Wall Street - Panic And Their Indications
( Originally Published Early 1900's )
The causes which usually give origin to panics described. How these great upheavals in business and finance may be partially avoided and their consequences alleviated when they do occur. Greater elasticity in the methods of banking required to enable the banks to meet emergencies. These institutions have in recent years done well when not handicapped by law. They should be permitted to make more liberal use of their reserve to relieve financial distress. How banks and business men should cooperate in times of impending crisis. The forecast of the panic of 1893. I belief in prophecy generally resolves itself into the fact that there is a great deal of repetition in all history, and by watching the present, storing the mind with a careful knowledge of the past, and collating the facts thus in possession, a pretty good idea of the future may in many instances be premised without any pretensions to supernatural power. When events turn out in accordance with the general tenor of any instance of forecast, that is irrefutable evidence that the reasoning has been practically correct, irrespective of the principle upon which it may be based. I shall reproduce here the greater portion of an article which I wrote by request and which was published January 13, 1893. In this I stated the conditions which underlie panics, and the deductions were unhappily exemplified in the panic of I893, which soon began. The article was as follows: - The query now being asked on all sides, "Will there be a panic in 1893?" should impress business men and financiers with the fact that certain peculiarities in the development and trade of the United States render our markets more exposed to peril than those of any other nation, and make the question of panics a peculiarly American one, as we shall see. The financial crises known as panics are commonly spoken of as freaks of the markets due to antecedent reckless speculation; as being controlled in their progress by the acts of men and banks who have lost their senses, but above all as being easily prevented, and as easily cured when they happen. These are the notions of mere surface observers. They may be in a measure true when applied to the markets of some of the older countries, whose business moves in long-established grooves and embraces but little of the risk attendant on new enterprises. In France and Germany, for example, the hazards of business are almost entirely confined to the accidents of political events, and such nations are exempt from panics due to purely commercial causes. Panics in the United States are due principally to causes from which European countries are exempt. We are still a nation of pioneers. Nearly fifteen millions of people are added to our population every ten years. This new population has to subdue new territory. New lands have to be cleared, new mines opened, new railroads built, new banks created, new industries established, and new corporations founded. These new ventures are necessarily in a measure experimental. Some of them fail utterly while others succeed magnificently. They require large outlays of capital in advance of obtainable results. In many cases these outlays are met by borrowing, the loan being secured by liens upon the uncertain undertakings, and therefore lacking the stability of value that attaches to well-developed investments. We have thus a ceaseless stream of new issues of stocks, mortgages, and commercial paper, comprising a large amount of outstanding obligations, liable, from the uncertainty of their basis, to wide fluctuations in value. Then we have also a large amount of obligations issued against enterprises, which, though not properly new, are still in an experimental stage, and the value of which is, therefore, subject to wide fluctuations. Issues of this character naturally appeal to the adventurous instincts of our people and cause activity in speculation. The action of commerce, like the motion of the sea or of the atmosphere, follows an undulatory line. First comes an ascending wave of activity and rising prices; next, when prices have risen to a point that checks demand, comes a period of hesitation and caution; then contraction by lenders and discounters, and then a movement, in which holders simultaneously endeavor to realize, thereby accelerating a general fall in prices. Credit thereupon becomes more sensitive and is contracted; transactions are diminished; losses are incurred through the depreciation of property, and finally the ordeal becomes so severe to the debtor class that forcible liquidation has to be adopted, and insolvent firms and institutions must be wound up. This process is a periodical experience in every country, and the sharpness of the crisis that attends it depends chiefly on the steadiness and conservatism of the business methods in each community affected. In times of crisis, the obligations of the enterprises so numerous in this country suffer instantly from the uncertainty about their intrinsic value. Holders are anxious to get rid of them; banks which have advanced money on them call in their advances, and they become virtually unavailable assets. Every panic that has happened since the beginning of the era of railroads in this country has been intensified many fold by the sudden shrinkage in the value of this class of assets, and it is precisely here that the aggravation and the chief danger of an American panic centers. Risks and panics are inseparable from our vast pioneering enterprise, and all we can hope is that they may diminish