Moody' s Magazine sr^ss ublication de- Moody's Magazine THE NATIONAL INVESTORS' MONTHLY investor in securities. In its pages are discussed, monthly, the fundamental causes of market movements and the principles of safe investment. It does not disseminate tips nor does it encourage speculation in the ordinary sense of that word. Its aim is to safeguard the investor and to teach him to think for himself. Moody s Magazine contains, every month: An editorial review of current events in which a careful, unbiased and inter- esting analysis of current investment and general conditions is made in such a way that the average man is always able to comprehend them. Special articles of well-known financial experts and economists on such topics as the Tariff, the Currency, Railroad Rate Regulation, Gold Depreciation, questions which vitally affect the securities markets. Educational articles on the various phases of bonds, stocks, mortgages and other forms of investment; on Wall Street and its methods and on other sub- jects interesting to the investor. Regular departments covering life insurance, public accounting, legal decisions affecting investments, financial diary of the month, stock record of the month, monthly letters from Washington, London and Montreal and a sec- tion devoted to answers to subscribers' questions on specific investments. Subscription price, $3.00 a year. MOODY'S MAGAZINE 35 Nassau Street New York City NOTICE TO READERS READERS of the Book may arrange with Roger W. Babson, Wellesley Hills, Mass.,to be sup- plied each week with the latest figures on Railroad Earnings, Foreign Commerce, Crops, Domestic Trade, Political Conditions, Money Supply, Gold Movements, and eighteen other subjects of vital interest to investors. Only by receiving these figures regularly and systematically, tabulated in form for practical use, can the great principles herein outlined by Mr. Hall be of direct and immediate profit. Office o( HENRY HALL, Author of "How Money is Made in Security Investments" 52 BROADWAY, New York. \\ 7HILE books like " HOW MONEY IS MADE IN SECURITY YY INVESTMENTS" have done much toward educating the public with regard to the proper times and seasons when to buy and when to sell stocks, yet an extensive correspondence shows the awful mistakes which are being constantly made by people in private life in buying securities at the wrong time or buying the wrong things or both. The author is constantly in receipt of inquiries from those who have done him the honor to buy his book, concerning (1) slocks and bonds in which they have invested ; (2) other securities, which would ensure safety of principal and afford the best chances of appreciation in value; and (3) the author's opinion of the stock market at the time being, and whether it is best either to buy or sell in order to take advantage of the great swings in prices as outlined in the book. So great has become the number of these inquiries, and so large have been the profits of men who have followed the author's advice, that it now seems proper to make a moderate charge for the author's services in these matters. For $10 the undersigned agrees to make a careful report upon the holdings of stocks or bonds of any individual or institution, pointing out those which should be held for coming appreciation in value and those which ought to be sold, either because they are too high or for other reasons; and, further, to make suggestions concerning other stocks and bonds which can safely be bought both for income and for large profits. In addition, the trend and present position of the financial markets will be explained. Correspondence is invited. Send me a list of the securities you are carrying, for my criticisms and comments. HENRY HALL. MACKAY & CO. Members, New York and Boston Stock Exchanges. Dealers in Government Bonds and other Investment Securities. Interest allowed on deposits : : : : : NASSAU AND PINE STREETS, NEW YORK 13 Congress St. 421 Chestnut St. Boston Philadelphia Rookery Building, Chicago HOW MONEY IS MADE IN SECURITY INVESTMENTS OR A FORTUNE AT FIFTY-FIVE BY HENRY HALL FOURTH EDITION 52 BROADWAY NEW YORK 1909 Copyright, 1909, by HENRY HALL THE DEVINNE PRESS CONTENTS PAGE A NATION OF INVESTORS 3 How AN INVESTOR MAKES MONEY 11 BATE OP INTEREST ON INVESTMENTS 21 BONDS 28 STOCKS 44 CYCLES OF PROSPERITY AND DEPRESSION ....... 55 NORMAL YEARLY MOVEMENTS OF PRICES 105 COURSE OF THE STOCK MARKET SINCE 1860 ,114 POINTS TO BE WATCHED 119 TURNING POINTS IN THE MARKET 139 DULL DAYS IN STOCKS 154 WHEN TO BUY SECURITIES 160 WHEN TO SELL SECURITIES 169 MAXIMS OF WALL STREET 177 FINANCIAL TERMS AND PHRASES 182 RANGE OF LEADING STOCKS SINCE 1890 193 INTEREST BATES AND SURPLUS DEPOSITS SINCE 1890 . . 210 INDEX . 231 PREFATORY EXPLANATION A NUMBER of text books have been written to explain the character of the securities, which are sold through the banking and brokerage houses of the United States. They treat of stocks, bonds, notes and mortgages and describe the peculiarities of each. Other books have been published to define the meaning of the technical terms in vogue in the financial world. They all serve a useful purpose. It seems to the writer, however, that there is imperative need of another work, which shall go beyond elementary facts, and, in the matter of advice, shall do more than dwell upon the simple truism that an investor, before all other things, should pay attention to the safety of his capital and the regularity of his income. An investor needs to know how he can actually accomplish those ob- jects, and farther, not only how he can avoid the loss of part or all of his money, but also how to make money in securities. This book is devoted to the broad principle, that, unless there is a fair assurance that money can be made on stocks and bonds, it is almost certain that money will be lost on them or so locked up as not to be available for other uses for a period of years. If securities are going no higher, if the times do not promise greater profits and larger dividends, then all classes of securities are go- ing lower, at a date not far distant. A vast amount of money is either badly employed or wasted, every year, by investors, and great opportunities viii PREFATORY EXPLANATION are lost, in consequence of inattention to cautionary sig- nals, which are easily recognized by men experienced in finance but are entirely overlooked by others. Coming danger and coming prosperity are always fore- shadowed in various ways. An investor sometimes buys stocks or bonds, when it is of dominating importance that he should sell everything he has, both with a view to harvest the profit he has on them and to reinvest later selling in times of bullish enthusiasm being the step the average investor is usually the most reluctant to take. Conversely, an investor only too often sells, when every financial consideration demands that he should buy. To guide him in buying and selling, and to urge him to take his profits on investments at certain critical periods, are the objects of this book. History repeats itself in Wall Street with unfailing regularity, as in all other fields of human activity. A diligent study of Wall Street methods and the financial history of the past fifty years will reveal to any intelligent man considerations of great importance; and the, fruits of such a study are here laid before the public in the belief that they will conserve the interests of actual investors. Attention will be called especially to the remarkable changes in prices of all securities, brought about by alter- nating periods of prosperity and depression, and to the smaller but also noteworthy fluctuations at certain sea- sons in each year, all of which will be utilized by a care- ful investor. It may be well to say that this book is not written for the information of men of large fortunes. The man of millions needs no guidance from a work of this sort. He has private information not at all at the service of the PREFATORY EXPLANATION ix generality, and he can proceed with the purchase and sale of securities, with a confidence which is denied to men less well informed. The subject of security investments, and how to make money in them, is here discussed to meet the requirements of many thousand Americans, who have moderate amounts of money, say from $500 to $5,000, which they desire to add to their permanent capital, and from which they wish to derive as large a revenue as is consistent with safety, and from the investment of which they can also gain an actual increment to their principal. This work will not encourage the belief that a man can make himself rapidly rich by trading in Wall Street with a few thousand dollars of capital. The achievement is possible to men who have been trained to the business, but it is foreign to the purpose in view. The object will be to show that security investments can be handled in such a shrewd and conservative manner, that the princi- pal will be safe and the income sure, and that when this is accomplished, a desirable increment can be added to prin- cipal in a perfectly legitimate way a policy which will ensure a fortune possibly in a series of years and certainly, in a life-time. NEW YORK, April 29, 1909. IN presenting the fourth edition of this book to the public, the author calls attention to the remarkable fact that a large proportion of the business world appears to have been taken entirely by surprise by the panic in stocks and recession in business of 1907. It is alleged that thousands of active business men lost, in one year, the profits of the previous ten, and virtually were forced to begin life anew. x PREFATORY EXPLANATION The aftermath of a panic is practically the same in all cases. The losses are always grievous. The poor suffer to some extent; the rich suffer the most. That was cer- tainly the case, in 1907, when the securities listed on the New York Stock Exchange fell more than $4,000,000,000 in value. While the panic of 1907 resembled 1893 in some respects, 1896 in others, and 1903 in yet others, the general result has been the same so far as wide-spread losses to prosperous individuals is concerned. But it is remarkable that intelligent and well read men, attentive to the conditions on which prosperity -and sol- vency rest, should have been taken by surprise by the panic of 1907. As early as December, 1906, the signs of a coming crisis were unmistakable. The enormous excess of loans over deposits in New York, almost unprece- dented in history, a condition paralleled to some extent in the country banks, was alone sufficient to foreshadow the course of events in 1907. The panic was, in fact, predicted by the author in correspondence with authorities in Wash- ington, as early as January, 1907. This volume was perhaps the first to point out the vital influence of an excess of loans over deposits upon the course of the stock market. The events of 1907 have vin- dicated its position on this subject. The rebound in stocks and bonds from the low level of the Fall of 1907 has been vigorous, as is usual in the second year after a panic; and various good stocks have, in 1909, reached the highest prices at which they have ever been sold. The immediate future now rests upon the action of Congress in revising the tariff, the decision of the United States Supreme Court on the "commodity clause" suit, and the currency legislation of the present Congress. HOW MONEY IS MADE HOW MONEY IS MADE A NATION OF INVESTORS OLD TIMES IN AMERICA, COMPARED WITH THE PRESENT. AMERICAN SECURITIES ONCE OWNED MAINLY ABROAD. THE CHANGE SINCE 1825 PEOPLE were strong, healthy and happy in the ' l good old times ' ' of the forefathers of the republic, but they were not rich. The skies were as blue as now, the grass as green, the streams were full of fish and the forests of game, the soil was fertile, and it was not difficult to make a living; but scarcely any one owned securities and the commonalty knew little about them. Several millions of people occupied the thirteen colo- nies. They were courageous, industrious and thrifty. But in the simple occupations of the pioneer settlers of a new continent, no great amount of surplus wealth could be accumulated. Lands and plantations, stage coaches, toll roads, sailing vessels, petty manufactures for local sale, retail and auction stores and inns all existed and were the forerunners of lines of business, in which for- tunes have since been made. At the time, they merely afforded a subsistence to the energetic men, who devoted their lives to them. Millionaires were almost unknown, while men worth several hundred thousand were extremely rare. General Washington was probably the only man on this continent in his day, who could have been rated as a millionaire. 