CHAPTER LXX
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LEADING WALL STREET EVENTS UP TO THE FALL OF 1907.
The natural result of the panic of 1903, and the long period of depression in Wall Street, was that an unprecedentedly large surplus reserve was accumulated by the New York banks in 1904, reaching its maximum in August. This was still further swelled in 1905, when speculation for a rise again assumed formidable proportions, and new high records were made in the stock market. Both bank loans and deposits reached a magnitude never before known, and the activity on the Stock Exchange, combined with that in trade, and land, mining, and other speculations outside of Wall Street, caused the clearing house exchanges to greatly exceed those of any previous year.
Our foreign imports also increased till they made new high records, although our exports failed to keep pace with them. This large import trade reflected both the rising fortunes of the rich, who had suffered severely during the depression of 1903, and the general prosperity. Our imports are the barometer of the times. When these are good, they are large; but in bad times they shrink enormously, for a large percentage of them represent luxuries, and we are a luxury-loving people, and, in comparison with Europeans, our manner of living is expensive, not to say extravagant.
Before the end of 1905 the banks of the rest of the country followed those of New York in reporting deposits and loans larger than ever before, whereas in the early part of it their only high record was in the amount of their cash reserves. This showed the great demand for loans and discounts to meet the requirements of the rapidly increasing volume of trade and speculation.
The amount of money available for loans was largely reduced in the early part of 1905 by our heavy exports of gold. But it was subsequently increased by the issue, up to December 1st, of sixty millions in National Bank note circulation, which was so much fuel added to the fire of speculation, not, however, in Wall Street, as much as in the interior, where there was a rage for new enterprises of all kinds, mostly speculative. Everyone with money enough to make a venture seemed to be seeking a short cut to wealth.
This inland speculation and business activity, particularly in the West and South, caused the exchanges or clearings of the banks all over the country, except in New York, which was comparatively dull, to reach larger totals than ever before. Our iron production and foreign imports, at the same time, made new high records.
The gold in the United States Treasury, owned by the Government, increased under the tariff on imports from $193,072,614, early in 1905, to $291,258,135, near the end, and the total amount held by it, including that held against outstanding gold certificates, increased to $816,354,352, the largest in the Government’s history, and also the largest held by any government or institution in the world. The next largest sum ever held elsewhere was $591,600,000, by the Bank of Russia, in 1898. Yet on January 31, 1895, the total amount of gold held by Uncle Sam—that is, by the Treasury—was only $97,353,776, and on February 12th this had dwindled to $41,340,181, owing to the run on the Treasury through fear that the Government might be forced to suspend gold payments. But President Cleveland’s prompt action in selling bonds for gold—to the Morgan-Belmont syndicate—averted this possibility.
Before glancing at more recent events, it is well to refresh our memories by looking back at the most conspicuous features of the stirring period in Wall Street’s history, extending from the beginning of 1901 to 1906. In 1901 we had a year of extraordinary developments, including new company organizations and old company amalgamations, wild and reckless speculation by the outside public, heavy borrowing of European money to carry on this speculation, the failure of the corn crop, and, except for corn, a heavy fall in the prices of our products.
In 1902 Wall Street was flooded with new bond and stock flotation schemes, all clamoring for bank loans, although the activity of trade called for all the loanable capital available. Coincidently, there was wild and reckless speculation in stocks by newly made industrial millionaires with large bank resources and enormous loans at their command. The outside public, however, were not tempted by the bait they offered. Hence, the banks had an excessive burden of loans, all the greater because of the determination, at any risk, of the speculative capitalists to carry out their flotation schemes so as to control great industrial, railway, and other corporations. Meanwhile, there was an immense increase in our foreign imports and a decrease in our agricultural exports, and a great rise in raw materials and the cost of labor. But, fortunately, the year gave us a good corn crop and other satisfactory harvests.
