Fifty years in Wall Street

by Henry Clews

This want of confidence was mainly due to exaggerated apprehensions of the effect upon railway and industrial corporations and their stocks of the Government investigations and prosecutions, and the hasty action of the States against the railways in cutting down their rates. Much of this State legislation is too restrictive, and will probably be modified, or rescinded, after a trial.

It was argued that there was no telling where and when the so-called crusade against the railways and the Trusts would stop, or what the final result would be. The bears and the alarmists were equally loud and excited in pointing to the twenty-nine-million fine as a sign of what, in varying degrees and amounts, might happen to other corporations, and bring ruin to many of them. Thus a merely unsettling influence was magnified into a formidable element of national disaster. As prophets of disaster, the bears outdid each other, regardless of their friends, the bulls.

The threats and aggressive attitude of some of the Government’s law officers alarmed many as much as their allegations against the corporations they prosecuted did, and they feared that irreparable harm to those corporations, and their business, would be done before their cases were finally decided on appeal, and that their stocks and bonds would suffer accordingly, with, it might be, interest and dividends suspended. Thus they borrowed a large amount of trouble.

With these feelings uppermost in the public mind, or at least influencing investors, it was not surprising that such a fever of distrust prevailed on every stock exchange in the United States, and that sympathetically and temporarily it somewhat affected the London Stock Exchange and every bourse on the European Continent. The situation had begun to look almost hopeless before reason began to take the place of hysteria among most investors and speculators. Then the indiscriminate slaughter of stocks prompted investment buying, and the great scare, after two weeks of storm and stress, gradually passed into history, while prices, with occasional setbacks, responded to the change of sentiment by slow but general recovery. But whether this will be followed by a relapse or not remains to be seen.

The apprehension excited among investors and speculators in stocks by that $29,240,000 fine against the Standard Oil Company of Indiana did an immense amount of harm through the enormous losses to which it led. In combination with the prosecution of the Southern Railway by Southern States, involving the conflict between North Carolina and Alabama and the United States Courts, that extravagant fine, so suggestive of opera bouffe, was the immediate cause of the heavy liquidation that produced this August crisis and turned the New York stock market into a storm center. Although there was no probability or even possibility of this fine ever being collected from a million-dollar corporation, even if affirmed on appeal, public sentiment was about as much disturbed as if it were ultimately collectible. By creating, although without sufficient reason, fear of confiscation, it led to those enormous sales and sacrifices of stocks by investors, as well as by speculators, and the virtual panic that lasted those two long and memorable weeks.

The innocent thus suffered with the guilty, and the evil effect of such a fine was clearly demonstrated by a very severe and disastrous object lesson. The true remedy for rebating and other wilful violations of law is not to be found in the infliction of heavy penalties on the guilty corporations, but on the responsible and guilty officers of those corporations, and not alone by fine but by imprisonment. Heavy fines inflicted on corporations fall finally on their stockholders, through a corresponding loss of dividend-paying power, and the lowering of market prices for their stocks. The proper remedy is punishment behind iron bars.

As the stockholders are in no way responsible for delinquencies in management, it is unjust to make them suffer the consequences of these. It should, therefore, be the future policy of both the Federal Government and the States to punish corporations for illegal practices by criminal proceedings against those in their employ who are found to be responsible for them. Thus punishments will be confined to the guilty, and confidence will be restored among investors, for such prosecutions would in no way tend to depreciate the value of the stocks and bonds of the corporations concerned, but on the contrary they would tend to enhance their value by promoting honest management. This is a pivotal point to be kept constantly in view. Backsliders would be the only sufferers.

The collapse in Wall Street stocks was, however, not so much due to the trust prosecutions, the Southern States Railway legislation, the twenty-nine-million fine, and the avowed policy of President Roosevelt’s administration, as to the general condition of monetary affairs, and the condition of the stock market itself, although the causes enumerated started the August collapse. The outside public had for a long time been holding aloof from the stock market, owing both to the railway and industrial prosecutions, and hostile State legislation, and the great activity in trade, and in land, mining, and other speculation calling for a great deal of money. Speculation outside of Wall Street was never more rampant.

At the same time stocks were very largely concentrated in the hands of a few men of great wealth, who were anxious to sell them at improving prices, and they could only do this by making a market for them. They had in this endeavor a hard row to hoe, as the farmers say, for money was scarce and dear on time, not only here but all over the world, with the European market, like our own, overloaded with securities for sale, and, worse than all, with no demand for them from investors. They were in a tight place, rich as they were.

This condition of affairs was reflected in the gradual and persistent decline of British Consols, that had always been rated as the best and safest securities in the world, to 81, the lowest price at which they had sold since 1848—the year of the Smith O’Brien uprising in Ireland, when they touched 80. The depression in the other European stock markets was almost equally great, particularly in Berlin. We could, therefore, look for no market for our stocks, or our vast accumulations of new railway and other bonds, in Europe. The foreign markets were closed to us, and wanted nothing American but our gold. Our speculative capitalists loaded down with these unsalable securities were severely handicapped. From being giants, they had become cripples. Their wealth was tied up instead of being in the liquid form of poorer men who had their money in savings banks, withdrawable at any time. One New York City institution, the Bowery Savings Bank, held and still holds over a hundred million dollars of deposits.