3 : MONEY is MADE Securities were not unknown of course ; but there were only a few joint stock companies and almost no corpora- tions 7 and from the very nature of the case, stocks and bonds had little more than an academic interest to per- sons who had no money with which to buy them. Owners of securities were found only among a limited number of merchants and bankers in the larger cities and the pro- prietors of landed estates, North and South. Stocks and bonds came into vogue, gradually, after the War for Independence, as wealth increased and the trade and natural resources of the country were developed. Before many years had passed, the necessity had arisen for enterprises, which could be set on foot only through the aid of the united funds of many different persons or the resources of the State. Bonds were issued by the public authorities for the payment of debts to the soldiers and others and for the construction of roads. New ven- tures outside of the province of Government were carried out by organizing joint stock companies and corporations ; and as foreign trade had brought a great deal of money into the country, it was possible to secure the capital for the early modest enterprises mainly through leading men of the different localities, who took the stocks and bonds of new companies, largely from motives of public spirit and not because they were seeking desirable forms of in- vestment for surplus funds. The first great stock com- pany came into being in 1791, when Congress chartered the original United States Bank. Local banks were formed in the leading cities, followed later by fire and marine insurance companies. During the twenty years next after Independence, Americans had become familiar with the idea of devoting a part of their surplus capital to the purchase of securities. A NATION OF INVESTORS 5 For many years, however, it was practically impossible to float large issues of securities in the United States. The projectors of every important enterprise looked to Europe for a considerable part of the funds required. One of the interesting items of news in "Niles's Register " and other public prints, a century ago, was the quotations of American bank shares and State bonds in London, printed here about a month late as a rule. An illustration of the inability of rich Americans, a century ago, to absorb a large issue of even the most gilt edged security is "afforded by the experience of the first United States Bank, an institution of which the country was extremely proud. Measured by the times, the bank was a gigantic concern. It had a capital of $10,000,000, of which the Government took $2,000,000, the public $8,000,000. In modern times, it is on record that one man has supplied $8,000,000 for a single enterprise. , In 1791, the sum was too large for the whole of the infant republic. While it is true, as reported by President Washington, that the entire capital stock of the Bank was subscribed for in one day, the fact remains that those who thus be- came partners in the Bank took the stock in most cases as a speculation, not as an investment; and, as was ex- pected, the bulk of it speedily found its way abroad. In 1809, after the Government had sold its interest in the Bank, an official report stated the rather surprising fact that only 7,000 shares (of $400 each) were owned by Amer- icans. The remaining 18,000 shares were held in Europe, mostly in London. How little the ownership of securities interested our people in the early days is farther shown by the entire absence of special facilities for dealing in them. Bonds and stocks were bought and sold principally at the stores 6 HOW MONEY IS MADE of leading merchants and auctioneers. Not until 1792, a year after the organization of the United States Bank, were steps taken which tended toward the creation of a specific market-place for securities. In that year, a start was made in New York, by an agreement between a few jobbers of stocks and bonds as to rates of commission. This was the germ of the New York Stock Exchange. In later years, dealers in securities in other cities started stock exchanges of their own. After the dawn of railroad construction in 1826, invest- ment in stocks and bonds began to play a distinct part in financial affairs. Wealth had continued to accumulate; and many persons were found in the cities, who had man- aged to save, through frugality and their talents as busi- ness men, dollar by dollar, sums of money not required in the prosecution of private business. This class of persons became considerable buyers of the securities of the pioneer railroad lines and public utility corporations, which sprang up in the '30s and '40s. Some of these in- vestments were profitable, with the consequence that men of means turned more and more in the direction of cor- porate securities as a proper and safe employment of sur- plus capital. Each decade of progress added to the vol- ume of stocks and bonds afloat and the number of buyers of them. The process was a gradual one, however, and more than one generation of active business men had crossed the stage of affairs and disappeared, before there was any striking increase in the transactions in securities or the roll of stockholders in corporations. From Edmund C. Stedman's " History of the New York Stock Exchange" it appears that in 1827, trading at New York was confined to forty-two descriptions of secur- ity issues, as follows: A NATION OF INVESTORS 7 Twelve bank stocks. Eight public bonds. Nineteen fire and marine insurance companies. Delaware & Hudson Canal stock. New York Gas Light stock. Merchants' Exchange stock. In 1837, a day's trading sometimes amounted only to about 4,000 shares. Even as late as the outbreak of the Civil War, in 1861, in spite of the enormous advance in wealth and enterprise, only twenty-two stocks were dealt in on the New York Stock Exchange, in more than frac- tional lots, sixteen of them being railroad shares. How remarkable is the change which has since taken place will appear from the fact, that in 1906, sales of stocks on that Exchange amounted to 289,425,000 shares, having a par value of $28,942,500,000, while bonds were sold in 1905 to the value of over $1,000,000,000. More than 250 descriptions of stocks were dealt in, and more than four hundred and fifty varieties of bonds. In the eighty years or so since the whistle of a locomo- tive was first heard in the States, a change has been wrought in the wealth of the people, the volume and value of securities afloat and the number of investors, which is one of the marvels of the world's history. It is good to be an American and to have played some part in the betterment of conditions, which has brought about this transformation. No figures are at hand, at all important, as to the actual wealth of the population in Washington's day. It is known, however, that by 1850, wealth had grown to about $7,000,000,000 and has since expanded to $95,000,000,- 000. In 1907, the country is rich and comfort is general, at least among the native born. Americans earn more, 8 HOW MONEY IS MADE live better and save more than their forefathers did. Thousands are now capable of owning a few shares of stock or a few bonds, compared with a mere handful in the year of adoption of the Constitution, and there are more than 5,000 millionaires. So far as the people at large are concerned, one needs only to refer to the sav- ings bank to gain a clue to the general diffusion of wealth 8,635 depositors in 1820, with total deposits of only $1,139,000, and more than 7,400,000 depositors now, while the average of accounts is thrice as large. In every rank of life, one now finds investors in secur- ities, and the number of them grows, year by year, as the natural product of the thrift of a busy people, laws which give equal opportunities to all, an inspiring climate, boun- tiful harvests from our rich soils, the energy shown in every branch of trade and manufacture, the discoveries of coal, oil and metals, the division of estates, and the oppor- tunities for profitable speculation. Here, as in older countries, in which there is entire freedom of thought and action, and which have risen from primitive conditions to wealth and prosperity, thou- sands of workmen have passed the stage where they often lacked bread to eat, and have saved a few thousand dollars and bought a few bonds or shares of stock. Many a village blacksmith and smart carpenter and grimy toiler in an iron mill is thus a capitalist on a small scale. More than 40,000 employes of the United States Steel Corporation alone are owners of stock in that concern. In New Eng- land, operatives are taking shares in the cotton mills. Farmers, who, as a class, formerly struggled under the most trying conditions for a bare maintenance, are now recruiting the ranks of buyers of securities. A notable A NATION OF INVESTORS 9 circumstance is the fact that in the West hundreds of small banks have been organized in the last ten years, an appreciable part of whose stock has been subscribed for by farmers. Among the millions who are under salary as managers, teachers, journalists, officials and clerks, or who conduct small retail stores, there is now an army of frugal people who seek a larger return on their modest accumulations than a savings bank affords and who are receiving from 5 to 7 per cent, from stocks and bonds which they have bought. A curious instance is known, in which the chambermaids and serving men of a Southern city became stockholders in a local shipyard, started for repair of the swarm of fishing and truck boats owned on Chesapeake Bay. In the cities, a vast number of people, men and women, are owners of from five to twenty shares of bank, gas, or street railroad stock. There is little need to multiply instances, since it is within the knowledge of every one, that investors are now to be found on every side among the ranks of people of moderate means, as well as among the men of wealth. Without dwelling further on the point, suffice it to say that Americans have fully learned the desirability of in- vestment in securities and the United States has become a nation of investors. There are no statistics as to the exact or even approxi- mate number of investors in America. It is doubtful if any useful object would be served, if the number could be known. As long as the assessor and tax collector flour- ish in the land, insurmountable difficulties will stand in the way of an accurate census of security owners, although 10 HOW MONEY IS MADE the facts would be interesting enough. A few of the fore- most corporations, like the Pennsylvania Eailroad and the United States Steel concern, have taken pride in publish- ing the number of their stockholders; but they are exceptions, and a policy of secrecy prevails among the majority of other stock companies. A few years ago, one of the New York mercantile agencies made a strong effort to compile the total number of stockholders in leading railroads but was obliged to abandon a task made impos- sible by official indifference. II HOW AN INVESTOR MAKES MONEY GREAT EICHES POSSIBLE IN STOCKS. MOST FORTUNES IN AMERICA ENHANCED BY SECURITY INVESTMENTS. HOW THE THING IS DONE TO the young man and the uninitiated, one of the most mysterious of phenomena in the business world is the accumulation of magnificent fortunes by men who began life without a dollar. With rare and conspicuous exceptions, the men of to-day who live in splendid houses and own estates in the country, and who have steam yachts, motor cars, art collections and practically un- limited means, have come up from poverty. How can such fortunes be made in one life-time ? Machiavelli took the ground, that no man could ever rise to great wealth or power, without the use of either force or fraud. This might have been true in his times and country. It may be true, in these times and this country, of more than one man who has obtained opulence by trampling others un- der foot or by taking unfair advantage of his countrymen. But the assertion is not true of every rich man; it is not even true of many ; and the life story of such men as Mar- shall Field, J. P. Morgan, George Peabody, John W. Mac- kay and thousands of other well-known Americans is a sufficient refutation of Machiavelli 's heartless and im- moral doctrine. 11 12 HOW MONEY IS MADE But how do rich men make their money? What is the process ? Is the way yet open to men of moderate means ? Can a young man, who starts in life with a clear head, an honest heart, a strong physique, and a willing spirit, but without a cent to his name, ever expect under present circumstances to gain such opulence as other men enjoy? The answer is, certainly; and John D. Rockefeller and Andrew Carnegie are authority for the statement and they ought to know. While there is more than one way to make money, it is an interesting fact, that most of the conspicuous fortunes in America have been enhanced by, and thousands of them have been chiefly due to, investments in stocks ; and it may also be stated that the majority of men make their big money after they are fifty years of age. Every young man who has saved a/ thousand dollars can take his place among the capitalists of the future, if he will depend upon some regular occupation for his means of support, and will spend a reasonable amount of his leisure time in the study of finance, the tariff and banking, and will follow sound and sane methods in his security investments and cultivate his own judgment and powers of intuition. Such a man ought readily to be worth a million at middle age. Does this seem a chimerical idea ? Let us see, as we go on. Before passing on, however, let the writer disavow any intention to encourage active speculation in stocks. His purpose is a different one. So far as that is concerned, however, nothing that any man can say will ever put an end to speculation, which is the principle of barter car- ried to the point of taking risks. Bold spirits have always speculated in something, from the days of primitive man HOW AN INVESTOR MAKES MONEY 13 in lands, cattle, mines, mulberry trees, tulips, potatoes, iron, gold, grain, beans and whatever else has been in great demand at different periods in the world's history. No power on earth has ever been able to prevent this. The instinct to make money by buying something or creat- ing something, which stands a chance of being sold