Then came 1903 with its train of disasters. Investors took alarm at the masses of new securities thrown upon the market, and withdrew from it. The securities consequently became unsalable, and prices declined rapidly. This forced liquidation in bonds and stocks of all kinds,
## particularly the better kinds, to save the poorer from sacrifice by the
syndicates, corporations, firms, and persons who were over-extended and unable to respond to the calling in of loans by the banks and other money lenders. Wall Street was full of “undigested securities,” on which it was impossible to borrow any longer. So multitudes of holders had to sell them for what they would bring. Then came a heavy decline in iron and steel, among other things, an equally heavy reduction of the profits of industrial corporations, with many corresponding reductions in dividends, and a very sharp contraction in our before greatly expanded foreign imports owing to the hard times. We had a rich man’s panic, and plenty of poor rich men. But, again, we had abundant grain crops, although the cotton crop was very short, which resulted in our shipping more cotton to Europe in the autumn than ever before, while its price was abnormally high.
In 1904 we saw one effect of the depression of 1903 in the abnormally large surplus reserves of the New York banks, when money on call for about eight months loaned largely as low as one per cent. Only four times before had these reserves been exceeded. Then came the largest gold exports ever made by us. In June the stock market began to recover under spirited speculation for a rise, together with much buying by investors. But reckless professional speculators carried prices so high that the market collapsed in December. During the year there had been a slow yet general revival of trade, in the face of extremely high prices for cotton, resulting from a short crop and a bull movement, which paralyzed the cotton manufacture, and caused many mills to close both here and in England. But happily this was followed by the most bountiful cotton crop we ever had, owing to the high price of the staple having stimulated cotton planting all over the South. A heavy fall in the price of cotton resulted, in which the bull leader failed. But the grain crops met with disaster, and were the smallest since 1900, which resulted in the highest prices since 1898, and the smallest exports to Europe since 1872. The presidential campaign in the meantime passed without creating a ripple in the tide of Wall Street.
In 1895, simultaneously with much discussion of the world’s increasing gold product, we saw both here and in the Old World, especially in the latter part of the year, unexampled monetary stringency with very high rates for money. The surplus reserve of the New York banks was wiped out twice, that is, they twice fell below the dead line of the required twenty-five per cent. reserve on their deposits, while the Bank of England’s condition was the lowest since 1890, and the Bank of Germany’s the lowest since 1897. Yet we had a very active and excited bull speculation in stocks, just as Germany had, despite the high rates for money, and its abnormal scarcity consequent on its vast employment in trade and speculative enterprises outside of Wall Street.
That the world’s increased gold product largely stimulated speculation for a rise, both by adding to the amount of gold in circulation and the amount of paper money issued by the banks against it, is certain. Its effect has not been seen in lowering rates of interest, but in lowering its own value, or purchasing power, by reason of its increased supply or, in other words, by raising the prices of stocks, commodities, labor, and whatever else money buys. So the increased supply of gold has only quickened the uses for it by fostering speculation, and the demand for speculation has outrun the increased supply of gold—that is, money—and correspondingly raised interest rates, as well as prices. In 1905 our national prosperity was crowned with abundant harvests, the corn crop having been the largest on record, and that of wheat the second largest. This gave a fresh impetus to trade and speculative enterprise, with increased railway and industrial earnings, and production, especially in iron and steel products, at a higher pitch than ever before. Dividends and reserves also increased in proportion. Russia’s disastrous war was waged without causing any national disturbance in Wall Street, and her largely reduced crop of wheat helped us to secure better prices for our own surplus wheat in Europe. So it is an ill wind that blows no one any good.
In 1905, too, we witnessed the stormy upheaval in the Equitable Life Assurance Society, begun by the acrimonious duel between President Alexander and Vice President Hyde, which led to the general exposure of the waste, extravagance, graft, and corruption in life-insurance management, through the investigation of the New York Legislative Committee. The loss of new insurance business, caused by the popular distrust of the companies exposed, had its principal effect in Wall Street in their reduced power to buy bonds; and the prolonged stagnation in the bond market after they ceased to be large buyers was largely attributable to this cause. But the exposure was much needed and did great good in correcting abuses of power and turning the rascals out.
