Part 2
In 1824, the protective tariff enactments were followed by general inflation in all lines of business. Two years later, in 1826, a general depression occurred with many failures. The depression at this period was even greater in England than in the United States, and many writers attribute the entire trouble to European business reverses, but it is probable that we had been living beyond our means and that this fact, to say the least, aggravated the disturbance.
In 1837, after six years of good times, another crisis occurred. This depression was attributed to various causes. The great New York fire of 1835, the loss of charter by the United States Bank in 1836, and the calling in of $37,500,000 of government deposits by President Jackson, are all given due consideration. The actual panic, however, did not appear until May 10, 1837. All the banks suspended specie payments, and securities,--in fact all properties of whatever kind--fell rapidly in value. The most plausible explanation of this crisis is over-speculation in land. The other evils mentioned might easily have been rectified by the recuperative powers of a growing country, had the more serious element of wild inflation been absent.
In 1848, after a long period of prosperity, broken only by the war with Mexico, business inflation and over-speculation again brought about the logical and inevitable result. Europe also had been over-speculating again and a crisis in England soon extended to the United States. Liquidation was drastic and the depression lasted until the discovery of gold in California began to bear fruit.
In 1857, one of the most serious, as well as the most short-lived, of our crises occurred. Again speculation was extreme; December, 1856, marked the high point in securities, and prices continued to sag for some months; but it was not until August, 1857, that a panic occurred.
In 1864, came a crash in speculative prices following tremendous inflation. Between April, 1864, and April, 1865, leading stocks declined from $50 to $100 per share. As the inflation of this period was caused largely by the high prices of commodities and greatly increased railroad earnings occasioned by the events of the Civil War, most writers on the subject do not consider it in their theoretical discussions of crises.
In 1872, another boom was on, particularly in Iron and Steel. The Chicago and Boston fires had not been as effective in breaking stock prices as might have been expected. Prices of stocks began going down materially in April, 1873, and in fact had been rather “toppy” during the preceding years. This panic, like most of the others, was preceded by enormous speculation and high prices. It is interesting to note that while stocks were declining, general business was booming. The trained minds of Wall Street were learning to discount the future at longer range and more accurately. The iron and steel business exceeded all former records in 1873, both in the matter of normal price and actual production.
In January, 1884, numerous failures and suspensions produced a panic which was in reality the culmination of a long decline. As in 1872, this panic was preceded by enormous general business. The steel and iron trade again broke all records in 1882, and other lines were equally prosperous.
In 1893, the period of prosperity which followed the enactment of the McKinley bill was rudely broken. Speculation had been rampant, as usual. On May 4th, 1893, the National Cordage Company went into the hands of a receiver. Only a year prior to that date, this corporation was paying 12% in dividends and the stock was selling well above par. There were many badly inflated stocks and many rotten spots in the speculative stock markets. The Distillers and Cattle Feeders shares fell from $70 to nothing, and were assessed $20 per share. The aggregate liabilities of business failures in 1893 were almost $350,000,000, over 20% greater than in 1892. Banks failed right and left, and several leading railroad companies went into the hands of receivers.
In 1903, another period of depression occurred. It is doubtful if this period can be rightly classed with the other crises already mentioned, for it was more in the nature of a drastic but orderly retrenchment than a panic, and the bull stock market of 1902 was again in full swing early in 1904.
In thus briefly detailing the crucial points of nineteenth century financial affairs, there is no intention of entering an economic discussion, and no pretence of giving anything like a comprehensive history of the events preceding or following their recurrence. The subject here discussed is speculation, and the object sought is to gain knowledge that may be of value in forming opinions as to future prices. We may gain some information of this character by analyzing the following points:
1--Did price declines in stocks precede, accompany, or follow panics, crises, or general business depression? 2--What are the signs which usually precede such periods? 3--What are the salient causes? 4--Can any dependence be placed in the regularity of these recurrences?
On the first head it will be found that in all cases the top of the stock market has been reached prior to the actual eruption in general business. Stock speculation in 1814 and 1826 was not of great volume nor importance, and cannot be given much consideration.
Beginning with the panic of 1837 we find that the highest prices for stocks were made in October, 1836, while panic conditions did not occur until May, 1837. Preceding the panic of August, 1857, highest prices were reached in the last months of 1856. Highest figures were recorded in April, 1872, just one year prior to the panic of 1873. The stock market anticipated the troubles of 1884 by 17 months of declining prices. In January, 1892, stocks began declining and continued their downward course until the panic of 1893 cleared the atmosphere. In our last period of depression (1903) stocks had reached their pinnacle in September, 1902, just one year before the market turned for the better.
