repudiation thus escaped, though with fearful loss, the country plunged
into all the unsettlement caused by a too sudden and too extensive
change in the tariff. These changes were announced by the House
Committee on December 27th.
The conditions mentioned in the last paragraph beginning on page 22 of
the introduction to this book, were at work. Before the market had
recovered from the "Silver panic" of 1893-4, the terror caused to the
business world by the proposed very decided changes in the customs dues
laid hold upon every trader in the United States and reflectedly upon
every one of its citizens. It shook business throughout. Would not such
a plan as is set forth in the footnote below [Footnote: "Mr. DeCourcy W.
Thorn expressed himself yesterday as heartily indorsing the Democratic
celebration to be held in this city January 17 next, to which all the
party leaders will be invited and at which subjects of interest to the
party will be discussed.
"When asked to give his opinion on some of the questions worthy of
discussion at this gathering Mr. Thorn mentioned the tariff and economy
in the conduct of national affairs.
"In the coming national Democratic celebration," he said, "I hope
suggestions dealing with a rational reformation of the tariff and the
need for national economy of every kind will be duly considered, and
that on these two subjects alone, to be treated thoroughly but
temperately, will this national Democratic gathering advise our party as
to its best course to pursue.
"In three successive Presidential canvasses since the Civil War the
Democratic party has received a majority vote of the people of the
United States, and in my opinion would have gained three thereby,
instead of the alternate two, elections to the Presidency if the tariff
issue, the major one of the two great issues--namely, tariff and
economy--on which they won, had been so sought to be applied as not to
threaten unduly to affect general business."
PROTESTS AGAINST EXTRAVAGANCE
"All will agree with me that a reasonable economy, instead of the actual
wild extravagance of government, is more than ever a national need. Who
will disagree with me, that in addition to the contribution from
internal revenue, the tariff should be used merely to contribute towards
the due expenses of the Government economically administered, but so
applied as not to break down the standard of American citizenship, as
exemplified in the working people of our country; and eked out, if it is
possible, by contributions into the national treasury of sound
inheritance taxes?"
URGES CUT ON NECESSARIES
"Is it not possible to apply that general plan as follows: Divide, say,
all of the articles now upon the tariff list into three classes.
"(_a_) All such as are usually found in the typical American
homes--I mean the homes of those admirably called by Grover Cleveland
the 'plain people,' who are just the same class, I believe, as those
indicated by Abraham Lincoln, when he said, 'God must greatly love the
common people, for he made so many of them'--and put that list of
articles on a free list or a severely tariff-for-revenue-only list.
"(_b_) Create a second division composed of all the articles of
luxury. Put upon them the very highest tariff they will stand and yet
come into the country, except in the case of articles of antique art.
These latter should be admitted free.
"(_c_) Keep upon all other articles now in the tariff list the
actual duties for the period of one year, but after that period and the
actual imposition of the proposed new tariff I am discussing shall have
begun, put all the articles involved in Class _c_ upon a
tariff-for-revenue-only basis, so constructed as not to break down the
standard of the American workingman's living."
YEAR TO MARKET STOCK
"This period of one year--say, would allow manufacturers to market their
stock on hand or already required to be produced on the basis of the
market influenced by the quasi-Government protection extended by the
existing tax laws of the nation.
"At the end of this period the manufacturer would be obliged to produce
at less cost in order to find a market in competition with his foreign
competitor, which competition would result in lower prices that he and
his foreign competitors would have to offer to the working people and
other citizens of our country,"
EFFECT ON WAGES
"Those working people and other citizens would for a year have been
enjoying at lesser cost all of the articles used in the typical American
home I have referred to and could without loss therefore well afford to
submit to a reduction in wages so long as that reduction in wages was
contemporaneous with affording them a proportionate or more than
proportionate reduction in cost of the articles for whose purchase those
wages were sought to be expended. At the same time, the manufacturer at
a proportionately lesser cost of production, through this reduction in
wage-paying, would be selling as much or more of his old products at
their old profit.
"Could we add to the income from the tariff and internal revenue the
sums derived from the sound national inheritance tax I have mentioned
above it is evident we would have supplied for the period of change from
one tax system to another an 'adequate governor' to use a mechanical
illustration, to prevent undue oscillation of prices in the business
world."