Our exports of domestic merchandise kept pace with our tremendous industrial prosperity, and these more than doubled in the ten years ending with June, 1906. Raw cotton, provisions, and iron and steel manufactures were exported in the fiscal year 1906 to a value exceeding $300,000,000, iron and steel showing the largest increase, and seventeen articles, or classes of articles, had an export value of from ten to forty-two millions. While iron and steel have taken third place, raw cotton still holds the first, and provisions the second, and copper manufactures have advanced from the eleventh to the fourth place. But refined mineral oil, that was third, is now the eleventh, and flour has dropped from fourth to seventh, although showing an increase of seven millions, and wheat from seventh to thirteenth.
On the other hand, our exports of agricultural implements were five times as great in 1906 as in 1896, which advanced them from the twenty-third to the fourteenth place in the list. Our cotton manufactures, too, advanced in value from twelfth to eighth, that is, from $16,750,000 to $53,000,000. There is, however, still room for a great increase in these, and the outlook favors a large and growing demand for them in China, the Philippines, and South America. We have become a great manufacturing and mining, as well as agricultural, nation, and a lower tariff on raw materials would swell our exports enormously. That will come in time; but at present politics stand in the way.
In 1906 we saw a continuation of the same big bull speculation in stocks that, with varying fortunes, had been progressing since June, 1904, with Edward H. Harriman, president of the Union Pacific Railway system, and James J. Hill, president of the Great Northern Railway system, the most conspicuously dominant figures in the railway world, and, incidentally, in the world of Wall Street. Prices on the Stock Exchange, and the rates for money, both on call and time, were abnormally high, and still tending upward, till both frequently exceeded six per cent. in August, and, in some instances, jumped as high as thirty per cent. early in September, the excess above six, in the case of time loans, being represented by a commission. This, on the eve of the usual drain of money westward and southward, to move the crop, caused much anxiety for the future, as it was entirely without precedent in that month. But the Secretary of the Treasury, through bank deposits and gold imports, was relied upon to relieve the stringency when it became more acute later on, under the actual drain of money West and South. He did so by renewing his offer, made in April, to deposit gold with national banks when secured by bonds, to the amount of any gold they wanted to import, the deposits to be returned when the gold arrived. Thus they were saved loss of interest in transit, and gold was imported largely.
The money market seemed to have no terrors for the great speculative capitalists in control of the stock market. Prices were still bid up boldly, and the Harriman and Hill stocks, in particular, were marked up to figures never before quoted, just as Reading and the other anthracite coal stocks had been long before and have been since.
The chief sensation of the year 1906 in the stock market was produced by the Harriman announcement on Friday, August 17th, that the semi-annual dividend on Union Pacific had been raised to five per cent., or from a six-per-cent. per annum basis to ten per cent.; and that an initial dividend of two and a half per cent., or at the rate of five per cent. per annum, had been declared on Southern Pacific. These unexpectedly large dividends and the delay in making them known, after they had been acted upon by the directors on Wednesday, and finally on Thursday, greatly excited and disturbed Wall Street. They were dividends that staggered the bears and astonished the bulls, and caused an advance of sixteen per cent. in Union Pacific and five per cent. in Southern Pacific stock that day. They also made the whole market run into a wild bull speculation, stimulated by a rush of “shorts” to cover their contracts, and a sudden influx of fresh buyers from the outside public. Reckless buying by these made it easy for the bull leaders to run prices up sharply, especially as it was expected or feared by many that the example set by Union Pacific in dividend raising would, or at least might, be followed by certain other large companies, both railway and industrial, whether the increase was justified by actual net earnings, or only intended for stock-jobbing purposes.
The criticisms of President Harriman and his associates to which these sensationally large and peculiarly announced dividends gave rise, were too trenchant to bear quotation or description. But Mr. Harriman was said to have added ten millions to his personal fortune by the rise in Union Pacific and Southern Pacific stock, which preceded and followed these very generous distributions to the stockholders.
