Fifty years in Wall Street

by Henry Clews

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?