We find therefore that in the majority of instances, highest prices for stocks were reached long before business troubles were openly apparent. This action represents to a certain extent the selling of stocks by men who were wise enough to foresee trouble.
Another interesting fact in regard to crises is that they are usually preceded by record-breaking business in all directions. As iron and steel may be considered the best barometer of business conditions, the following tables are instructive:
PIG IRON PRODUCTION IN THE UNITED STATES SINCE 1860.
Year Production Tons 1860 919,770 1861 731,544 1862 787,662 1863 947,604 1864 (Depression) 1,135,996 1865 931,582 1866 1,350,344 1867 1,461,626 1868 1,603,000 1869 1,916,641 1870 1,865,000 1871 1,911,608 1872 2,854,558 1873 (Depression) 2,560,963 1874 2,401,262 1875 2,023,733 1876 1,868,961 1877 2,066,594 1878 2,301,215 1879 2,741,853 1880 3,835,151 1881 4,144,254 1882 4,623,323 1883 4,595,510 1884 (Depression) 4,097,868 1885 4,044,526 1886 5,683,329 1887 6,417,148 1888 6,489,738 1889 7,603,642 1890 9,202,703 1891 8,279,870 1892 9,157,000 1893 (Depression) 7,124,502 1894 6,657,088 1895 9,446,308 1896 8,623,127 1897 9,652,860 1898 11,773,934 1899 13,620,703 1900 13,789,243 1901 15,878,354 1902 17,821,307 1903 (Depression) 18,009,252 1904 16,497,033 1905 22,992,380 1906 25,307,191
It will be observed that the high record of production has been reached just prior to our greatest periods of depression, or during such periods.
The second phase of the question, “what signs usually precede such periods?” opens a wide field for the student of speculative changes. Some inspiration may be gained from an examination of the two points already considered, i.e.: priority of price movements and business inflation; but it would be extremely difficult to use them as guides unless many other factors were given consideration. If we eliminate the element of periodicity, any attempt to determine the turning point by examination of advances in prices of stocks or volume of production and consumption of commodities is futile. Using pig iron as a barometer we might, after production has gradually increased from 8,623,127 tons in 1896, to 15,878,354 in 1901, argue that a considerable reaction was due in this line, but we would be out in our calculations two years and two million tons. Neither can we accept the simple fact of a decline, or the beginning of a decline in iron or in any other single commodity as indicating lower prices for stocks; for however accurate iron may be as a barometer of general business, it is not at all a barometer of the stock market. It is practically certain that stock prices will move either to higher or lower prices long before any reasons for such movements are apparent to the ordinary observer. Future stock market movements are largely deductive, and are not founded upon ordinary industrial statistical evidence.
There is, however, one method by which some light may be thrown upon the subject of probable movements. A careful study of monetary conditions and expansion of credits will frequently reveal dangers not apparent in any other direction. It is scarcely necessary to say that such examination must not be confined to one quarter, such as New York City; or to one country, such as the United States. A comprehensive view of the world’s monetary conditions will be necessary. This subject is dealt with more fully in another chapter.
There is much difference of opinion among writers and students of economics as to the cause of depressions. Bagehot attributes it to the fact that, “at particular times a great many stupid people have a great deal of stupid money.” This writer contends that occasionally money accumulates abnormally and craves an investment outlet. To use his own words, “This blind capital seeks for some one to devour it, and there is plethora; it finds some one, and there is speculation; it is devoured, and there is a panic.” Horace White attributes panics to over-speculation. Bonamy Price says: “A vast outlay in new enterprises involving a large consumption of food and materials, whether in the way of pure waste or temporary unproductiveness, ought always to suggest a feeling of danger. This excess occurs in seasons of prosperity.” John B. Clark holds that it is due to an excess of production; or an excess of production in one line with a deficiency in others. Leone Levi: “The main cause for the occurrence of crises is the sudden realization of an insufficiency of capital to meet present demands.” Thorold Rogers says: “The cause exists in the function of exchange; in the expectation of unreasonable profits and in incorrect calculation.” It was the late Henry George’s theory that depressions are brought about by higher prices of land. He held that workers thrive as they have easy access to natural opportunities for production, and are impoverished as they are deprived of such opportunities. All periods of speculation and inflation end in higher land values. Landlords call for a larger percentage of the product than workers can afford to pay, and both labor and capital become idle until there is a readjustment. Prof. W. S. Jevons, and a host of others, attribute crises to sun spots and their effects on harvests. And so on through a long line of theories.