The fact that Mr. Harriman, the son of a quiet country clergyman, should have been able to come into Wall Street and climb the ladder to wealth and power as he has done, and with such amazing celerity, shows the unlimited possibilities of the Street as a gold mine, for the Union Pacific Railway system, like the other great railway systems whose stocks and bonds have always been dealt in here, was practically born and financed in Wall Street. His rise to a position of such prominence and vast power is far more wonderful even than the career of Russell Sage as a Wall Street money maker; for Russell Sage never had any power but his money, whereas Edward Henry Harriman represents and controls thousands of millions’ worth of other people’s property, employing tens of thousands of persons. He is a moving spirit in dozens of banks and other corporations, including the Wells Fargo Express Company, outside of the Union Pacific and Southern Pacific system of railways and steamships. The great stock market struggle between Harriman and Hill for the control of Northern Pacific in 1901 was a battle royal on a grand yet disastrous scale, that will always be memorable in the history of Wall Street.
When Russell Sage died in July, 1906, within a few days of his reaching ninety years, leaving not far from a hundred millions of money, he left a will which reflected his sagacity as a money saver, for he left all he had, except a few unimportant bequests, to his wife. He did so, I infer, instead of distributing his great wealth himself, because he knew that the State inheritance tax would only be one per cent. on what he gave her, while it would be five per cent. on what he left to such relatives as he had surviving, as well as to all others.
It was, to a certain extent, “the ruling passion strong in death,” for, of course, he knew that his wife had no use or desire for so much money. Although his bequeathing it to her was a tribute to her goodness and a symbol of their happy married life, she would probably have preferred to shoulder a much lighter load of wealth. Its distribution will be no ordinary task, although it will doubtless be a labor of love with Mrs. Sage.
Russell Sage, in his manner of life, all now agree, set a good example of frugality and industry in an extravagant and pleasure-loving age, and hence he is held by many to have been a public benefactor. His unusually economical and plain habits, together with his great wealth and great age, naturally made him conspicuous and also a target for the wits, and in this way he became better known through caricature than matter-of-fact description. But that was one of the penalties of publicity. He passed from poverty to great wealth entirely of his own creation without being spoiled by it, and remained one of the plain, unpretentious people till the end.
He owed all he had to Wall Street, and his career illustrated, more than any other has ever done, how fertile a field for fortune making Wall Street may prove to a sagacious man, of untiring industry, who knows how to cultivate it, and can see and avail himself of its splendid opportunities. His rise from extreme poverty to immense wealth, through his own unaided exertions, shows how one man, single-handed, may do wonders and turn all he touches to gold, and that, too, in Wall Street. We are living in a stirring and rapidly progressive time, and the great and growing importance of the New York Stock Exchange was reflected by the rise in the price of a membership in it in 1906 to not very far from a hundred thousand dollars.
The year 1906 was one of immense activity and prosperity in trade. Prices were high and still advancing, and profits large, particularly those of industrial corporations. At the same time a mammoth bull movement was running its course on the Stock Exchange, and the grain crop turned out larger than ever before in our history, while enormous issues of new securities were announced by both railway and industrial corporations. These new issues severely taxed the resources of the money market, already being too heavily drawn upon by the “big men” of the Street to promote their wild bull campaign in stocks, and spasms of stringency were frequent. Indeed, the year 1906 from beginning to end witnessed a continuation of those inordinately heavy demands for money from Wall Street and corporations, and these led to the disturbed monetary conditions which were first felt in September, 1905. It was an eventful year, a year of immense activity on the Stock Exchange, in which much that was unprecedented occurred. It was a year in which the stock market, after touching high record prices and violent ups and downs, went gradually, in an excited speculation, from bad to worse, in a limited sense, or from one critical stage to another, till it reached the year’s end. Then it averaged only nine per cent. below the highest prices. But it became, in spite of the boldest bull manipulation, gradually weaker and more demoralized. The bull movement at length met its Waterloo in the spring of 1907, because the plunging millionaires who had been bidding them up found no buyers for their stocks. So they had to liquidate heavily, like the rest. It was another rich man’s panic.
From a slow and irregular decline stocks good, bad, and indifferent passed into the rapids of a bear market, with the bears, emboldened by success, recklessly aggressive, and on March 14th prices broke from ten to twenty-five per cent. under their fierce attacks, and relentless hammering, supplemented by an avalanche of long stock forced for sale under stop orders that had been reached, or through weakened and exhausted margins, or by holders unwilling to take any further loss.
