Had the national banks of New York City enjoyed the right to expand their circulation in the manner provided by the plan of the American Bankers’ Association, at least a part of the débacle would have been avoided. “The banks and trust companies of this city have in their vaults the largest store of good credit that can be found in any city in the world,” said one of America’s foremost economists as the panic raged, “but much of it is utterly unavailable because of our currency system. One of the trust companies that closed its doors has in its possession live assets amounting to over $50,000,000. All this credit is dead. It cannot do the work of a single dollar in the paying-teller’s cage. What is wanted in a time like this is freedom to convert the credit of banks into a medium of payment that will satisfy the people.”[72]
True enough, and just what the whole financial community, including the Stock Exchange, had been repeating for years. Currency issues which do not provide for all situations, including not only ordinary demands, but also such exceptional cases of shrinkage as this one was, can never be called perfect, nor even safe. There is no health in them.[73] The most effective and the most rapid means of regulating and protecting the general credit situation is by increasing or diminishing the volume of outstanding bank-note currency not covered by a reserve of gold or other lawful money. This method is employed successfully both in France and in Germany. The Bank of France and the Imperial Bank of Germany to some extent regulate credit conditions by acting as central banks of discount; but their most effective action is by increasing or diminishing the uncovered amount of their outstanding notes. When additional currency is needed as a circulating medium they supply this currency by issuing notes. When contraction of currency, or a check upon the further expansion of bank credits is desirable, they accomplish the result by diminishing the volume of their outstanding notes and by raising the discount rate. This system is as nearly perfect as any yet devised.[74]
Whether we shall ever succeed in adopting it, or something like it, in America, is the burning question in our banking offices to-day. Until something is done, the layman who distrusts the plan of a central bank and looks upon Wall Street with abhorrence, may find satisfaction in knowing that the average New York banker is the most worried and harassed man in American business life. With millions of other people’s money in his possession subject to withdrawal by check at sight, and with millions of the best security in the world in his vaults lying absolutely idle and worthless so far as raising currency is concerned, he stands between the devil and the deep-blue sea. Anything that frightens his depositors, or even remotely suggests panic, gives him a cold chill. People who talk of manipulation by New York bankers as a cause of the panic of 1907 or any other panic are blind to the fact that any disturbance of normal conditions is the one thing that bankers would avoid as they would avoid the plague.
There was a third cause of the panic in the course pursued by the President. In some quarters it is still termed “the Roosevelt panic,” and there exists a belief that the President by his actions and speeches played a large part in bringing about the crisis. Personally, I feel that this has been exaggerated. There had been, unquestionably, wrongdoing by certain corporation managers. The President, with a characteristic vigor not unknown to politicians, seized upon it as a theme for his speeches, and the “evils,” the “malefactors,” the “corruption” and “dishonesty” with which he bruised the air, raised a suspicion in many quarters as to the status and security of the whole financial situation and undoubtedly contributed to the frightened liquidation of the day. The impression these utterances produced abroad, where American securities were popular, was painful, and led one returning tourist to remark that Europe was acquiring the idea that we were “a nation of swindlers.”
All panics are largely psychological, and this was no exception. The President’s public speeches came at a time when emotion, apprehension, and alarm filled men’s minds; and at a time when those irrational moods were most likely to exaggerate the difficulties that existed, and to conjure up difficulties that did not exist. Panics seem to come from lack of money, the real difficulty is lack of confidence, and it was to this that the President’s course directly contributed.
I am of the opinion that, judged by his public utterances, especially his October speech at Nashville, Tenn., the President had not the remotest idea that such an awful shock as the panic of 1907 was imminent. He was not a student of economic conditions; he had no familiarity with crisis-producing phenomena; he had never seen a panic at close quarters. His speeches did not cause the panic, for that disturbance was foreordained; they served, however, to hasten it, to intensify it, and to keep it alive. Perhaps I may add that the sparks beaten by him from the anvil of political expediency at that unfortunate moment threw more light upon the President himself than upon the evils he condemned. Perhaps, too, that was what the President most desired. In any case, the fact remains that just as there is too much confidence in times of excessive expansion, so there is too little in times of unreasoning depression; and that the President’s attitude aggravated the latter situations is undeniable.
But by what stretch of the imagination can the Stock Exchange be credited with playing any part in this third cause of the panic? If temporary depression results from exposure of wrongdoing among railroad, industrial, or financial institutions, nowhere in the land is execration poured forth upon the evil-doers more vigorously than within its four walls. Far from complaining, the Stock Exchange and the whole investment community welcome such exposures, despite their effect on the market, for the precise reason that their own protection and benefit, if nothing else, is promoted by it.
There was yet another reason for the panic, closely related to the attitude of the President. I refer to the predicament of the railways of the country as 1906 passed into 1907. Staggering under a load of traffic which sorely taxed their equipment, the managers of these properties cried aloud to the investing public for funds. But capital was not to be had. Tied up in real-estate speculation and in quarters whence it could not be easily recovered, the normal supply of capital was immobile and inert. What was worse, encouraged by the attitude of the President, an epidemic of radical anti-railroad legislation became manifest in the several States, new and onerous burdens of taxation were imposed, and a wave of distrust and suspicion regarding railway investments was created. Simultaneously the cost of wages and materials advanced—both characteristic phenomena indicating trouble—and, as a consequence of all this blockade, the ratio of net to gross in the matter of increased earnings fell from the normal proportion of about 40 per cent. in the first nine months of 1906, to less than 10 per cent. in the same months of 1907.
Railroads are public utilities that must continue to handle business offered them no matter what happens, and so, to meet all these abnormal demands, but one course was left open to them, and that was to raise funds by issues of new stock. This, of course, amounted practically to an assessment of stockholders; as an expedient it failed because “Wall Street” had already recognized the symptoms of disease. It was too late. Money and credit attract money and credit, and confidence attracts both. There was a shocking absence of confidence in the emergency of 1907, and the railroads suffered enormously by it.
With this matter certainly Wall Street had nothing to do; it could not in fact do more than it had just done in pointing out to the country at large, through a drastic process of liquidation, the obvious withdrawal of far-sighted investors from a situation that had become tense. Nor can the railroads be censured, because the great volume of business that confronted them was not created by them, and yet had to be transported by them. The fault lay, of course, in the wholesale and reckless expansion of all lines of industry, and in the immensely increased extravagance of public and private life.