at an advance, is deeply implanted in the human breast; and the necessity of making money by some such process is so imperative to the majority of men, and there are so few "sure things" in life, that it would seem to be as useless to try and stop the taking of risks, as to seek to level a brick wall by throwing dandelions against it. With reference to taking risks in stocks, the great ob- jection is that many persons incur them without the slightest knowledge of Wall Street history or methods. Their Wall Street ventures are unequivocal gambles. A deep student, be he a plodder or a man of genius, will suc- ceed, where others fail. With legitimate business as a means of livelihood, with close study of underlying fac- tors, infinite patience and conservative methods, an in- vestment in stocks should be profitable in nine cases out of ten. An investor would then be following the line of action, by which the captains of finance have been able to amass riches in Wall Street. Long ago, it was observed that the market prices of all securities were subject to serious variations. In the early part of the last century, bank stocks sometimes sold for 50 per cent premium. Bonds often sold below par. The stocks of various of the pioneer railroads underwent fluc- tuations of great violence. Some of the first railroad lines, especially in the West, and more particu- larly those which were fostered by Government 14: HOW MONEY IS MADE land grants, were built while population was scanty and before the routes traversed could supply business enough to ensure dividends or even the expense of opera- tion. Each railroad proved a powerful stimulus to local trade and to the value of lands ; but the companies them- selves often languished for years and many of them be- came insolvent for lack of money. The decline in value of the stocks of some of those roads will never be forgotten by men yet living. On the other hand, the bankers who financed, the men who managed, and the larger stock- holders who clung to those corporations, during their years of trial and until settlement had wrought its mir- acles of development, discovered one secret of great wealth in the rise in value of their stocks when dividends had become assured. Even among stocks on which dividends had always been paid, extreme fluctuations in price were witnessed from year to year, and season to season, in response to trade conditions, the abundance of money and the public de- mand for securities. It certainly took no observing man long to grasp the fact, that the varying price of securities supplied an op- portunity for profits much beyond the income to be de- rived from them as investments. Cool and far sighted men have materially added to, and made, fortunes in stocks, carefully bought in years of panic and depression and sold in later periods of prosperity. The primary object of every man who buys a share of stock or a bond is, and should be, to invest his surplus money safely and derive a suitable income therefrom. But it is a maxim of Wall Street, that ' ' a good investment is a good speculation." It is so indeed. If properly HOW AN INVESTOR MAKES MONEY 15 bought, stocks will in time show an increment on the pur- chase price. A few examples of fortunes, which have been made in stock investments, will not be out of place. They are taken from the history of the last generation. Commodore Vanderbilt began life as the owner of a canoe, which he sailed as a ferry boat from New York to Staten Island. He borrowed money to go into a steam ferry line and extended his operations to steamboats in general. Late in life, he went into railroads and made the name of his family famous by buying good stocks when they were cheap and selling some of them afterward at an advance, often at almost fabulous prices. Moses Taylor, who had grown up in the mercantile busi- ness in New York, surprised even some of his business associates by dying worth $40,000,000, made by backing Delaware, Lackawanna & Western at a critical period in its affairs and after a thorough investigation. The Astors owe their immense holdings by no means entirely to real estate. They have always been careful and shrewd buyers of stocks in violent declines. They are often in the stock market. Crocker, Huntington, Stanford and others of that group of remarkable men were merchants in a small way in the neighborhood of the California gold mines. Their for- tunes were due in part to railroad contracts but mainly to the rise in value of the stocks owned by them. Jay Gould, one of the most daring and intellectual men Wall Street has ever known, left more than $70,000,000 to his family, the bulk of which arose from the purchase of stocks in times of depression and their appreciation in price after he had built up the properties they repre- sented. 16 HOW MONEY IS MADE George Peabody derived his great wealth from stocks, bought and sold wisely. Thousands of other men, some of them not known out- side of their immediate circles, until the Probate Court or their gifts to public objects revealed the extent of their possessions, acquired entire financial ease through stocks, bought when they were low and sold advantageously when they were high. What took place in that respect during the last gener- ation is being also done, to-day, by a throng of men, on every side, who have risen from modest beginnings in trade, mines, manufactures, etc., and are now among the captains of finance and industry in these States. Among the men who have added to their wealth by stock investments, there are, of course, a few persons of excep- tional qualities, who have themselves called into play the forces, which made stocks in general or those in which they were particularly interested, high or low. All the others, and that means all except one out of every thou- sand, have simply taken advantage of the situation as they found it. They bought stocks, when they could do so, safely and cheaply; and they sold, when the good times or the manipulation of prices by insiders had forced stocks to high figures. It is this policy only which can be followed by the small investor. He can do little or no- thing whatever to affect the price of stocks, one way or the other ; but he can buy them, when they are extremely low, all things considered, and he can sell them in boom times, at or near the top of a long rise. Now, what results can be produced in a series of years by the ordinary investor? Suppose that a young man, starting in 1870 with a thou- sand dollars which he had earned and saved, had put it HOW AN INVESTOR MAKES MONEY 17 into New York Central stock. That was an approved and good stock, with a great future, and a dividend payer. Ten shares could have been bought for $900. New York Central has always been an investment stock, very steady in price, and very safe. If the investor, starting with his ten shares, had sold the stock within four or five points of the top of every considerable rise, and had reinvested all the money in New York Central somewhere near the bot- tom of every marked decline, from 1870 to 1905, he would have been worth at middle age the sum of at least $150,000 ; and this would have taken care of him, all the rest of his life. No panic could have touched him, because his shares would have been fully paid for. He would not have been obliged to go into the market and give an order (to buy or sell) more than once or twice a year, as a rule. He would have learned by experience, when New York Cen- tral stock was too high to keep, and conversely when it was so low that he ought to buy it. He would have had to be a diligent student of financial conditions in general and of the earnings and prospects of New York Central in particular. He would have received a number of dividends while the stock was in his name between times; and at the moments of reinvestment, he would always have had a little surplus cash left over after making his purchases. If, in 1870, he had put his money into Illinois Central, another sedate investment stock, with a great record as a dividend payer, he would have had to pay about $1,300 for ten shares of it. If he had sold, and bought again, as above outlined, dealing in Illinois Central alone, his hold- ings would have grown to about 900 shares by 1905, worth about $170,000, all the outgrowth of the original $1,300. Ten shares of Delaware, Lackawanna & Western, 18 HOW MONEY IS MADE bought in 1870, for $1,020, would have grown to 1,000 shares in 1905, worth about half a million. There were fewer stocks to choose from in 1870, than now only about seventy actively traded in at the New York Stock Exchange, then, compared with over 250 now. It is therefore quite possible, that a neophyte in invest- ment in 1870 would have put his first thousand dollars into some stock, which afterward ceased to pay a divi- dend for a time, or into a stock which did not pay a divi- dend even then, but which like Union Pacific had a great and certain future. Suppose that he had gone into St. Paul, a stock with a checkered career, but now a gilt edged investment. He could have bought fifteen shares in 1870 for $900, paying about $60 a share. In 1877, St. Paul was worth as low as $11 a share. The price rebounded from that low figure and in 1881 St. Paul sold as high as $12954. In 1888, dividends were suspended for a time. Hundreds of men have followed the fortunes of St. Paul through good and evil days until the present time. They saw the stock* rise to $1983/4 in 1902. If an investor in fifteen shares of St. Paul (bought in 1870 for $900) had sold anywhere near the top of the next considerable rise, and had reinvested all the money in the same stock anywhere near the bottom of the next heavy decline, and had pursued this policy con- sistently, he would have made about $2,000,000 by 1905. If our investor had chosen Union Pacific for his studies and investment, from 1870 to the present day, he could have started with fifty shares costing about $1,000 and sold out his interests in 1905 for something like $3,000,- 000, and this, too, without having had to pay the assess- ment when the company was reorganized in 1897. HOW AN INVESTOR MAKES MONEY 19 Central of New Jersey would have yielded about $6,000,000 in thirty-five years from an original invest- ment of $950. Does it not begin to be clear how magnificent fortunes have been made in stocks, by many actual investors? Now, it must be admitted, at once, that no private in- vestor can ever be in such close accord with the ruling spirits in the stock market, or have such an intimate ac- quaintance with underlying conditions, as to be able to know when the exact top of a boom has been reached, or when prices are actually scraping on the bottom of a long decline. An outsider can never sell at the highest or buy at the lowest, except by the merest accident ; and he will probably go in, or out, several dollars a share away from those extremes. He will often experience the chagrin of seeing his favorite stock go higher after he has sold and lower after he has bought. Allowance has been made for that in the foregoing calculations. No man can expect to do better than the real insiders. It is perfectly understood that they begin to sell, a little at a time, on the way up, as the top is approached, and they begin to buy " on a scale down ' ' as the market is near- ing its bottom. The real point for an investor is to be able to tell, approximately, when the major swings of the market, extending over a series of months or years, are coming near their turning points. That is near enough for him. But this is the very gist of the whole matter. How shall a man know when to go in and when to go out of stocks ? In order to accomplish anything like the results referred to above, a man must know this and know it for himself. An investor has a thousand dollars to invest. He reads 20 HOW MONEY IS MADE the daily newspaper for a week and he notes that stocks go up to-day. Tomorrow, they mysteriously go down, for no reason at all that he can see. The end-of-the-week financial columns discuss the general situation; and the writers are blue or cheerful, as the case may be, and what they have to say is most interesting and informing. A very few of them are bold enough to say now and then, in their own phraseology, " Investors, the time has come; buy stocks as quickly as you can." Has any one ever known a good newspaper to advise everybody to sell their stocks and retire from the market ? The newspapers can- not do this. They can and do call attention to the fact, when distribution is in progress. But this is as far as they have any right to go, considering what the province of a newspaper is. The reader has the facts and must judge for himself. An effort will be made in following chapters to supply an investor with the means of forming his own judgment in this matter. An investor may follow one of two courses. He may put all his eggs into one basket, and watch the basket. That is not a bad policy, and it is the only one which may be pursued at the outset of the future capitalist's career. A little later, he can diversify his investments ; and there are advantages in having three or four stocks, moderate amounts of each, one or two of them industrials. This latter class of stocks are apt to swing more violently and farther than the railroad securities. In case industrials are added to a man's investments, those stocks are prefer- able which make public reports and which supply the ac- tual data from which the fortunes of the company can be followed. No need to specify. Ill BATE OF INTEREST