BANK RESOURCES TO PREVENT STRAIN
"The further use of the existing financial agencies for cooperation of
the banks in all sections to mass resources and apply them to prevent
undue local strain upon credit dispels the fear of any necessary injury
to the financial fabric in effecting this change.
"Grover Cleveland, whose character and principles I have long revered,
seemed to me in the application of his plan for tariff reform to have
endangered at once the success and the permanence of his reform of the
tariff--which you recall was confessedly and very properly not a
reformation to free trade--by failing to provide in it a method for
avoiding or at least minimizing and shortening any incident disturbance
to the business world. His plans, further, failed by not reasonably
insuring for the transition period from the old tariff to the new one
sufficient national income for national expenses."] have virtually
prevented all that? When I sent that plan, which I had stated in an
interview in the _Baltimore Sun_ of December 24, 1910, to the
various members of the Finance Committee of the United States Senate and
to the Committee on Ways and Means of the House of Representatives, very
many of them wrote me affirmatively on the subject.
To revert, however to the due order of our tale. It was on January 17,
1893, that Secretary of the Treasury John G. Carlisle, without any new
legislative authority, offered to sell $50,000,000 Government bonds
already mentioned. If issued during the Silver-repeal fight when Gorman
proposed his compromise, and if Carlisle had made it clear very early
that as many such issues for gold would be made as were needed to keep
the trading public safeguarded against any monetary-business cramping
caused by the governmental policy affecting the tariff, a minimum rather
than something approaching a maximum of disturbance would have followed.
In better spirits because of the issuance of the $50,000,000 Government
bonds for gold, the business world worked along. The House had passed
the Tariff Bill early in February by a big majority. Business soon
looked up decidedly. But the Seigniorage Bill was adopted in March.
President Cleveland, that sturdy upholder of the Nation's credit, vetoed
it. He knew that any new moral obligation to keep at a parity with gold
dollars worth in themselves less than one hundred cents in gold would
materially shake domestic and foreign credit.
The veto had a deservedly splendid effect upon all our trading
interests. This was increased by the failure of the House to override
the President's veto of the Seigniorage Bill. But the Senate had not
acted on the Tariff Bill. Business dwindled and there occurred strikes
and other widespread labor troubles, especially in the bituminous coal
trade. In many parts of the country the militia, and in Chicago United
States troops, had to be employed to maintain order. Call money was a
drug on the market. The net gold in the Treasury was very low. The
Tariff Bill dragged its weary length along. President Cleveland and
Chairman William L. Wilson of the Ways and Means Committee of the House
insisted that the bill would produce sufficient revenue for the expenses
of the Government. Senator Gorman and others in the United States Senate
insisted to the contrary and demanded that the tariff on sugar should be
kept at a high figure. A bitter controversy ensued. Finally, on August
13th, the House accepted the Senate Tariff Bill. It was time for some
affirmative action, for among other threatening conditions the net gold
in the Treasury had fallen to the lowest figure since resumption of
specie payments in 1879.
Business began to revive. The issue of $50,000,000 Government bonds for
gold to replenish the Treasury stock was a very stimulating influence.
The improvement dated virtually from the agreement in February between
the Government and the Morgan-Belmont Syndicate to prevent the export of
gold. In June, 1895, the Government gold was thus brought up to a round
$100,000,000 for the first time since December, 1894. But
notwithstanding the fact that the business outlook was decidedly better,
the inevitable disturbances to business following a general change in
the tariff, unsettled political conditions in Europe and the selling of
American securities owned abroad, the shortage of the American cotton
crop, President Cleveland's Venezuela message, which many persons
thought might bring on war with England, and another decline in the
Treasury free gold, again shook business confidence.
Improvement, however, was stimulated by a remarkable increase in the
supply of money in our balance of trade and by the virtual settlement of
the Venezuelan question. The business situation was steadily clearing.
The ills from the panic of 1893-4 were well behind us. The
Spanish-American war proved to be harmless to us financially, while it
tended to show that National neighborliness could be exercised in a
splendidly unselfish way. By our treaty of peace with Spain on December
10, 1898, an additional emphasis was given to the revival of trade.
During 1899 a great rush to speculate brought the pinches in money
inevitable in those pre-Reserve Bank days, but could not stop the
general broadening of business interests although the industrial
situation was unsatisfactory in spots. Indeed, the succeeding year was
to witness severe industrial trouble destined to cause a general
set-back in business. The situation cleared considerably when the
November elections of 1900 showed the country to be safe from the Bryan
silver policy.