Yet enormous as was this paniclike fall in prices on that disastrous day, many stocks went still lower in the breaks that followed the sharp rally that succeeded it. So March, 1907, ended as it began, in gloom and depression, which was followed by comparative dullness but little recovery in April and May. In June, however, it became evident that liquidation had exhausted itself, and all unfavorable factors had been discounted by the decline. Hence, although the market was almost entirely professional, with the outside public as apathetic as ever, it began to develop an upward tendency, notwithstanding the sharp rise in grain and cotton due to the extensive damage done by an unusually cold spring, and the fact that we shipped $15,000,000 in gold to France in June.
This vast and thorough liquidation had been mainly by the bull pools and richest speculative capitalists in Wall Street, and involved tremendous losses. These leaders of the bull movement had been caught overloaded with stocks, carried over from the previous boom that they had recklessly engineered. They were forced to sell because the banks were either calling in their loans, which they were unable to replace, or calling from time to time for more margin to offset the decline in prices. Thus their cash resources were being constantly impaired.
Meanwhile, money loaned at abnormally high rates, and five times in the spring, autumn, and winter of 1906 the New York banks showed a deficit in their reserve. Money, therefore, was very hard to borrow, because these giants of speculation had overtaxed the banks’ resources by borrowing too much. Coincidently the outside public held aloof from the stock market, owing to the great activity of trade and the wild speculation in land, mines, building, and other new enterprises all over the country.
This speculation from Maine to California absorbed an immense amount of money, of which Wall Street saw nothing, and it left the large speculative holders of stocks without any market for them, except among the professional traders. No wonder they staggered, and finally, in the spring of 1907, succumbed under the heavy loads they were carrying, which they had mistakenly bid up to excessively high prices in a vain attempt to bring in the public as buyers. Wall Street was then the only blue spot on the map of the United States.
To relieve the pressure for money there, and so help to bull stocks, the large interests in Wall Street, excepting J. P. Morgan & Co., imported from Europe $40,000,000 of gold in the spring of 1906 and $45,000,000 in the autumn.
This last great importation caused the Bank of England to raise its minimum rate of discount from three to four, then to five, and then again to six per cent., the highest since the Boer War. The rate, it was intimated, would have been advanced to seven per cent. had we taken any more of the yellow metal. The purchase of so much gold in England was made possible only through the Secretary of the Treasury, Mr. Leslie M. Shaw, practically advancing the means for importing it by lending gold to the banks, secured by collaterals, the loaned gold to be returned when the imported gold arrived.
The spring gold importations followed the great San Francisco earthquake and fire, on April 18th, involving an estimated loss of $250,000,000. Most of this, however, fell upon British, German, and other foreign fire-insurance companies, which relieved this country financially to a corresponding extent, although New York shipped more than $50,000,000 of gold to San Francisco to fortify the banks in that city.
After the stock market had been sold to a standstill and its weak timbers eliminated, by May, 1907, it was only natural, in view of its previous drastic liquidation and heavy decline, that with good crop weather following the backward spring, stocks should advance. The keel of a future bull market of large dimensions had been laid by the disastrous liquidation that had occurred, and we subsequently witnessed its development on a rapidly ascending scale. It is a law of nature that
## action follows reaction.
This reminds us that Wall Street easily passes from one extreme to another, and that very often the dawn is nearest when the night is darkest, in finance as well as nature. Moreover, Wall Street is always with us, just as the poor are, and the stock market is a serial story that never ends.
In July, the improvement in the stock market, and especially the Harriman stocks, was very decided, with the indications favoring a wider and more active speculation, for as yet it was almost entirely professional. In this movement the Standard Oil and Harriman party were the bull leaders, with Union Pacific the leading stock. Notwithstanding their vigorous efforts, however, the outside public remained entirely apathetic, and there was growing anxiety as to the future of the money market. This was increased by our having, unexpectedly, to ship gold to Europe, nearly all of it to the Bank of France, as well as by depressed monetary conditions there, with much disturbance, under heavy liquidations, in London and Berlin. Even British Consols declined from week to week, till they touched 81, the lowest price recorded since 1848, the year of the Smith O’Brien rebellion in Ireland, when they sold down to 80.