ON INVESTMENTS 2 PER CENT A MONTH COMMON A CENTURY AGO. LEGAL RATES OP THE PRESENT DAY. THE RETURN NOW TO BE LOOKED FOR ON MONEY AND SECURITIES BEFORE passing on to consider the more important matters, to which these pages are devoted, a few elementary facts should be set forth. First, what rate of return on investments in bonds or stocks may an investor look for? When a man has saved his first thousand dollars, or when later he has derived some other and perhaps larger sum from his private busi- ness or from previous investments, what shall he do with, and what can he get for the use of his money ? If he is in a business capable of extension, the natural use of surplus earnings would be an increase of facilities for carrying on his regular vocation. Goods, tools, machinery, buildings, ships, or working capital would be added to. In a solvent private business, it is held that yearly profits must be around 25 per cent, more or less, in good years, in order that the business may be carried on properly in the lean years, when profits are small, or when, to maintain an organization and keep one's list of customers, the owner is obliged to operate without profit or possibly at some loss for the time being. Among manufacturing corporations, yearly net profits 22 HOW MONEY IS MADE range from 4 to 15 per cent, this moderate return being due to the fact that the percentage of profit is figured on the total capital, as represented by the stock and bonds, the capital being inflated in most cases by a very large and perhaps undue issue of securities. Standard Oil has divided between 31 and 48 per cent annually during the last ten years, but this is an exceptional case. If the capital stock of the concern were as heavily watered as that of most industrial corporations, the percentage of profit would be much smaller. In a manufacturing busi- ness owned by a private firm or an individual, the annual profits would need to run from 20 to 25 per cent in order to provide against the strain of bad times, which occur regularly and cannot be avoided. But while such a return on the money invested seems tempting, on the face of the matter, there are many persons who do not care to undertake the responsibilities of private business, with its labors and anxieties, and others have sufficient equipment to hold their own against such competition as they are exposed to. With them, the propriety of other investments presents itself, when a sum of money has been saved beyond the cost of living. An abundance of investments can be found besides standard stocks and bonds. The scope of this work does not admit of consideration of them. It may be said of stocks and bonds, that they make smaller demands upon the time and personal attention of the investor than do promissory notes, rentable real estate, shares in shipping, special partnerships, and analagous forms of investment. The risk is no greater, provided that an investor is as cau- tious in one case as in the other, especially with reference RATE OF INTEREST ON INVESTMENTS 23 to the time when he buys and the price he pays. The chances of selling out at a profit are larger. Farther, if one wishes to withdraw his capital from an investment in standard securities, he can do so at any time at a moment's notice, by sale through a brokerage office or a bank, whereas investments of the nature of some of those mentioned above are of a more permanent character and cannot usually be disposed of quickly or to advantage. The income to be expected from stocks or bonds corres- ponds rather closely to the average rate of interest on long time loans of money (four months or more) in New York city, the financial center of the country. In early times, the scarcity of money made interest rates high. It was not at all uncommon to obtain 15 or 25 per cent upon loans or ready money. Wealth was limited and surplus capital extremely small. Supply and demand always regulate rates of interest with an iron hand. The law is effective all over the world. In Eng- land, a few centuries ago, and indeed in Europe generally, until the Spaniards began to pour the gold and silver of Mexico and Peru into the old world, ten per cent was the ruling rate of interest. Higher rates were paid by those who needed money badly to those who loaned it. In Eng- land, the growing wealth of the country gradually brought the ruling rate down to between 2 and 4 per cent where it stands to-day. If the rate for time loans goes much above 4 per cent in England, now, it is only because money strin- gency, or possibly a panic, threatens the commercial world. In France, a high rate of interest was current, until the development of industry, the enterprise and the riches of the people caused it to fall to 5 per cent and finally to 2 and 3 per cent. In Germany and Holland, low rates 24 HOW MONEY IS MADE have reigned for centuries on account of the thrift and prosperity of the people. In various of the newer sections of the United States, where conditions have been similar to those in early times in the East, high rates were common down to the middle of the last century. Two per cent a month, equal to 24 per cent a year, and even more, was once paid in California and other sparsely settled sections of the Western coun- try. The great profits of the pioneer bankers in the ter- ritories and on the Pacific coast were obviously due, in part, to the high price which merchants and others were willing to pay for the use of loanable funds. A trifling incident, which affords an insight .into the conditions of forty years ago in the West, is told by an Illinoisan, now resident in New York, who was a small merchant in one of the towns of his State, when he was married. He was then worth $6,000 ; and it was agreed between his wife ,and himself, that when they were worth $10,000, he would re- tire from business. He could get 2 per cent a month for the use of his money, and this would yield an income of $2,400 a year. In those days, it was fashionable to be economical ; and the couple did not know what they could do with $2,400 a year. But Illinois settled rapidly, the people grew prosperous, great crops of grain brought mil- lions of money into the West, and interest rates declined. The time when $2,400 a year could be realized on $10,000 of capital passed. Our Illinois merchant is yet in busi- ness. The legal rate of interest, to-day, is 6 per cent in New England and the Middle States; from 5 to 8 per cent in the West and South. Each State has its own laws; but nowhere is the legal rate over 8 per cent. RATE OF INTEREST ON INVESTMENTS 25 It is true that a higher rate of interest is allowed in many of the States, when the parties to the loan agree upon the same by private contract. In the West and South, 10 and 12 per cent is the limit. Money never brings such rates, however, except during periods of great stringency and for a short time. In Maine, Massa- chusetts, Rhode Island, California, Colorado, Arizona, Montana and Nevada, "any rate" is legal when agreed upon by private contract ; and in New York, "any rate is permitted on call loans of $5,000 or more on collateral security. It is under this provision of the law, that such extravagant rates for temporary accommodation were seen in New York city, as 125 per cent in December, 1905, 127 per cent in October, 1896, and 186 per cent in 1899 and 1890. But while the rates allowed by law on long time loans are as stated, the great borrowers of money in this country can usually obtain ample supplies of capital at modest figures. The cities and States are able to borrow all the funds they require at an average of 3^ to 4 per cent; and millions have been loaned to the United States govern- ment at 2 per cent. Railroads, manufacturers and mer- chants can, in ordinary times, borrow at 3^ to 5 per cent, according to their solvency and the amount of security given. In years of considerable stringency, the commer- cial community which generally has to pay the highest rate of interest, is sometimes charged 7 or 8 per cent on time loans for a short period. In 1873, 24 per cent was charged in New York on commercial paper, and in 1893, 15 per cent was asked, but exceptional cases like these are not to be considered. Rates of that character were simply due to spasms in the money market and were of short dur- 26 HOW MONEY IS MADE ation. In ordinary times, and for a period of years, the ruling rate of interest on long time loans seldom goes far from 3^2 to 5 per cent for the bulk of the business, with an average of about 4 to perhaps 4^2. This is the amount of return an investor can expect from safe, sound, ap- proved security investments. Conservative men are even of the opinion, that securities which pay a larger yield on the money invested are dangerous, although this idea is open to discussion. The range of interest rates on time loans for four months or more in New York city, since 1890, have been as follows : 1890 4 y 2 @ 9 Average, 5 % 1891 4 % @ 6 1/2 " 5 y 2 1892 2 V 2 @ 6 " 4 % 1893 2%@10 " 5y 2 1894 2 @4 " 3 1895 2 @ 6 " 3y 2 1896 3 @12 " 5% 1897 2 % @ 5 " 314 1898 3 @6 " 3% 1899 2 @ 6 " 4% 1900 3 @6 " 4% 1901 3 @ 5V 2 " 4% 1902 4 @ 6 y 2 " 5 1903 4 @6 " 5% 1904 2 @ 5 " 3y 2 1905 2 y 2 @ 6 % " 4 1906 4%@ 8 " 5% 1907 4 @ 8 " 5% 1908 2 y 2 @ 7 " 3 % An investor will therefore look for a return of 4 per cent or a trifle more from money, which he puts into rail- road stocks or bonds. If those securities sell at prices which would make the yield 5 or 6 per cent, as they RATE OF INTEREST ON INVESTMENTS 27 usually do in panic years, they are a purchase, assuming that in the case of any particular company, the corpora- tion is solvent and its finances in good shape. A larger return can be expected on industrial investments, which ought to yield from 6 to 7 per cent, ordinarily, to compen- sate the investor for the larger risk. Bonds are more stable in price than stocks; and those whose soundness is beyond question seldom fall below an investment yield of 4 or l / 2 per cent. If the companies which have issued them are strong, and, if for any reason, such as the preva- lence of panic or high money, they can be bought to re- turn anything like 5 per cent, they are a purchase. A discussion is now in progess among financiers and students, as to the probable effect of the increasing gold supply upon prices and rates of interest. It is the opin- ion of many, that such enormous additions as are now being made to the gold money of the world must tend, in time, to lower the rate of interest and raise the sell- ing price of bonds. This position is strongly opposed by others, of whom Prof. Joseph F. Johnson of New York is one, who maintain that gold inflation must stimulate enterprise and increase the demand for the use of money and thus maintain interest rates. John Moody 's theory is, that the rate of interest will rise and that bonds and other fixed income securities will decline, while stocks and those securities whose incomes increase as the production of wealth increases will appreciate in value. While the con- troversy is interesting, the influence of the flood of gold now being poured into circulation will obviously not be immediate and can only be made clear by the lapse of time. IV BONDS THIS CLASS'OF SECURITIES DEFINED. HOW TO JUDGE OF THE SAFETY OF A BOND. MARKET PRICES OF VARIOUS ISSUES BONDS may be bought through any bank or brokerage house in any part of the United States. They are issued in denominations of $1,000 each, ordi- narily, although bonds for $500 can sometimes be bought. They are put forth by railroad companies, public service and industrial corporations, and by municipal, State and the national governments. A bond is evidence of a loan of money. Every issue by a corporation is secured by a mortgage of some kind, on a portion, or all, of the property of the company ; and this document is deposited with a trust company, which acts as trustee. Bonds issued under a first mortgage have priority over all others; and the interest on the whole of the funded debt of a corporation must always be paid ahead of any distribution for dividends on the stock. In case of default in payment of the interest, holders of the bonds may foreclose the mortgage and then, being in full possession of the property, they may reorganize the con- cern, the first mortgage bondholders having the first claim to consideration. The growth of the country and the necessity for addi- tional capital have compelled most railroad companies to 28 BONDS 29 issue several different classes of bonds. The value of second mortgage and other junior issues depends on the total value of the property. Junior issues are often prac- tically as safe and sound as first mortgage bonds, because the original issues were not large, and because the prop- erty against which they are all a charge is of equal value to, or greater than, the total funded debt, and the com- pany is perfectly solvent. Debentures are generally considered a junior issue of bonds, because they are printed in the form of a bond, with coupons attached; but they are in fact merely the promissory notes of the company, and they rank as such. If the corporation which issues them is solvent, they are good investments and often bring a premium. Eailroad equipment notes have taken their place as funded debt and are a popular investment. They are floated for the purchase of cars, locomotives and similar equipment. There was formerly some laxity in the mat- ter of this form of railroad obligation but their issue is now based on sound principles. It is conceivable that a railroad, whose equipment notes are offered for sale, might be heavily cumbered with debt and its stock sell below par, without the safety of the equipment notes being affected. The cars and engines are pledged for the pay- ment of the notes ; and the company is required to main- tain them in good condition. The equipment really be- longs to the banking house, which has financed the trans- action (or, more accurately, to the holders of the notes) and they constitute the security, which is ample; they cannot become the property of the company until the notes are paid. These notes yield about 5 per cent in- terest. About $175,000,000 of them are now afloat. 