Big business interests took hold of market conditions. Huge combinations
of trade interests became the order of the day. The United States Steel
trust was the vastest and was the transcendent achievement of J.
Pierpont Morgan. The Stock Exchange was wild with speculation. The
collapse came there in the famous decline of the 9th of May, 1901,
precipitated by the Northern Pacific corner. In a month the market was
tranquil again. The shooting of President McKinley produced great
financial nervousness. The over-trading abroad, especially in Germany,
was influencing us and all the rest of the world, which had not yet
recovered from the vast financial cost of the English Boer War.
The ever increasing closeness of business relations the world
over--their virtual solidarity, in fact--was being illustrated again
with us. A chief example was trouble in the copper groups following a
slackened world demand for their products.
Overtrading was doing its usual work. This induced loss of business
courage in many quarters, or shall I say a realization that nowhere in
the American business system was there any arrangement empowered so to
marshal the competent strength of financial America that large and
overwhelming disturbances should become impossible in business
generally. Indeed, the Government forces seemed to tend contrariwise to
big business practices. They took virtually their first step in
"trust-busting" when they tried to break up the Northern Securities
Company, which had been concocted to handle the celebrated Northern
Pacific case. Labor troubles supervened. Many great speculative stock
campaigns collapsed. The banks yielded to the imperative need to reduce
credits. The year 1902 had almost experienced a widespread panic: but
the marshaling of great private resources had restored confidence
temporarily, and it closed in peace.
PANIC OF 1903.--Then came the real beginning of the protracted "trust
busting" campaign. Business took fright, for it believed it was to be
bullied rather than soundly regulated. Great failures oh the Stock
Exchange were its sure indications. Fear and distrust was upon all the
American business world. Industries languished. Money was easy because
less and less employed in trade. The great captains of industrial
finance, however, patched up troubles and differences here and there
and, availing themselves of the plentiful supply of money, soon had a
notable speculation at work. Gradually the country took heart again and
business experienced a revival.
It was thought that President Roosevelt, elected in November, 1904,
would help bring about discrimination between "good" trusts and "bad"
trusts, and whose "trust" is bad! But "trust busting" became an even
more popular and political pursuit. Indeed, the abuses practised by many
of them had created a situation regarding which the question was
becoming in the popular mind simply this, "Shall trustdom rule the
people or the people rule the trusts?" The sound control of both before
the Constitution of their country must be the happy solution.
The Bill of May 9th of the House of Representatives, giving the
Interstate Commerce Commission power to fix railroad rates, was ominous,
and little noticed by the general business world; but some noticed and
acted. The Senate had not voted; nor did they realize what
rate-regulation implied to railroad balance sheets and so to the Stock
Exchange. Some interest was selling securities. The business public was
awakening to the fact that legislators, legislation, the people, and the
law were hot after the business methods of many organizers. Fear,
founded on a tardy awakening to facts, declared itself, but
spasmodically, for now and again the great captains of finance and
industry were trying to save the situation. They successfully aided
whatever of momentum there was in general business. But Congressional
activity as to any combinations in restraint of trade was unabated. It
called upon the President for such information as the Interstate
Commerce Commission might have as to a combination in restraint of trade
between the Pennsylvania Railroad and certain lines allied with it.
The battle between the old style and the new style of managing great
corporations was fairly on. Labor troubles added to the existing
disarrangement of business. San Francisco's vast earthquake and
consuming fire sucked much capital away from financial centres in order
to replace the $350,000,000 of capital destroyed. The money market was
greatly restricted. The stock market showed signs of panic. The
Secretary of the Treasury continued to help the situation as best he
knew how. Notably, he offered $30,000,000 Panama Canal Bonds, and very
successfully sold them. That afforded an additional basis for bank-note
issuing. The stock market responded with a fine upward swing. Heavy
dividends were declared by certain leading railroad and other
corporations. Indeed many high records were made by securities and so
distracted attention from that steady tide of keener inspection and
stricter regulation by the agents of the people which was destined to
unmoor and toss and injure many a financial craft. Railroads asserted
that the country needed a great increase in railroad trackage, but that
the actual treatment of the roads deterred extensions through
frightening capital. So the year 1906 wore away after having sorely
tried the nerves of the whole business world which it left in a most
justly apprehensive state.
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