The details of the panic of 1907 are still fresh in mind, and need be but briefly referred to. Banks and trust companies closed their doors and suspended payments to depositors. Cash and credit became almost unobtainable; we were face to face with demoralization. Clearing-house certificates were resorted to at practically all banking centres throughout the country; there was a general requirement of time notices for withdrawal of savings bank deposits; all normal credit instruments were impaired. The Secretary of the Treasury was forced to exercise heroic discretion in the matter of security for government deposits and for the very necessary increase of a note circulation that was then suffering from a spasm of contraction. There was an immense hoarding of funds and a consequent drying up of fluid capital, while from one end of the country to the other, there was liquidation, business contraction, retrenchment, panic, and ruin. “Wall Street” and the Stock Exchange had foreseen that the chain was only as strong as its weakest link, and had done what it could to prepare the public for the break. To assert at this late day that it did aught but its full duty is humbug in excelsis.
I have already cited one instance, the country’s expanding bank loans as contrasted with “Wall Street’s” contraction, to show how plainly the warning was conveyed. As another instance, take the immobilization of capital tied up in the enormous real-estate speculation then prevalent. In New York City alone the increase in mortgages recorded jumped from 455 millions in 1904 to 755 millions in 1905, an increase over the previous years of 32.7 per cent, and 66 per cent, respectively.[68] The figures showing the increase in building permits are similarly significant, revealing the fact that in 1905, 1906, and the early months of 1907, money was pouring into new construction at a rate without precedent. In Greater New York alone, not including Queens County, building permits granted in 1904 amounted to $153,300,000, and in 1905 to $229,500,000, and in the face of disaster this rate of increase continued up to the very eve of the panic.[69]
Outside of New York the expansion in building operations was equally rapid and equally ominous, showing an increase in twenty-five cities alone from $201,300,000 in 1903 to $234,200,000 in 1904, to $280,400,000 in 1905 and to $307,800,000 in 1906—all this but a small part of the actual funds thus locked up throughout the whole country.[70] We thus find that one of the most important and inevitable causes of the panic was the absorption of exceptionally large amounts of capital in enterprises that required a considerable time for completion, or which, when completed, were not immediately profitable; and to them may be added factories and extensive public and private works of every kind. This form of expansion, as Senator Burton points out, when carried to extremes almost invariably brings about a disturbance.
Now let us consider. Does all this expansion of bank loans outside of New York and all this tremendous increase of building operations show that the Samsons of “Wall Street” were pulling down the temple on their own heads in order to slaughter the Philistines, as alleged, or does it show an indifference and lack of readjustment to the growing stringency of money, as revealed by the Stock Exchange in its liquidation of March and April? “As a rule,” said John Mill, “panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”[71] There would have been no such “betrayal” had judicious reflection and a measurement of facts followed Wall Street’s warnings.
A shrewd man, one of the old school of New York City wholesale merchants, who has nothing whatever to do with Wall Street or the Stock Exchange, yet whose trade arteries extend to many parts of the country, has long governed his business by the published reports of Stock Exchange transactions. If he sees there revealed a wholesome, normal, and conservative expansion in all lines of business and a money market that betrays no uneasiness as to the future, he presses on into new lines of endeavor, confident that the immediate future is serene. If he finds an urgent liquidation on ’Change, with the coincident phenomena of impaired credit instruments, he draws in his lines and waits. It makes no difference to him who is rocking the boat, nor why; experience has taught him that if it rocks, the time has arrived to go ashore. And this steady old merchant, I have no doubt, is but one of a numerous type.
Those who ignore the economic tides that ebb and flow through the medium of the Stock Exchange as they did in 1907, do so because they do not understand that these great market movements are really but expressions of natural laws. If there is a rising tide—a boom—it is attributed by thoughtless people to speculation and gambling. If there is a bad break, it is caused by panic-stricken repentant sinners, or by the activities of the bears. The essential point that is missed here lies in the fact that, while bulls and bears alike may have their brief hour, sooner or later, regardless of them, the market responds to actual conditions and discounts the future of those conditions.
Booms are not made on the Stock Exchange; they are made in the country’s fields and forests and workshops. Panics are not created there; they have their origin in mistakes and excesses throughout the world, and in psychologic conditions which stock markets cannot hope to control. The pendulum may swing far, but it comes back. Sooner or later the movement of prices tells the exact story of future business, and of credit, and of all the economic agencies that enter into them. This was not well understood in 1907, and, as I said at the beginning, I doubt if it will ever be understood in the sense that it will avoid a recurrence of panics. All that we may hope for is that periods of depression, which are inevitable, may not be attended in future by such a loss of the reasoning faculties as that which brought about the affair of 1907.
Now let us consider another cause of the panic—the currency system, always bearing in mind the fact that the first and greatest cause of the panic was the over-expansion outside of New York that has just been described. The causes which we are now to consider were of minor importance when measured by this overshadowing matter; nevertheless they played their part and must be considered accordingly.
Not all panics, to be sure, can be prevented by a perfect currency system, yet this one could have been measurably prevented, and “Wall Street” and the Stock Exchange had labored for years so to prevent it. At the gatherings of the Chamber of Commerce, at the bank meetings, at all the meetings of merchants and manufacturers for years preceding 1907, the mischievous effects of our currency system were proclaimed and the ultimate outcome predicted. Congress was petitioned again and again to remedy those intolerable conditions, and to permit national banks to expand their circulation under proper safeguards, but without avail.
When the storm burst, a most impressive object lesson in practical finance resulted. What was at worst but a normal stringency of the circulating medium developed, when added to abnormal demands from the country at large, into conditions that created great alarm. There was no way by which the banks of the country could use the resources which they actually possessed to meet the urgent requirements of the hour. A great nation of enterprising people found itself—and still finds itself—compelled to do a banking business differing in degree, but not in kind, from the old-woman-and-her-stocking system of finance. The way our bankers got down on their knees to London and Paris in that emergency, frankly admitting their inability, under our old flint-lock laws, to handle a situation which foreign bankers meet without difficulty, is a subject at once painful and humiliating. Literally our bankers begged for help and got it. Some day we shall have to beg again.