30 HOW MONEY IS MADE Convertible bonds are a popular feature of railroad finance. The convertible feature is usually intended to give the bonds a speculative value. They can be exchanged for the stock of the company under certain conditions. The high price brought by Union Pacific convertible 4s in 1905 is eloquent testimony to the popularity of that class of obligations. An investor in bonds should concern himself, first and foremost, with the question of safety of the investment and assurance of regular payment of interest. Other mat- ters may also be taken into consideration, but they are subordinate to the point above referred to. Until the safety of principal is evident, an investor should never buy a bond of any kind. Safety is the corner-stone of suc- cess in all security transactions ; and if a man will begin his financial career with this idea firmly fixed in his mind and will always adhere to it, he will have learned the first grand lesson in the building of a fortune and will never have cause to regret his action. If he lacks the facilities, or the education, which would enable him to investigate personally, then he should buy only under the guidance of a bond broker, or a banking house, whose reputation is a guarantee that the securities recommended are of the highest class. In the final analysis, safety of a bond depends upon the amount of property in good condition, owned by the company; total capitalization; earnings; and priority of other liens. It follows that a prudent man will make an effort to keep himself fully informed with regard to the financial status of the corporations, with whose fortunes he has allied himself. Indeed, he will do well to post him- self before he buys. He ought to do this, some time ; and BONDS 31 there is no better opportunity than before he has com- mitted himself. One must look before he leaps in Wall Street. The average capitalization of the railroads in the United States is $64,265 a mile, of which $30,837 per mile represents the stock and $33,428 the bonded debt. To judge whether a road's capitalization is moderate or ex- cessive, it is necessary to consider the nature of the route traversed, whether the line was easy to build or the re- verse, whether it is a single track or a four track line, the volume of traffic and the value and cost of terminals in great cities. Capitalizations vary from about $35,000 to more than $200,000 a mile. As the bonded debt is a mortgage on the property, its total volume should not ex- ceed about 50 to 60 per cent of the value of the property. Earnings of the different railroads of the country, for a series of years, and a great mass of other important data, can be found in the Manuals, which are printed by several authorities, annually, revised to date. Current earnings appear in the annual and other re- ports of all railroads, which are printed in the financial newspapers as rapidly as they appear. If an investor is not a subscriber to a sound and conservative financial publication, he cannot become one too soon. He will thus obtain all important statements of earnings in detail and as quickly as every other reader. In default of any other method of getting them, an investor can write to the secre- taries of the corporations themselves, who will cheerfully supply them. If a corporation publishes no reports, if it locks up in the secrecy of its ledgers and vaults the facts upon which it would be justified in asking for loans of money, the public can protect its interests only by letting 32 HOW MONEY IS MADE the bonds alone. There are enough good things in the market to make it unnecessary for an investor to plunge blindly into the dangerous business of buying securities about whose value he can learn nothing. With reference to the safety of any particular railroad bond, one or two general rules apply. It is seldom that any two railroads operate under precisely the same condi- tions or are in exactly the same position as to the total volume of capitalization or the relative amounts of bonds and stock. If, however, earnings for a few years past have paid all expenses, all cost of maintenance, the taxes, interest on the funded debt and good dividends on the stock, and especially if, in addition to all that, they yield some surplus besides, the bonds must be deemed a safe investment. It is held by railroad men that, after cost of maintenance has been deducted from earnings, then from 60 to 65 per cent of the profits should pay all fixed charges, that is to say, taxes and interest on the funded debt. If 80 per cent is required, an investor should take advice as to the propriety of selling his bonds and going into some other security. The market value of the stock of a railroad is some- times an excellent guide to the value of the bonds. Large earnings and valuable assests ensure a high price for the stock; and the same factors ensure the safety of the bonds. Junior issues of bonds are often tempting, because they can usually be bought for less money than those of a higher class. The net return in interest would then be larger. But, if they are cheaper, they may be so, be- cause the risk is greater. The risk is a matter which must be considered. So far as safety of principal is concerned, the nearest BONDS 33 approximation to the ideal is afforded by bonds of the United States, a country which pays its debts and has a phenomenal record in this respect. Bonds of well gov- erned cities and States belong in this class also. They are always in demand, fluctuate little in value, and can always be sold at a moment's notice. Bonds are sold by banking houses engaged in the busi- ness, on the basis of net yield in income. This basis is calculated on the selling price of the issue, the rate of interest paid, and the length of time it has to run. Tables have been prepared, which show at a glance the net return upon any bond at a particular price. When a bond is said to sell on a 4.1 per cent basis (or any other which may be named) the figure indicates the net re- turn to be derived by an investor, at the selling price named. The rate of interest paid by good city or rail- road bonds is from 8^2 to 4^ per cent. If a bond is thoroughly sound and pays from 5 to 6 per cent interest, it- is certain to sell at a price which will make the net re- turn on the investment as above. In former times, when capital was scarce and rates of interest high, railroads were obliged to bid strongly for money; and millions of dollars worth of bonds were sold by them, bearing from 6 to 10 per cent interest. There are yet afloat about $520,- 000,000 of such bonds; but they are being retired as rapidly as circumstances will permit, to be exchanged for securities bearing a lower rate. Industrial and street railroad bonds pay from 4 to 6 per cent, but, if they are safe investments (which all of them are not), they are apt to sell at a premium, and the net return is in the vicinity of 4 per cent. That a railroad bond may be dangerous is evident 34 HOW MONEY IS MADE from the fact, that out of about $6,873,000,000 of funded debt of these corporations, fully $275,000,000 of the total pay no interest at all at present. If a bond sells at a premium, that should not neces- sarily deter an investor from buying it. If a bond is listed on the New York stock exchange, or if it has a broad and quick market, or if it belongs to the class of savings bank investments, it is apt to bring a premium. Such bonds can be quickly disposed of, at any time, when the investor wishes to realize on them. The speculative in- vestor is apt to give much attention to bonds which do not sell at a premium. And it may be well to say that, at the present time, a number of bond houses are advising the sale of high class, well seasoned and thoroughly sound investment issues, paying 6 per cent or more, which have weathered the gales of adversity and are selling at a good premium, especially if they have only a few years to run. By so doing the investor will capitalize his premium before there is any reduction in price as the bonds approach maturity. If the money were then put into bonds selling below par and having a longer term to run, it is held that income will remain unimpaired, while the investor will put himself in line for another addition to his principal through the future increase in value of the new investment. Men who care most for safety of principal fill their safe deposit boxes with gilt-edged bonds. Most of them have stocks, especially of the companies with whose management they are identified. Br.t sound bonds, which yield about 4 per cent, constitute the bulk of their permanent holdings. They avoid wildcat securities of every kind and are never found in the category of a resi- BONDS 35 dent of the East, who died ostensibly worth a million and whose estate could show securities for that amount, which were worth absolutely nothing. A few extremely conservative men exist, like the wealthy manufacturer who sold so many millions of oil cloth to the late A. T. Stewart, who never buy anything except bonds and who never sell a good one, even if it has advanced $100 or $200 in value. The estates which are left to women and the surplus funds of savings banks and insurance com- panies are largely invested in this class of gilt-edged securities. These examples embody the best judgment of the most competent men in the field of finance, on the point of safety of capital and certainty of income. The highest class of investment securities are beyond doubt those which the laws of the State of New York allow savings banks to purchase. They are divided into three classes. In substance, they are as follows: Bonds of cities of not less than 45,000 inhabitants, which have been incorporated for twenty-five years, and have never de- faulted in the interest or on the principal of their debts for more than 90 days at any time, said cities to be located in States^ which were admitted to the Union prior to 1896 and have never defaulted on the interest or principal of their State debts since 1860. Bonds and mortgages on real estate, unincumbered, to the amount of not more than 60 per cent of the value of the property. First mortgage bonds of railroads lying mainly within the State or connected with and controlled by such railroads, pro- vided that there has been no default on principal or interest of their bonded debts within five years of the investment, and pro- vided also that at least 4 per cent in dividends has been paid on all the outstanding stock within the same five years. New York also allows savings banks to buy the first mortgage bonds of cer- tain other railroads, under certain conditions, viz: Boston & 36 HOW MONEY IS MADE Maine; Chicago & Northwestern; Chicago, Burlington & Quincy; Chicago, Milwaukee & St. Paul; Chicago & Alton; Delaware & Hudson; Delaware, Lacka wanna & Western; Michigan Central; Maine Central; Illinois Central; Pennsylvania; Morris & Essex; New York, New Haven & Hartford; United Bailroads of New Jersey. This is, in main, the law; but there are a number of minor provisions and an investor who wishes to be fully informed as to all details should obtain a copy of it for examination. A good 3 l /2 per cent bond sells in the market for from 95 to par that is to say, from $950 to $1,000. A sound 4 per cent bond sells for $1,000 to $1,050 normally ; and 5 per cents, from $1,050 to $1,200. Prices go above or below these figures in extreme bull or bear markets, and in accordance with monetary conditions. For instance, Union Pacific, 1st lien convertible 4s, sold as high as 160^4 in 1906, owing to the rise in value of the stock, for which they could be exchanged. Any bond, having a long time to run, selling much under the prices above quoted, is of doubtful security. As they approach maturity, all bonds tend to decline to par. An example of a first class bond is afforded by Central of New Jersey, general mortgage 5s. In the crash of 1903, they never sold below $1,260 and they have since gone to $1,360. During the last five years, 65 per cent of the earnings has paid all expenses and fixed charges and left from 8 to 10 per cent or more for the stock. On the other hand, Colorado Midland, 1st gold 4s, sold in 1905 between 73 and 79. The earnings of the com- pany did not even fully meet the interest on the funded debt. BONDS 37 As an illustration of another class of bonds, may be cited Central of Georgia, 3rd preference income 5s, a junior security. They ranged in 1905 between $525 and $835. Other issues take precedence of them. Earnings do not pay the interest on the funded debt. The bonds in question rise and fall, hand in hand with the chang- ing chances of something being paid upon them in the way of interest. Changes in the market prices of the highest class of purely investment bonds afford small opportunity for speculative profits. They all do fluctuate in price, how- ever, with the times and underlying