As the summer of 1907 advanced, speculation throughout the country continued in rapidly increasing volume, while on the Stock Exchange there was an almost complete cessation of activity. Business men of the West and South seemed to feel that as there had been no serious failures, and as the decline in the stock market had restored values to an attractively low basis, there would be a normal recovery similar to that which followed the panic of 1893. They felt that the trouble, whatever it was, had now been corrected, and in this fancied security they went about with further expansion of their business enterprises, confident that no serious difficulties were in store. The Stock Exchange was often cynically referred to in that period as “the only blue spot on the map.” Its members were cheerfully invited by a Western newspaper to “shake off their torpor and join the Sunshine movement.”
It is only fair to say that there was some force in the buoyant if superficial viewpoint of the country at large, for in the autumn of 1907 we were blessed with all the kindly fruits of the earth in abundance. The average crop of our agricultural products gathered that year was enormous, and behind it lay large reserves of wealth that had accumulated from a series of good crops in the years just preceding. There was, moreover, a partial failure of foreign crops that brought about heavy foreign requirements, thus assuring rich returns to American producers. Our railroads, which in the previous panic of 1893 were so affected by declining traffic and by the unproductiveness of new territory into which they had ventured that bankruptcies became general, were early in 1907 in better physical condition than ever before. Their gross earnings were at a maximum; their surpluses fat with the profits of recent years; their credit high. A long accumulation of foreign-trade balances had made the inherent strength of the nation greater than ever before. Finally there was the great essential difference between 1907 and former years in that we were now, by statute law as well as in fact, on a gold-standard basis.
And yet, without one unsound basic factor visible to superficial observers, we were suddenly plunged into a grave disaster—a panic which in actual money losses surpassed any of its predecessors. It came, this cataclysm (as the Stock Exchange had vainly predicted six months earlier), at the worst time it could possibly come, just when the banks were called upon to furnish $200,000,000 to transport and market the crops. Small wonder that in the face of such an optimistic outlook men stood aghast at the violence of the panic. As they had not understood the warning, so they could not understand its swift fulfilment. In all the long processions of panic-stricken people who stood in line at the banks in those trying days, not one in a hundred could understand how an institution could be solvent and yet be forced to suspend. Later on, smarting from losses, this bewilderment gave way to distrust and suspicion, as is often the case, humanly speaking, when men look elsewhere than to their own folly for the sources of their misfortunes. They were in a receptive mood when the charge was made that “Wall Street and the Stock Exchange” had brought about all this misery; they believed it to be true, and many still believe it.
The charge was so widely circulated and was fraught with such possibilities of mischief that there was danger of ill-considered legislation directed against the Stock Exchange and supported by ill-advised public opinion. Thus it happened that Governor Hughes of New York, doubtless moved to forestall hasty law-making, appointed a committee to investigate the Stock Exchange. In another chapter we have reviewed the work of this commission; meantime, the words of its chairman are quoted, in passing, as a sort of ex post facto reply to the outcry that “Wall Street did it.”
“The immediate cause of the panic,” he says, “was a simultaneous rush to sell securities, by holders who perceived that there was trouble in the money market, and who wanted cash to meet maturing obligations. These holders were not Wall Street men merely, but people in all parts of the country who had invested some of their savings in stocks and bonds. The very raison d’être of the Stock Exchange is to supply a market where invested capital can be quickly turned into cash, and vice versa. The remoter cause of the panic was a long course of speculation in all kinds of property, real and personal, that had pervaded all parts of the country, and many parts of the Old World, and had now reached its climax.” Mr. White here adds in a footnote that it has been “shown conclusively that speculation on the Stock Exchange was not the chief contributor to the collapse of 1907, but that speculation on a much wider scale, through the length and breadth of the land, was the exciting cause.”[64]
I have said it was not surprising that the public failed to observe signs of disturbance in the happy conditions that seemed to prevail before the panic. The blindness of the mass of the people to these impending catastrophes is, indeed, a marked characteristic of all similar epochs. Let us digress for a moment and consider the history of other great disturbances. In 1825 the King’s Speech as read by the Lord Chancellor dwells on “that general and increasing prosperity ... which, by the blessing of Providence, continues to pervade every part of the Kingdom.” This was in July; in December of that year the whole country was torn by a devastating financial crisis. The London Economist, in 1873, dwelt at length on the “astounding” progress of the Austrian States, and said, “All over the rich countries of the Danube, capital and labor are vigorously at work in the discovering and turning to profit the amazing resources which have been lying unheeded for centuries.” This was written in March; the Bourse at Vienna closed its doors May 9th, and a panic of exceptional severity was followed by long and continued depression. On December 31, 1892, R. G. Dun & Company’s Weekly Review of Trade said: “The most prosperous year ever known in business closes to-day with strongly favorable indications for the future,” and yet four months later the storm burst.[65]
These instances go to show how the elect may err in estimating conditions, despite the fact that in two of these three memorable crises ample warnings of an impending catastrophe were proclaimed in the stock market long before these prophecies of continued expansion were printed. In each instance the portent was ignored; in each the ultimate penalty was paid. So it was in our own great crisis of 1907, and so it will always be.
There was a panic throughout the United Kingdom in April and October of 1847, yet the early response to changing conditions took place two years before, when stocks began to fail in July and August, 1845. In the year 1857 commerce and industry expanded throughout America in increasing volume up to the very eve of the August crisis, yet the stock market in the summer of the preceding year gave clear warning of what was to occur. One year before the panic of 1873 a similar “slump” foretold what was coming, and the same was true of the year preceding the panic of ’93.[66] Previous to the last-mentioned crisis stocks began to fall, with unmistakable emphasis, early in 1892. Of seventeen of the most active, five reached their maximum price in January, 1892, three in February, four in March, two—Lake Shore and Michigan Central—in April. And as we have seen, identical preliminary warnings developed on the Stock Exchange from one year to six months before the last great panic of 1907.[67]
The panic that hit the Paris Bourse in October, 1912, causing a disturbance not equaled in violence since 1870, was brought about by sowing the wind through an immense public speculation based on two fine harvests in Russia and a feverish revival of commercial and industrial activity all over Europe. Up to this point all the indicia of the movement—such as bank loans, building operations, public and private extravagance, and a blind infatuation for speculation by a normally prudent nation that had not speculated on a large scale since the Panama débacle of 1894—corresponds exactly with conditions in America just preceding the 1907 crisis. The similarity between the two incidents goes even farther, for early in September of 1912 the French bankers and Agents de Change, recognizing the strained condition of credit, had deliberately put in motion corrective agencies designed to stop the rise with the least possible derangement of confidence.
They would have succeeded, no doubt, and the situation would have exactly paralleled our own discounting processes of March, 1907, but for the unforeseen Balkan difficulty which, coming out of a clear sky, upset the plans of the conservative financial forces and precipitated a panic. It came, as a French banker explained, a week too soon—by which he meant that, given a little more time, the worst phases of the disturbance would have been avoided through gradual and orderly liquidation. As it stands, the panic will no doubt go down into French financial history as “the Balkan panic,” just as our disturbance of 1907 is ascribed, faute de mieux, to Wall Street wickedness; but in reality both the French and American crises had their origin in precisely similar causes. The Balkan news in Paris only precipitated what the French Bourse had planned to accomplish in an orderly manner, just as Wall Street and the Stock Exchange had done five years earlier in a similar emergency. The essential lesson of both instances is that the same causes which generate prosperity will, if pushed far, generate an equivalent adversity.