We may seem to be prepared for these periodic set-backs, and there may be men amongst us of sober reflection who are really wise enough to foresee the top to a normal movement, yet the accidents that have happened will happen again,—bad harvests, war, sudden failures, earthquakes,—these are not easily discerned in advance. Sanguine and ardent merchants will make the same old mistakes; good times will engender the same old hallucinations; people who see, or think they see, wealth being created all around them, will always rush in and buy at the top; there will be too much work for the dollar to do—and after that the deluge. Finally, in order that we may not become pessimists, let us remember the words of the greatest of American philosophers: “The changes that break up at short intervals the prosperity of man are but advertisements of a nature whose law is growth.”
Another phenomenon quite as curious as that of panics, and one that is similarly psychological, is the unhesitating, slam-bang zeal with which we place the responsibility for these misfortunes on the shoulders of others. We, as a people, have brought the disaster upon ourselves by reason of our indiscretions. We have lost our heads and entangled ourselves in a mesh of follies. But we do not admit such reproaches, even in our communings with self. Not at all. The fault lies elsewhere, and it is balm to our bruises to place it elsewhere with indignant energy. It will not do to preach at such times about currency systems, laws of supply and demand and kindred generalities, for these are abstract and vague to a mind inflamed by losses. What such a man wants is a head to hit; something concrete, a target for his exploding wrath. And he never hesitates. He says Wall Street did it. His fathers said the same thing, and his children will follow suit.
Now here is a strange thing. After a man has said, “Wall Street did it” over and over again, he believes it, just as he believes or takes for granted a similar tedious reiteration by the humble katydid. To such a man, the thing he wants to believe, when stated over and over again, comes by repetition to fix itself in the mind as a demonstrated truth, notwithstanding an utter absence of proof or of reasoning. He says “Wall Street,” or “the Stock Exchange,” until he can think of nothing else. It is a catch-phrase, short and sweet, which he hammers home to his own ineffable satisfaction, and he thinks it and broods over it to his heart’s content. The politician then comes along with his cures for all the ills of society, and, finding Wall Street a convenient means of perpetuating his accidental notoriety, his voice joins the harmony. The indictment is then complete.
Take the panic of 1907 as the last and most conspicuous example. The financial losses involved, and the extent of the disturbance of the machinery of credit, made it the worst panic of this generation. As it burst upon the country at a period when to the outward eye prosperity reigned throughout the land, men were at a loss to explain it. They could not understand how such appalling conditions could occur in such apparently cheerful surroundings. As everybody was affected by it in greater or less degree the whole country was full of people with a grievance. They were themselves directly to blame for it, but they looked elsewhere for the responsibility for their folly.
That sinister influences were at work was, in the popular mind, undeniable; and by that same token we are pretty close to “Wall Street” when we talk of things sinister. At about that time a member of Congress made a speech in which he asserted, with all the art of katydid repetition so dear to the heart of the true believer, that the Stock Exchange was the cause of the panic. Rich men broke the market and “held the bag,” he said, while panic-stricken owners of property poured the invested savings of a lifetime into that capacious receptacle. Nothing could be simpler. Newspapers must print such things, and the public found what it wanted on the first page. Even to-day, five years after the fact, this delightful explanation of the 1907 panic blossoms like the rose as a political campaign progresses. The voice of the hustings “knows its business.”
Mr. John Burroughs warns us that it is one thing to treat your facts with imagination, but quite another thing to imagine your facts. Sufficient time has elapsed since 1907 to soften, somewhat, the bias and prejudice created by the events of that year, and perhaps there may be among us minds open to reason. The New York Stock Exchange feels, honestly, that a great injustice was done it by the criticism and abuse so generously poured out in the first shock of that event. Far from causing the crisis, its members assert that the institution fulfilled one of its most useful functions in giving ample warning of its approach, and that, when those warnings were disregarded, it concentrated all its machinery on the task of restoring order from chaos. They speak feelingly when they say that never in its history has the Stock Exchange been called upon to deal with so great an emergency, and never has it demonstrated so admirably its fundamental purposes. When they make these statements they offer to prove them. Let us examine the proofs.
The panic of 1907 was not unlike many preceding financial disturbances. The opening months of the year had witnessed a general liquidation on the Stock Exchange, brought about naturally, and in simple, automatic compliance with economic laws and precedents. There had been over-expansion in all lines of business; careful students saw the portent; able men of power and influence heeded its warning and set corrective forces in motion months before the shock came. Total transactions in shares sold on the Stock Exchange had risen from 187 millions in 1904 to 284 millions in 1906, while the value of the securities thus sold increased from 12,061 to 23,393 millions of dollars respectively. This was too rapid growth, and the general liquidation that had been under way for months effectually corrected it, since New York City bank loans secured by Stock Exchange collateral declined, as shown by the Comptroller’s report, from $385,652,014 in August, 1905, to $251,867,158 in August, 1907—a corrective force represented by $133,784,856.
The Stock Exchange has been defined as “a barometer of future business conditions,” and never did a barometer give clearer warning. It said in effect to all the banks of the country and to business men generally: “There has been a widespread over-expansion of credit; it must stop; we are doing our share here in New York to correct it; you must do likewise.” And, in order that there might be no failure to understand what was meant, New York City bank loans were reduced with drastic emphasis, months before the panic came, by nearly 35 per cent. “Without an exception,” writes Prof. S. S. Huebner, “every business depression in this country has been discounted in our security markets from six months to two years before the depression became a reality.”[61] Senator Burton, another authority, emphasizes the point further: “In addition to other influences which promote an earlier rise and fall, there must be mentioned the more careful study and attention to the financial situation which is given by dealers in the stock markets and in great financial centres. They often forecast the grounds for a rise or fall in prices before the general public is awake to the situation.”[62] This, then, was the situation in the summer of 1907. The Stock Exchange had “cleaned house,” and had liquidated thoroughly, warning the country to go slow.
Why was not this warning heeded? I recall vividly the daily expression of surprise, on the floor of the Exchange, and throughout the financial district, in the months that elapsed between our March liquidation and the outbreak of the October panic, that the country should pay so little attention to “Wall Street’s” admonition; that it should continue its unprecedented boom despite the plain intimation that the funds to support it were exhausted, and despite the general knowledge of every tyro in business that future conditions are discounted in Wall Street as freely as promissory notes.
Had the business interests of the country so much as inquired into that warning they would have found by turning to the Comptroller’s reports of the loans of national banks for the entire country that such loans had expanded from $3,726 millions in 1904 to $4,679 millions in 1907. They would have seen that whereas the New York City banks contracted their loans by nearly $134,000,000 from August, 1905, to August, 1907, loans and discounts by the banks of the whole country in that period actually expanded $700,000,000. Surely it will not be urged that Wall Street or the Stock Exchange had anything to do with bringing about this expansion. On the contrary, it shows that speculation in commercial lines, in new enterprises, in lands and in all the various forms that “out-of-town” banks are expected to finance, went on and on in vastly increasing volume long after the danger signal had been hoisted on the Stock Exchange, and in utter disregard of the warnings those signals conveyed.[63]