conditions. No securities are proof against monetary stringency, panics, and long depression; and all are subject to the inspiring and lifting influence of prosperity and a lively demand for investments. Abnormally high rates of interest on money depress the value of bonds for the time being and a prolonged bear campaign in stocks has the same effect. Excellent bargains in bonds can be found in such periods. An investor needs to be alert at such times, if he has money standing idle. He must reason that, in order to make his principal perfectly safe, the bonds he buys must have a good chance of appreciation in value at some later period. Certainly, he would not buy when the signs point to lower prices. Men who have only a little money to invest and who are absorbed in the management of a private business can give little attention to the monthly changes in the prices of bonds and ought not to try to speculate in them. A class of well-to-do m'en exists, however, who have the time and a liking for such matters, and who have considerable experience and a knowledge of finan- 38 HOW MONEY IS MADE cial matters; and they make a specialty of buying broad trading bonds, even if not of the highest grade, whenever there is a smash in the stock market or when extremely high rates of interest prevail. They reason that if the bonds go lower, they can be retained as investments, whereas when the bond market rallies, as it is certain to do in time, the securities can be sold at an advance larger than the percentage of interest which has mean- while accrued. In this way, while dealing in the class of securities which best safeguards their principal, they add something to their capital. From 1893 to 1905, Missouri, Kansas & Texas, 1st gold 4s, rose from $690 to about $1,040 ; and Texas & Pacific, 1st gold 5s, advanced from $590 to $1,250 or more. United States Steel, 5s, sold as low as 65 in 1903 and have since risen to par. In the terrible financial reaction of 1903, many bonds fell from eleven to twenty-eight and one half points (be- tween $110 and $285) and supplied excellent chances for profitable investment. Among them were: High, 1902 Low, 1903 Decline Atchiaon, adj. 4s, 1995 97 86 11 Bait. & Ohio, conv. deb. 4s, 1911 118 94 24 Cent. Ga., 1st pref . inc. 5s, 1945 89 % 61 28 y 2 Ch. & East Ills, gen. con. 1st 5s, 1937 126 % 113 13 % Ch., Mil. & St. Paul, gen. mge A, 4s, 1989 117 103 14 Ch., E. I. & Pac., gen. 4s, 1988 113 % 99 14 % Mex. Central, 1st con. inc. 3s, 1939 36 % 12 % 24 Minn. & St. Louis, 1st con. 5s, 1934 124 % 109 15 % N. Y. Central gold 3%s, 1997 109 % 95 14 % Lake Shore, coll. 3%s, 1997 98 87 11 Penna. conv. gold 3%s, 1912 112 % 93 % 18 % Southern Ewy, 1st consol. 5s, 1994 124 111 % 12 % Texas & Pac., 2d gold inc. 5s, 2000 102 % 81 21 % Union Pac., 1st lien conv. 4s, 1911 113 % 90 % 23 % BONDS 39 In 1905, nearly all of these bonds returned to the high values of 1902 and several of them went higher. Union Pacific 4s sold as high as 150J^ and the Central of Geor- gia bonds above noted went to 101. There is another class of bonds, which present great attractions to men who are able to assume a business risk and possess the patience to wait a series of years. These are the prior lien bonds of small railroad systems, which range at a low level during periods of depression. Some of the new and yet undistributed bond issues belong in this class of speculative bond investments. As for the bonds of small railroads, there is always the chance that they may be taken into some one of the larger systems, and the bonds will receive favorable consideration in the succeeding readjustment of the finances. Remembering always that the small investor will, if prudent, have nothing to do with bonds whose safety is doubtful, even then it remains true that he will not buy in the height of a booming market. Indeed, if he then has any securities which are quoted well above the high prices of recent years, he will do well to sell them, bank the money, and bide his time, until the bonds have once more fallen below the average of the last two or three years. He will then reinvest. Four per cent bonds selling somewhat under par, are now the most popular form of permanent investment. As an illustration of the changes in price of bonds dur- ing any given year or series of years, a few of them are shown in the table below with their highest and lowest quotations since 1890 inclusive: 40 '6861 '* 'V '93ra HOW MONEY IS MADE CIOQO?OCirJ<^ i-M t-Ti< H|lM IHJOO C50OO5OOMl>.O OOOiHrHOOi-I 'S06I ' s l 'losuoo pwrj ^g V 'TTH "il '8I6T '8S 'qP /fcramfr ^'Jng'-qo T- QOClOOOt^-rJ< O"OOCOOCOiacO-*QO O5O>OOOO5OiOOOJOO OOOOlOi U86T 'ss * 9Sl[:tI T 193 sin ^swa 9 -no rJ. OOOOrHrHT-(OOi-(i-IC1CO10lO^(M OOOOJ0000000000 000050 sg *ST V * 'Sf 61 ' co oo cctaccj t- i-HOrHiHOOTHOO S66T ' "3 'FP BONDS 41 1S6I <8 9 Pl* ' no W rH O CO .5 i-l rH rH OOiHl-^QOtOlOCOiOlO TQ6I 's?8 Plo3 W in i!3 OS O5 O5 OJ Tj-CD OOOOOO OOOOOOOOS (M OS 0OOJOSO5O5OiOOO ^ O OOO5O5OJ '6T6I ' eO Tt^Oi i-ijoO O5 KJOO CJ LWl 'Si iT6T 'Si 'Aip BJ 4 -ptiH =y 'ia sg -josuoo -U98 '0 '0 eot>>v-(OQCOOQtQOr-<<^l ?S6I 1-fcq r^N H O CO Oi CO CO iO H O O Oi CO iI6l 'S9 ouj ;y -I 'a ' i86T COO OiH OTH THr-IOO OrH OO '8861 ' ^ ^ O CO rH rH 01 01 1 ^cqiococOT^Tji io Oi IC4COrtO CO l^ OSOO 'SI6I 's?8 is| Hoc H" (M t- CO t- rH O O O uoo ^sj CC) r-^N COt-CO OOOOOOO | r Cr5QOCOr-IClC5l>. OOr-trHt-lOO Tjo OO Sf 'UOO ^1 - OOtOO-r^^r-t H CO t>* CO O rH i-H 10 CO CO ie|( Ha H '0003 'SS 'out PI<>2 ps 'OgiOBJ Iff SBX9J, H-* Ha H 1 * H-"* MM es]oo H|* Ha Ha O HT-lTHT-l(M^tl>OOaaaCO CO O5 OO CO 'SS 'UOO !^St >n S HI CO 1861 '9 -naS irej^j -uBg iff stnoT^g a sg -uoo ^si Ha Ha lOirai-iTtHco a Ha M|OO H* Ha jciiokfaoo O^ O> O5 Oi O^ C5 Oi 05 O O O ^5 O O O O OO OO OO OO OO QO OO OO O) O) G) O) O O^ O) O) STOCKS THEIR NATURE. ADVANTAGE OF PREFERRED STOCKS.- THE NON- DIVIDEND PAYERS. HOW TO JUDGE OF THEIR VALUE THE purchase of a share of stock is an investment in the business, exactly as though the buyer were a partner in the enterprise. He is in fact a special part- ner to the extent of the value of his holdings; and he is not responsible for the debts of the concern beyond the face value of his stock. The stocks of most of the railroad companies and the leading industrial concerns have a par value of $100 a share. Perhaps fifty American railroads, most of them in the State of Pennsylvania, issue shares of $50 each ; and while the majority of these lines are small and ob- scure, yet the list includes several of the great corpora- tions, among them the Pennsylvania, the premier rail- road of the United States, the Heading, Lehigh Valley, and Delaware, Lackawanna & Western, and, in New York State, the Harlem and the Long Island. Two or three short lines have $25 shares; and Wyoming has a little one, with $10 shares. In the case of the Grand Trunk of Canada, the shares have a par value of 100 each or $500 in American money. Mining shares are usually issued in small nominal par value; but such stocks are seldom listed or traded in on the New York exchange. 44 STOCKS 45 The $50 or half shares, as they are called, are quoted in New York on the basis of $100 a share. When one buys Reading, for example, at $140, he really acquires two shares at $70 each. Stocks of every description can be bought through any regular banking house or broker, whether they are traded in on the exchange or not. Stocks are divided into two classes, common and pre- ferred. The common stocks, when the two classes are issued, are entitled to all the profits after fixed charges and preferred dividends are paid. Some of these com- mon stocks are of very high value. There are a good many however upon which no dividends are paid at pre- sent and the chances of any dividend are so remote, that their value resides mainly in the voting power. Preferred stocks have the priority as to dividends and usually as to assets, in case of a reorganization of the company. Those of the railroads are as a rule non- cumulative, while most of the industrials have the cumu- lative dividend feature. That is to say, if the stock is a 7 per cent cumulative issue, and if the company is unable to pay the full 7 per cent in any year, the arrears of divi- dends must be paid in full (in cash, stock or bonds) be- fore the common stock can hope to share in any distri- bution of profits. It was necessary in 1905, to reorganize the United States Leather Company entirely, as the Cen- tral Leather Company, to provide for the 41 per cent of arrears of dividends and finance the arrears of dividends on the cumulative preferred stock. It is desirable that an investor should acquaint himself fully as to the peculiar- ities of a preferred stock before he buys it. The non-cumu- lative feature is held to be favorable to the common stock. 46 HOW MONEY IS MADE Different policies are in vogue as to preferred stocks. St. Paul has a 7 per cent non-cumulative preferred ; and after 7 per cent has been paid both on that and the common stock, then both classes share equally in any division of profits over 7 per cent. The preferred stock of the Rock Island Co. has a right to elect a majority of the directors. The preferred of Interborough-Metropolitan of New York has no voting power, as long as dividends are paid. The price at which stocks can be bought is quite an- other matter from their par value. A good 4 per cent railroad stock is worth normally around par, that is to say $100 a share. It sells above or below this price, in sympathy with earnings, assets, total capitalization, and the rest of the market. If earnings are first rate, if dividends are entirely assured, and the general market is booming, 4 per cent railroad stocks often sell at from $110 to $130 a share or more. (Reading sold as high as $164 in the Winter of 1905-6.) That is more than true investment worth, because at $130 a 4 per cent stock pays only 3^ per cent on the investment. If earnings are falling off, if depression reigns, loans bring high rates of interest and a bear market is anni- hilating fortunes, good 4 per cent railroad stocks can sometimes be bought for $55 to $85 a share, as witness the prices of 1903. At those quotations, such stocks would yield from 5 to 7 per cent on the purchase money, and they are a bargain, provided always that the finances of the company are not impaired. The 5, 6 and 7 per cent railroad stocks sell, normally, around 125, 150 and 175 a share, respectively. They soar above those prices and sink below them with the times and in accordance with a wide variety of technical STOCKS 47 conditions. In a bull market, they tend to go above in- vestment value, and, in a prolonged bear market, much below. It is assumed that an investor will confine his atten- tion entirely to standard stocks, traded in on the ex- changes. No others can be bought promptly at ruling rates or sold to advantage. In the multitude of shares, which are listed on the exchange, which are the ones de- serving of confidence? The dividend payers will naturally have the prefer- ence. It is not every stock which is in that fortunate class. The Inter-State Commerce Commission reports in 1904 show that, whereas the steam lines of the United States had issued a total of about $6,400,000,000 of capital stock, yet on more than $2,600,000,000 of the aggregate there was not, and had not been for years, any annual dis- tribution of profits. A scant half of the enormous total paid 4 per cent or more. Among industrials, the common stocks of a majority pay no dividends. Obviously, no security will attract a conservative investor, unless it supplies him with an income, and not even then, if the price is too high. As for the non-dividend payers, to buy them is to enter upon a speculation. Whatever the future of any such stocks may be, the novice and the man of moderate means should beware of them, except in rare and specific cases. If he has access to an honest and candid official of the company, a banker connected with the property or any other source of trustworthy information and is assured that earnings are large and a dividend will be voted at an early date, the purchase of such a stock while it is cheap may be justifiable. 