in severity in proportion as our older and more consolidated interests afford an increasing power of resistance to their operation. I am disposed to think that in the future the counteraction from this source will be much more effective than it has been in the past. The accumulation of financial resource available for market purposes at our monetary centers is increasing at a very rapid rate. Evidence of this is seen in the fact that while the magnitude of our corporate undertakings is augmenting every year, we are also every year becoming less dependent on the money markets of Europe, and our large corporate loans are now made principally at home. These accumulations impart elasticity to our financial system and serve as a buffer against great financial disturbances. I cannot refrain from expressing the opinion that there are permitted to exist in this country conditions which needlessly aggravate the perils of financial upheavals, when they occur. In every panic much depends upon the prudence and self-control of the money-lenders. If they lose their heads, and indiscriminately refuse to lend, or lend only to the few unquestionably strong borrowers, the worst forms of panic ensue. If, on the contrary, they accommodate to the fullest extent of their ability the larger class of reasonably safe borrowers, then the latter may be relied upon to protect those whom the banks reject, and thus the mischief may be kept within some bounds. Everything depends upon anxiety being held in check by an assurance that deserving debtors will be protected. This is tantamount to saying that all depends on the calmness and wisdom of the banks. They may easily mitigate or aggravate the severity of the crisis according as they are prudently liberal or blindly selfish. It is, perhaps, safe to say that the banks never do all they may, but the banks of New York must be credited with having shown great sagacity in troubles of this kind within the last twenty-five years. They have largely succeeded in combining self-protection with the protection of their customers, and the precedents they have established will go far toward breaking the force of any further panic. Unfortunately the law imposes restraints upon the national banks which seriously interfere with the wise discretion of those institutions. As the law now stands, the banks are liable to be wound up at the order of the government if they permit their lawful money reserves to fall below 25 percent. of their legal deposits. This establishes a "dead line " which is so dreaded when approached that it becomes almost a panic line. When that limit is reached, the banks are compelled to contract their / loans, and, under certain conditions, the contraction of loans/ means forcible liquidation without regard to consequences. Thus the very contrivance designed to protect the banks becomes a source of serious danger to their customers and therefore to the banks themselves; and in times of monetary pressure it is the most direct provocative of panic. Were the banks allowed to use their reserves under such circumstances, a fund would be provided for mitigating the force of the crisis and the danger might be gradually tided over; but as it is, the banks can do little or nothing to avert a panic; on the contrary, the law compels them to take a course which precipitates it; and when the crash has come, they have to disregard the law and do what they can to repair the catastrophe that a preposterous enactment has helped to bring about. This is one of not a few restrictions upon our national banks which should be stricken from the statute book. It was chiefly due to the prompt and liberal policy of the banks that the panic of I884 was so short lived and so narrowly circumscribed. The results of the timely action taken by the managers of these institutions in that crisis prove that panics can be arrested by proper methods, and that quick and determined action is indispensable in the incipient stage of the emergency. If bank presidents could be relied on by the business community to act promptly and in unison with the business men, as they did in this instance, threatened panics need have but little terror for the people who now live in constant dread lest an outburst of business disaster may be sprung upon them at any time in any decade. In the early history of panics, bank managers, as a rule, have acted without system, without judgment, and almost entirely without any well-defined plan of action. There has been an astonishing lack of vigor in their methods and purposes. If the panic of I873 had received the same vigorous treatment at its beginning as that of I884, it could just as easily have been checked as the latter, and the entire country would have been saved in a great measure from the depressing effects of that serious collapse and its attendant disasters, which caused a state of general prostration for five or six years succeeding. These years, from a business standpoint, appear as a blank in the history of the country's progress. It was the disturbing element of panic makers, who generally constitute one of the most potent factors of disruption to be dealt with in seasons of business trouble, that caused the greater part of the mischief at the time of Jay Cooke's failure in I873. The holders of Northern Pacific bonds, finding then that the security was no longer equal to that of government bonds (as they had been taught to believe), but was apparently worthless, became panic stricken at their losses, and were all transformed into panic makers, infusing the spirit of distrust into every one with whom they