The consensus of opinion appears to favor the theory of over-speculation, whether in realty, commodities, or the shares of corporations, and this leads up to the question of periodicity. That there has been a recurrence of these troubles about once in ten years is not a debatable question. Nevertheless, many thinkers scout the idea of this repetition at marked periods being other than fortuitous. As prominent a student as Thorold Rogers, for example, ridicules the theory of periodicity. Many hopeful people believe that in time we will find means to avoid these bad spots; that the United States is a young and enthusiastic country, and that we will gradually sober down in both methods and effects. But against this theory lies the cold fact that these cycles have occurred with as charming regularity in France and England as they have in our own country, which would indicate that age and seasoning does not produce any appreciable improvement.
It is probable that the most acceptable theory as to the causes of periodicity is the psychological contention. Human nature is much the same throughout the civilized world. We suffer from a panic and a period of depression, and we grow wary and conservative. This course results in sound methods and accumulation. The business structure rests on a firmer foundation. Gradually the hard lessons of the past are forgotten by the older generation, and are entirely unlearned by the new business generation, all of whom are optimists. Again we expand our enterprises, again fortune favors us; the appetite for gold grows greater as wealth accumulates; men who were economical and satisfied on modest incomes now live extravagantly, and some of them dream of millions. Capital is spread out thinly. Story after story is erected on one foundation, and that foundation, sound enough at first, eventually gives way. Then we must begin our careful building once more. The ten year periods, therefore, may represent with more or less accuracy, the lapse of time between wisdom and folly,--the yard-stick of human intellect and experience.
Many of the writers on this subject seem to strive for tangible reasons for each depression. They dive into the subject for a cause and emerge with an effect, or a handful of effects. For example, the depression following 1893 was not caused by the failures of banks and other business institutions, but the failures were caused by the depression. It matters not that the failures ante-dated the bad conditions. Again, the depression itself was produced by prior inflation. It was the illness after over-stimulation. And so, in turn, we can ask what caused the inflation; and the answer is “Human greed and human folly.” This last analysis brings us around in a circle to the original theory of a psychological cause.
It is submitted that a dependence on periodicity of any kind, either in the ten year cycles or in year to year events is fraught with danger and cannot be adopted by the speculator. It is chart-playing pure and simple, and the man who disposes of his stocks for no better reason than that a depression appeared ten years ago, is liable to find himself in the position of the chart-enthusiast, who, after tracing a marked uniformity in movements for a period of years, runs into reverses and loses all.
It is not meant to say that a knowledge of the past is without value. Inductive reasoning is almost as important as deductive reasoning, when properly employed and applied. If we scrutinize the history of past crises and great movements with a view to determining the salient causes therefor, a great deal has been gained, for we may apply this knowledge to existent elements lying parallel to those which caused trouble in the past, and thus decide what is probable in the future. If, on the other hand, we place dependence on mere repetition, we gain nothing in education and stand in constant danger.
It may be contended that the active speculator has little to do with ten year cycles or their causes, but this is not the case. A correct understanding of the reasons for the great cycles will simplify the study of smaller intermediate movements. Much knowledge applicable to year to year movements will be gained. Monetary troubles, for example, occur almost annually, and their effects on market movements are usually, (not always), similar to those of more widely separated periods, but, of course, in a lesser degree.
III
The Gold Supply
It may be stated without hesitation that the effect of the increasing supply of gold upon prices of all bonds, shares, or commodities which may be classed as speculative, is more decided and certain in its operation than any other single factor. The process of readjustment due to this cause would be slow and regular if the principles at issue were universally and clearly understood. Not being generally recognized, however, the changes wrought by what is naturally an insidious factor are, at times, spasmodic and feverish. It is a remarkable fact that whenever a revolution occurs in any economic or financial process which is, by its nature, concealed or recondite, its existence and influence are discovered by a number of students simultaneously but independently. Important reversions or modifications may be submerged for a long period, and suddenly light is offered from all parts of the thinking world. It is probable that this intellectual phenomenon extends to, or is communicated to the financial world, and that marked and drastic changes in the affected quarters represent a belated recognition of forces hitherto unknown, and the readjustment of affairs by those who see first and furthest. That the operations of this minority will be important goes without saying. The faculty to grasp fully and quickly anything salient bearing on financial affairs is the ground-work of riches and consequently the trained minds of great holders of shares or commodities will respond most readily to sound basic arguments, and the greatest holders can often make of their knowledge a two-edged sword. For example, certain large holders of bonds, recognizing the fact that increasing gold production means higher interest rates, and consequently lower prices for bonds, would be able to dispose of bonds to advantage because of the apparent general prosperity growing out of this same production of gold. It may be assumed that in pointing out in interviews, etc., this reign of prosperity, the gentlemen in question would modestly omit to mention that the same influences which were causing high prices and much business in some quarters, were working damage in others.