48 HOW MONEY IS MADE No one can deny that a few non-dividend payers have enriched their holders. American Smelting, common, rose with its earnings from $36% in 1903 to $174 a share in 1906. Reading rose from $37% in 1903 to $164 in 1906. But a man with a moderate amount of money to invest should resolutely turn his back on stocks which do not afford him a dividend from the start. Neither of the two stocks above referred to attained their recent extremely high prices, until long after they had been placed on a dividend basis, and gave a promise of even larger payments. In selecting a stock for purchase, an investor must aim to guard the safety of his principal, first of all, and next consider the certainty and amount of the income. These are the vital factors. A man should especially avoid being swept away from the moorings of common sense by the bullish furor, which reigns among all classes of our people at intervals. It is sometimes better to buy a sound stock and secure a moderate income than, to strive for 7 per cent and endanger the safety of capital. It is a saying, attributed to one of the Rothschilds, that a man must decide whether he would prefer to sleep well or eat well. If the capital be safe, even though the in- come be moderate, the investor will sleep well. If the income be large and enable him to eat well, he may have to spend many restless nights in consequence of a reduc- tion of income and a shrinkage of his capital, in bad times. A partner in a private firm is entitled to look at the books. He has a right to know how much money the con- cern is making, or, if the business is going backward, to know that fact also. No man in his senses would ever STOCKS 49 enter a private firm without full knowledge of its affairs. Why should he do so in a corporation, without similar knowledge ? In the case of most railroad companies, as here- inbefore intimated, it is perfectly easy to "look at the books, " or in other words, to obtain the reports of earnings, etc., for examination. A few of the more popular industrial companies also issue statements, although some of the larger ones do not. If earnings are ample, even in bad times, to pay all fixed charges on the funded debt, all taxes and cost of maintenance, and all dividends, and leave something over for the surplus fund, the stock must be considered a safe investment, if bought when the price is low. The preferred stocks of industrial companies, and the common stocks of such strong concerns as American Sugar Itefining are so excellent with respect to the in- come they afford, seldom less than about 7 per cent, that regret must be felt at the lack of regular reports of earnings and assets. To buy some of these stocks is to leap in the dark. If there could be such governmental supervision as to ensure annual reports at least, the pub- lic would be benefited greatly; and it is difficult to un- derstand why the corporations themselves would be in- jured, although, in fairness, it must be said that some of the companies consider that they would be. Union Pacific now pays 10 per cent and earns more than 14 per cent for the common shares, while possessing assets of enormous value. The knowledge of this imparts a high value to the stock. Beading pays 4 per cent and earns more than 10. St. Paul pays 7 per cent on both classes of its stock and earns 14 for the common stock. United States Steel, preferred, is another example of a 50 HOW MONEY IS MADE security paying an excellent dividend, 7 per cent, and earning far in excess of all charges, even in bad times. The public knowledge of these things, derived from the minute and excellent reports of those corporations, has never proved an injury to the stocks. It does not follow, however, because the foregoing or any other standard stocks are good, sound invest- ment securities, that an investor should go into the market at the particular time when he happens to have money to invest and buy at the prices then ruling. Men of long experience do not do that. They keep their money in the bank, where it is safe, or loan it out at interest, and wait. There is a time for all things, and certainly there is a time to buy and a time to sell. So far as safety of capital is concerned, the ideal is most nearly attained by buying in times of great depression, or dur- ing a panic, when stocks are below their actual invest- ment worth. The margin of safety on a purchase is then the largest. It is no time to buy after a prolonged and extensive rise. A glance at the prices of leading stocks for the last fifteen years, on another page, should teach caution in the matter of buying. Governed by the lessons of experience, the wise inves- tor waits patiently until he can go in with the certainty that the prices will not go much farther, if any, against him, and on the other hand, that they are likely to re- cover. His capital will then be in no danger of impair- ment. This is the one great lesson to be learned by an investor in stocks. He is liable to incur some heart- breaking experiences unless he masters it. As between a number of stocks, all equally solvent, and all paying a proper income, an investor will naturally STOCKS 51 consider the future worth of the properties. He would do this in any of the ordinary transactions of business life. The margin of safety is affected by future worth. It is on this account that railroad stocks are generally held to be better investments than industrial shares. The possession of coal and other mines and lands, the growth of population, the fertility of the soil in regions traversed by the lines, the ownership of valuable ter- minals in cities, the development of manufacturing in- terests along the routes of the roads, and the improbabil- ity of new and serious competition, tend continually to add to the value of railroad properties in general. In the case of industrial concerns, the ownership of patents, the trend of the times with reference to such matters as the substitution of electricity for steam for motive power, the control of the sources of supply of iron ore and oil or other raw materials, and the liability to disturbance through tariff or other legislation, must be considered. Future worth is the only consideration in the matter of non-dividend paying stocks. No one would buy them on an investment basis, and not even as a speculation, unless it were expected that the properties they repre- sent had a great if distant future. Many of the common stocks of the present day are in the position of those of a number of railroad lines built in the '80s. The roads in question were constructed by men who had confidence in the country and looked entirely to the future for a proper reward upon their investments. Their common stocks, long worthless, rose in value with the settlement of the country; and some of them rank among the gilt- edged securities of to-day. Any one who buys such stocks would naturally do so, moderately and only after patient 52 HOW MONEY IS MADE investigation, and he would resign himself to the "long pull." Such stocks are never to be bought unless they are depressed in price. Industrial stocks have come to stay. Some of them have been tried by times of depression, have been attacked in the courts under the an ti- trust laws, and subjected to the strain of changes in the tariff laws. They have survived every adverse influence. American Sugar Refining is one of this class. The regularity of their dividends and the surplus profits which they have earned justifies their rating as good investments, if bought when they are low. The best of the industrials, with a few striking excep- tions, are those which do not issue bonds. If dividends are cumulative, so much the better for the stock. The United States Steel stocks are in a class by themselves. This concern has issued bonds but has accumulated a sur- plus of about $100,000,000. United States Steel pre- ferred, may have to weather other storms but seems bound to enter the investment class of stocks, owing to its extensive control over the beds of iron ore in this country. There are enough good and sound stocks in the general lists of the exchanges to answer all conservative invest- ment demand. A prudent man will avoid those which are not listed and those which are new and unproved, no matter how alluring the prospectus of the companies. When the time comes to sell, standard stocks find a prompt and satisfactory market at ruling quotations. Those not listed can generally be sold only at a sacrifice. It is sometimes asserted that it is the actual investor who runs the most risk. This is not a fair statement. On STOCKS 53 the contrary, it may truthfully be said that if an in- vestor buys with judgment, no one runs less risk than he. Under the worst possible circumstances, the owner of a share of stock risks only the surplus profits which he has put into the investment. Should the company waste its assets, or incur a crushing loss from fire, or, for any other reason, become so utterly bankrupt that nothing is left for the stockholders an almost unheard of case the investor has lost merely the sum he paid for the stock. This would be bad enough. But, on the other hand, if he were speculating and carrying stocks on a margin, or if he were in legitimate business and affairs were going badly, he would risk not only such surplus profits as he has turned back into the business but also, all, or a large part, of his remaining capital. Wall Street and the field of legitimate enterprise both supply a long list of insolvencies every year. The number now ranges be- tween 10,000 and 12,000 annually. In the throng one looks in vain for the names of conservative actual invest- ors in stocks. Men of large means do not, as a rule, buy extensively into the stocks of any company, unless they expect to or already take part in the management. An active part in the direction is, of course, entirely beyond the small in- vestor; but when a stock is low in price, and it is dis- covered that strong men are accumulating it on a large scale, for any purpose, this is a sufficient guarantee that a purchase would be safe for any one. When Henry C. Frick bought so largely of Reading, and when John D. Rockefeller, jr., bought 100,000 shares of Union Pacific (the price being moderate in both cases) in 1904, a boom followed in both of those stocks; 54 HOW MONEY IS MADE and the subsequent rise in values showed how safe it would have been for others to acquire Reading and Union Pacific at the same time. H. H. Rogers was once asked by a friend, who had more* courage than most men could have summoned for such a purpose, for a tip on the stock market. Mr. Rogers replied that he might let his friend in on a deal, then in progress in American Sugar, in which at the time they stood to lose $300,000. The friend did not buy; but, if he had stopped to reflect, he would have rea- soned that when a man like H. H. Rogers had bought a large quantity of American Sugar stock, he would never in the world have let go of it until the purchase showed a profit. As a matter of fact, the stock rose in value and the deal was closed to the advantage of all concerned. In a later chapter, suggestions will be made as to the time when, and the circumstances under which, an in- vestor can buy stocks, with the assurance that his princi- pal will be safe and that the purchase will bring him an increment on his capital. It can do no harm to insist upon the point, that, unless a stock is going to rise in value, within a few months or a year or so, no one should buy it, even as an investment. VI CYCLES OF PROSPERITY AND DEPRESSION THE FIVE, TEN AND TWENTY YEAR PERIODS. FACTORS WHICH IN- VARIABLY FORERUN A CRISIS. HOW STOCKS FORESHADOW THE TURN IN AFFAIRS THE fundamental point in making money on security investments is to know when to buy them and when to sell. If the reader is a man of impatient temperament and must positively know conclusions first, without reference to the facts upon which they are based, he can skip a good many pages of this work and read the last chapters first. But if he is a man of sound mind, and if he should refuse, as he ought to, to take any one's conclusions without knowing how he arrives at them, he will be compelled, sooner or later, to examine the premises upon which they are based. He might as well proceed, therefore, in an orderly way, making sure that the ground is firm under his feet as he advances. He will then follow the evolution of the writer 's argument, in the manner in which it is here set forth. Foremost among the factors, which influence the price of stocks, is the recurrence of cycles of prosperity and de- pression. So intimate is the relation, which exists between the price of stocks and bonds and the prevalence of good or bad times, that the subject is of the first importance. Considerable space will therefore be given to it here. 55 56 HOW MONEY IS MADE If furnace fires are blazing and mills are overwhelmed with orders, if granaries are bursting with the harvests, and railroad managers are at their wits' end to find cars for the traffic which pours in from every quarter, then profits are certain to be large in every vocation, thousands of men will have surplus profits to invest, and Wall street will respond to the dominating optimism of the period and bull the prices of stocks and bonds. When the times change, prices will ; and they will fall. Iron is said to be a barometer of the times. The price of iron certainly shows the actual state of trade. But a genuine barometer is an instrument which foretells a change in conditions before the clouds have actually broken away or gathered overhead. The most sensitive of all of them is the market prices of stocks and bonds. Since the world has become civilized, good and bad times have succeeded each other at more or less regular in- tervals. History has repeated itself also in the general sequence of events from one serious crisis to another and in the causes which bring them to pass. Most writers on finance concur in the statement, that the interval from one crisis to another is from ten to twelve years and that the period is slowly but gradually lengthen- ing. Prof. W. S. Jevons, of England, cites as dates of crises in the British Isles, the years of 1701, 1711, 1721, 1731/2, 1742, 1752, 1763, 1772/3, 1783, 1793, 1804/5, 1815, 1825, 1836/7, 1847, 1857, 1866 and 1878. Prof. Jevons sought to connect these upheavals in business cir- cles with the periodicity of sun spots which reach their maxima every eleven years. The notion seems fanciful. Human nature itself affords a sufficient explanation of all the phenomena of these great changes in the times, without PROSPERITY AND DEPRESSION 57 referring them in any way to sun spots or the action of the planets in their courses. A crisis invariably starts with money stringency and unobtrusive liquidation in securities and speculative ven- tures leading up to and bringing about the collapse of some great bank or business firm or some