came into contact, until, like a fatal virus, their terror inoculated the whole country, spreading business disaster far and wide. It is to be hoped that in future legislation on currency reform, ample provision against the emergencies liable to arise out of panics will be regarded as of the very highest importance. Referring to my own forecast of the panic of 1893, I think I may afford to lay modesty aside in view of the value of the facts. The following communications were written a few months prior to the outbreak. Then was the calm before the storm, but the rumblings of distant thunder were occasionally heard, for hearing which I do not take any special credit to myself or pretend that I have sharper ears than other people. There was a host of bankers and brokers in Wall Street and elsewhere who heard those rumblings as well as myself, but only a few of them spoke out their minds freely, and fewer still took it upon themselves to caution and advise those at the helm of state. The storm burst at length in tremendous fury on the heads of all the people of the nation, but directed its most destructive bolts against the larger financial centers, of which Wall Street, of course, was the chief. I had taken especial pains at the time to warn the Treasury through President Cleveland regarding the impending danger, and to suggest how it might be averted. I wrote to him as follows: - "NEW YORK, March 28, I893. " MR. PRESIDENT: - In view of the fact that the United States Treasury gold balance is now so low, while the gold balance in the banks is in a far more satisfactory condition, it would appear advantageous to strengthen the Treasury gold balance through a negotiation of bonds. The banks, I find in a canvass I have made amongst many of the large ones, are perfectly willing to part with $25,000,000 of their gold for bonds, as they are anxious to do all in their power to uphold the government credit. Such a negotiation as this could be better effected now than later on, and its moral influence would be to restore confidence, now on the wane, in the ability of the government to continue gold payments. Respectfully yours, " HENRY CLEWS." The time at which this letter is dated was very opportune for obtaining enough of gold through the channels indicated therein, and a loan of twenty-five millions then would have been more efficacious in allaying the excitement and impeding the panic than four or five times that amount a few months later; and, moreover, one hundred millions could have been more easily obtained then than twenty-five millions at the later date. History will bear me out, I think, as regards the relative conditions of the money market and the borrowing power at these two dates. Mr. Cleveland, however, did not seem to pay any attention to these suggestions. Why did he not? Simply because the result of their operation would have been in conflict with his political policy at that time, which was to let things severely alone, so that some pressure might come to teach Congress an "object lesson" which would force it to repeal the silver purchasing clause of the Sherman Law. That law, he seemed to think, was at the root of all the financial evil and distress with which the country was then visibly menaced. The gathering clouds which contained a terrific storm had already begun to darken the horizon and threatened, momentarily, to burst; and if Mr. Cleveland could have foreseen the fury of that financial gale, I am certain that he would have used the best means at his disposal to weather if not to avert it. An adherent of Mr. Cleveland has asked me this question: "Do moderate men think Cleveland deliberately and purposely brought on the panic, to teach Congress by an object lesson?" I answered: "He said so himself, and took great pride in this theory at the time, on the principle of making a law obnoxious by executing it. He has never said he was sorry for it." I do not wish the reader to imagine that I think there was any feeling of malevolence in Mr. Cleveland's desire to bring about a panic just as an " object lesson " to Congress, for the purpose of urging that honorable body to repeal the obnoxious clause of the Sherman Silver Act. He had no conception of the baneful results that were inevitable from his more than executive action. He could start the panic, but could not stop it at pleasure. His course of procedure in the matter reminds me of a story that is told about a raw recruit in the English army. On his advent into barracks the first thing that attracted his attention was the cannon, a specimen of which he had never seen before. He was an Irishman. So he said to the comrade to whose care he had been consigned and who explained the nature of the destructive weapon, "I would like to see how she shoots. Will you charge her?" The comrade consented and put in the ordinary charge of powder, but, when he was about to apply the match to the touchhole, he recollected that there was no ball in the cannon, and that he could not give Pat a full and satisfactory illustration of its power without that necessary adjunct. "Oh, never mind," says Pat; " what's the use of wasting a ball on a try shot? I'll put in me head, and you shoot aisy." So Mr. Cleveland thought he could shoot easy, but the range of the panic was a long distance one, and went far beyond his calculation. While it would be impossible to estimate the numbers of killed and wounded by that shot, it is safe to say that there have been very few, if any, pitched battles in the whole range of ancient and modern history so expensive as Mr. Cleveland's " try shot" at Congress.