Something of this kind has been going on in our bond and stock markets of late. The inevitable influence of gold on prices has made itself slowly felt for a long period, but it is only in the last year that a considerable number of individuals whose operations are of importance in the financial world have come to recognize how powerful this influence is. Price changes in divers securities and commodities hitherto unaccounted for, or attributed to wrong influences, have suddenly been explained to a number of important financiers, and a correct understanding of the problem has undoubtedly resulted in radical readjustments in some quarters. With that pertinacity in error which seems to distinguish the ordinary speculator, he has, however, gone on attributing these processes of equilibration to causes which have only a limited bearing on the case. The recent heavy decline in bonds and stocks, for example, was popularly ascribed to political and legislative action against railroads. Scarcity of money was given second place in these deductions, and gold production third place, or no place at all. If we reverse this order of importance and give gold production first place, monetary affairs second place, and political affairs third place, we are nearer the truth. It looks a little ridiculous that the scope of intelligent perspective should be blocked by three thousand miles of water, and that the unthinking majority who ascribe our decline in bonds to local politics should have failed to recognize so potent a fact as that the decline was world-wide; but such is the case. The readjustment in bonds was due to excessive over-production of gold, and it may be safely assumed that so long as this over-production continues to increase rapidly, bonds will continue low in price or, what amounts to the same thing, interest rates will remain high.
As to the importance of a correct understanding on this subject of gold supply and its influence on prices, I quote from Mr. Byron W. Holt’s book “The Gold Supply and Prosperity,” which, I may add, is used as the text book for this chapter. Mr. Holt says:
“This is the great problem that now confronts the financial world and demands solution of every investor. Not to solve it may mean great loss and possible failure. To solve it means success and greatly enhanced wealth for all who now have either a fair share of this world’s goods or who have credit and can intelligently go in debt for a large amount.”
As speculation or investment-speculation, as defined in the introduction to this book, are the subjects under discussion it is the intention to take up, in turn, such points as bear particularly upon price changes of speculative shares and commodities influenced by our increasing supply of gold. The main points to be considered are as follows:
1--The effect upon bonds and preferred stocks having a fixed rate of income. 2--The effect upon common stocks of railroad corporations. 3--The effect upon stocks of industrial corporations. 4--The effect upon speculative commodities--wheat, corn, oats, cotton, etc.
For the purpose of argument it will be assumed in this discussion that our supply of gold is rapidly increasing. We know that such has been the case in recent years, and it is the opinion of most students that this increase may be confidently expected to continue. To quote again from the work already mentioned:
“Both the output and supply of gold are likely to increase for many years.
“While the future output of gold is, of necessity, unknown and uncertain, there is great unanimity of opinion, among mining experts, on this point. It appears to be generally recognized that, during the last twenty years, the industry of gold mining, or rather of gold production, has been established on a very different and much more certain basis than any previously existing. No longer is the output of gold dependent mainly, or even largely, upon placer mining and the chance finds of ‘free’ gold. The supply of gold, in rock, sand, clay, and water, being inexhaustible, it is now possible, by machinery and metallurgical processes, to extract gold, in paying quantities, from many forms of these vast store-houses. To such an extent is this true that the future supply of gold is even more secure than is that of coal, iron, lumber, wheat or cotton.
“Even if prospecting were to stop and attention were to be devoted only to the gold mines and bodies already discovered, and geologically in sight, it is probable that the output of gold would continue to increase for many years. As Mr. Selwyn-Brown, a gold mining expert, tells us in his very interesting article, ‘as the rich surface deposits are being worked out, improvements in mining and metallurgical processes are enabling poorer and poorer deposits to be worked.’ That is, improvements in ‘stamp mills,’ cyanide mills, dredging machines and other gold extracting apparatus and processes are being made so rapidly that it is, every year, becoming profitable to work lower and lower grades of ore, sand and earth. As the grade declines the quantity in sight increases rapidly. In fact there are almost literally mountains of low grade gold ore that can even now be worked profitably. Some of the largest, most productive and most profitable mines of today contain ore averaging less than $3 and, in some instances, only $2 of gold per ton.
“The supply of such ore being inexhaustible the output depends upon the number and size of the mills employed to extract the gold. It is reasonably certain that, for years to come, the improvements in methods and processes of mining will more than keep pace with both the decline in the quality of the ore and the increase in the cost of mining due to rising prices and wages, occasioned by the depreciation of gold.