Then came an angry and threatening contest, and stormy litigation, between the States of North Carolina and Alabama and the Southern Railway Company, involving also other Southern States and railways. The main conflict was between the States named and the United States Courts on the 2¼ and 2½ cents a mile rate law. This went so far as to cause a revocation of the license of the Southern Railway to operate its lines in Alabama. The situation for a time was extremely critical, but a truce was at length arrived at, the Southern Railway agreeing to obey the State law, and leave the ultimate decision to the United States Supreme Court.
While this disturbing controversy was at a white heat, the $29,240,000 fine inflicted by Judge Landis, of the United States District Court, at Chicago, on the Standard Oil Company of Indiana, fell like a thunderbolt upon not only Wall Street, but investors all over the country. This was on Saturday, the 3d of August, and it looked so like confiscation, and so alarmed the large speculative capitalists, who had been supporting the stock market, that they at once withdrew their supporting orders and, for self-protection, became heavy sellers themselves of the stocks they held. They foresaw the effect of this disturbing decision, and the course of the Southern States towards the railways, upon investors, in causing liquidation. Simultaneously, a threatening report from the Bureau of Corporations added fuel to the fire of distrust.
Day after day, for twelve business days, following the opening of the stock market on Monday, the 5th, there was an almost uninterrupted and very heavy decline in prices for both railway and industrial stocks, the best and highest priced being the heaviest sufferers, and falling from ten to twenty-five per cent. The scare among holders of stocks increased as prices declined, and demoralization in the market carried these generally below the lowest in the panic of March. It was very largely another rich man’s panic, due to fears as to what might come next to disturb confidence in the value and future dividends of both railway and industrial stocks. The worst of it was, the innocent were, as usual, made to suffer with the guilty. But after a storm there cometh a calm, and so it was in this case, and perhaps all’s well that ends well. But the ordeal was a very severe one, particularly for the large holders of stocks, and made the year 1907 still more memorable than before.
Rumors of impending Wall Street and industrial corporation failures, as usual in times of disturbance, filled the air, but only one important industrial failure and one unimportant Wall Street suspension occurred in August, and the gradual return of confidence caused a gradual improvement on the Stock Exchange, although the semi-annual dividend on Southern Railway preferred stock was reduced from 2½ to 1½ per cent., and the dividends on Erie’s first and second preferred stocks were declared payable in four per cent. scrip warrants instead of cash. Toward the end of the month the Secretary of the Treasury announced that weekly deposits would be made in the national banks till October 15th, and this at once began to ease the money market and further strengthen confidence.
Early in September, however, there came a relapse in the stock market, and another Stock Exchange failure. This recurrence of disturbance and depression was partly due to stagnation, followed by demoralization in the copper trade, both here and in Europe, which caused a reduction in the price of copper by the selling agency of the Amalgamated Co. from 25 cents a pound to 18 cents, and not long afterwards to 15 cents.
Meanwhile the Calumet and Hecla, the Quincy, and other copper companies had reduced their dividends, owing to the small demand for copper, and Amalgamated copper stock declined rapidly to 57½, against 121 in January. In Boston, also, the copper stocks broke in the same demoralized way under heavy liquidation.
Railway shares sympathized with this extreme weakness of copper and the copper stocks, but not as much as American Smelting, the U. S. Steels, and other industrial stocks, and gradually the copper crisis ceased to dominate them. At the same time the general market for both railroad stocks and bonds was strengthened by the great success of the $40,000,000 issue of 4½ per cent. bonds by the City of New York, the loan being five times over-subscribed. This showed there was a large amount of money in the country awaiting investment in good securities. Yet, later, new low records were made for sundry railway and industrial stocks, including Southern Railway common and preferred, and the stock market, in its nervous and irregular fluctuations, told of the timidity of the bulls and the boldness of the bears, consequent on shrinkage in the iron trade, and uncertainty as to the business future.
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