startling ex- posure of fraud, shaking public confidence at the very height of good times and spreading consternation and terror among all men, who are committed to speculative ventures or struggling business enterprises. A panic fol- lows ; and the fright in business circles causes a reaction in trade. The first stage of a cycle ordinarily lasts three or four years. Its characteristic traits are dwindling trade, a fall in the price of securities, smaller earnings, retrench- ment in all expenses, lower wages, strikes, the closing of factories, discharge of surplus employes, and all the other melancholy concomitants of hard times. Dry goods and other firms and banks collapse by the hundreds. Tramps throng the highways and beggars the cities. All classes feel the depression. There is commonly a temporary rally after the first great shock and a second period of less violent liquidation. Three or four years succeed, forming the second stage of the cycle. A better feeling gains ground among busi- ness men. Mills reopen, merchants buy larger stocks of goods, labor is again in demand. Good times are seen to be near at hand. The third and last stage of the cycle is attended by a re- newal of the conditions, which caused the last crisis and will precipitate the next one. A boom breaks out, in all parts of the country. Goods bring higher prices, factories are rushed to their full capacity, trade is active, stocks 58 HOW MONEY IS MADE rise to unheard of prices, and every one makes money. Usually, there is a great speculation in real estate. A characteristic trait of this stage is prodigality in personal expenses. To use the words of Franklin, the poor see with envy on every side "luxury of dress, luxury of equipage, luxury of the table." New enterprises are launched in great number, and the market is burdened with enormous issues of new securities. Prosperity itself brings on fatal weakness. Bank resources, ample at first, soon begin to be overtaxed. Bank loans run ahead of deposits; the money supply is depleted; interest rates rise; and every weather signal of finance points to a coming collapse, which begins as usual with long continued liquidation. The third period fills out the cycle*. Every twenty years, the reaction seems to be more severe than the intermediate one. In the United States, crises have occurred at fairly regular intervals, in spite of the fact that the exploiting of the rich resources of a new country has from time to time changed underlying conditions suddenly, and of the other circumstance that an American stands less in awe of precedent than do the people of Europe. If, for instance, it should ordinarily take five years in Europe to pass from the top to the bottom of a cycle, attention would not neces- sarily be paid to that rule here. A variety of causes operate here to interfere with the orderly succession of events in the middle period of a cycle. Crop failures, po- litical changes, rate wars between railroads, laws on the currency and the trusts, and such matters as the discovery * Roger W. Babson, of Wellesley Hills, Mass., divides a cycle into four periods : One of prosperity, one of decline, a period of depression, and a period of improve- ment. This is really a technical matter. No objection is seen to Mr. Babson's four periods. Both mean the same thing. PROSPERITY AND DEPRESSION 59 of gold in California and oil in Pennsylvania, have each played a part in affecting the regularity of movement. Owing to the growing closeness of relations with Europe and to more settled conditions here, it is probable that, in the future, the United States will pass from one extreme of prosperity to the other in a more orderly fashion. History records the occurrence of crises in business af- fairs in America in 1791/2, 1814, 1826, 1837. 1848, 1857, 1864, 1873, 1884, 1893, 1896, and 1903/ y ^rief review of each is presented. The attention of the reader is asked particularly to a remarkable feature of the action of the stock market, with reference to crises. Almost invariably, the rise in stocks has begun a year or more in advance of the actual betterment in trade and manufactures. The advance has culminated, as a rule, from one to three years before the actual crisis has arrived ; and it has often been the long decline in stocks, which has finally precipitated the failures of banks and capitalists and brought on the panic. The rapid review of crises in America which will now be presented does not assume to be a history of Wall street; but each turning point in affairs will be sketched with sufficient detail to make the causes and circumstances clear. CRISIS OF 1791/2 TRADE conditions and money stringency led to America's first serious reaction and financial panic. Alexander Hamilton, Secretary of the Treasury, bought bonds to re- lieve the situation. Confidence was restored, and order brought out of chaos, largely through the operations of the first United States Bank, chartered in 1791. 60 HOW MONEY IS MADE CEISIS OF 1814 A DECADE of prosperity was enjoyed by the States after 1792 ; but the War of 1812 and the embargo and non-in- tercourse laws finally made trouble by almost annihilating foreign trade. From a total volume of $246,843,000, in the fiscal year ending September 30, 1807, foreign trade had fallen steadily to $19,892,400 in 1814, the smallest in the whole history of the republic, before or since. Ex- ports were less than the pitiful sum of $7,000,000. Amer- ican ships, long so profitable, were practically idle. The country was extremely dependent upon foreign manufactures and these could be had in proper quantity only by smuggling through Canada and the ports of New England. The goods were marketed by the merchants of Boston, to whom immense sums were owing by the rest of the country. In 1814, Boston drew on New York and Philadelphia, which were distributing cities, for the cash. Those cities called in their money from the sections tribu- tary to them. Specie was drawn from the doors of banks in New York and Philadelphia, by the wagon load, for shipment to Boston and Canada. Scarcity of cash in the United States caused general alarm and prepared the way for the panic. The United States Bank had disappeared in 1811 ; and the State banks had too limited a capital to carry the States through the crisis. They were already staggering under a heavy load of loans and could do no more. When the city of Washington was captured by British troops, Aug. 24, 1814, and President Madison took refuge in a Virginia forest in a heavy rain, a panic was the quick PROSPERITY AND DEPRESSION 61 result. In Baltimore, Philadelphia and New York, the banks suspended specie payments, Aug. 26 and 31 and Sept. 1, respectively. The banks in New England and a few in the West weathered the storm, but in all the rest of the country suspension of specie payments was general. Hundreds of business firms were wrecked and depression reigned throughout the country. Wall street was affected, of course, but trading was limited then to a few varieties of bonds and stocks, and the troubles of Wall Street figured to an unimportant extent in the universal distress. In England, inflation and depreciation of the paper cur- rency leJ to panic and reaction in 1816. 1819-END OF THE DEPKESSION HARD times lasted for several years. It is true that there was some rebound after the panic. Merchants did fairly well. New lands were being rapidly settled. A flood of paper money was poured out by the State banks, and, after April 10, 1816, by the second United States Bank, which gave a stimulus to enterprise and speculation. But the moment had not arrived for a general forward move- ment. Manufacturers felt the hardship of the times the most, owing to the lack of protection under the tariff laws. Many went out of business, especially the weavers of woolen goods, who could not withstand the competition of British mills, enormous quantities of whose productions were dumped on the wharves of our sea-coast cities for sale at auction. Imports were excessive. The balance of 62 HOW MONEY IS MADE trade ran heavily against the United States, amounting in four years, ending Sept. 30, 1818, to more than $165,- 000,000, a sum too large to be paid from the rich earnings of American ships. It was imperative to pay for the goods and this evil was soon made worse by another. Paper money having naturally depreciated, specie was withdrawn from circulation. To remedy this trouble, Government and the banks united in an effort to lessen the volume of paper money afloat. State banks, whose circulating notes were deposited in the United States Bank and its branches, were called upon to redeem them in specie. Many of them retired a part, or all, of their bills. According to A. S. Bolles, the volume of paper money was contracted from $110,000,000 in 1816 to less than $65,- 000,000 in 1819. This drastic proceeding brought on the inevitable collapse in the business world, starting in the Fall of 1818. New enterprises were laid aside until a more convenient season and many bankruptcies occurred. Edmund C. Stedman calls this the crisis of 1818. As the crisis of 1814 became acute through a panic, so the depres- sion virtually ended in one. The trouble was caused by the lack of ample supplies of money at a time of great na- tional growth. CEISIS OF 1826 AFTER drastic liquidation, economy and curtailment of all new commitments in business, courage revived ; and when better times dawned, business men took hold again with characteristic American spirit and promptitude. A protective tariff enacted in 1824 inspired fresh anima- tion in home industry. Imports were cut down, exports PROSPERITY AND DEPRESSION 63 were larger, and, in fact, during the six years, ending Sept. 30, 1825, they nearly balanced, excess of imports be- ing only a trifle more than $30,000,000. Money was in ample supply. Public works were built on an extensive scale and labor found good employment. The new life in every depart- ment of affairs led easily and in the usual way to specula- tion, always the bane of good times. The country went ahead too fast; and once more the banks could not meet all demands for accommodation. When a reaction in trade started in England, late in 1825, money stringency ruled here and put a stop to all new ventures. In 1826, a crisis occurred in the United States, with many failures, includ- ing the Franklin Bank and Jacob Barker. In England, the depression was fearful. 1831 END OF THE DEPRESSION MODERATE gold imports after 1826 led to a short revival of confidence. But the trend was downward for several years. Gen. Jackson was fighting a battle royal against renewal of the charter of the United States Bank and a reduction of tariff duties was being debated in Congress. In 1831, a rush of foreign goods turned the tide of gold outward. The times were extremely difficult and enter- prise was at a low ebb. By 1831, liquidation had ended, a slow improvement began, and the turn had come. CEISIS OF 1837 THEN followed a term of six years of halcyon days. This was the first era of active railroad building ; and by 64 HOW MONEY IS MADE 1837, the twenty-three miles of pioneer railroad line of 1830 had grown to 1,497. The demand for material and labor for these works proved an immense advantage to industry. General business also steadily grew better and all classes of producers and traders enjoyed a boom. The Clay compromise tariff of 1833, while not stimulat- ing in its effects, ended the uncertainty which had pre- vailed, at any rate; and although duties were to be lowered gradually until 1842, no serious consequences were felt for several years. As time rolled on without any serious check to the grow- ing optimism of the period, a vast variety of new enter- prises were launched, and deposit of the surplus revenues in the State banks aided in kindling the flames of a wild speculation. Securities attracted little attention, but a mania broke out for trading in lands, ships, agricultural products and manufactures, such as had never before been witnessed in this staid and old-fashioned country. It is recorded that prices were paid for city lots, in some cases, never afterward known. The famous m,orus multicaulis speculation was an incident of those times, rivalling the historic tulip mania in Holland. A furious carnival of trading broke out especially in Government lands, pay- ment being made for them in State bank notes. That which was bought to-day at any price was sold to-morrow at a profit, and exuberant enthusiasm prevailed among all classes. While the times were buoyant beyond previous experi- ence, underlying conditions were changing. Imports grew to extraordinary figures and the balance of trade against the United States rose from $13,601,000 in 1832 to PROSPERITY AND DEPRESSION 65 $52,240,000 in 1836. Gold was kept at home by reason of the large earnings of American ships and the investment of foreign capital in American railroads and other ven- tures. Indeed, a few millions of gold were imported, every year. But the eager demand for money to finance land and every other kind of ventures kept pace with in- creased money supplies and finally ran past them. Loans expanded steadily at the banks and at one time specie holdings did not exceed 7^4 per cent, of the loans. A great fire in New York, Dec. 16, 1835, inflicted serious loss on that community and was one influence tending to- ward the final reaction. April 10, 1836, the second United States Bank came to a stormy end, so far as its Government charter was con- cerned ; but it went on for a few years under a Pennsyl- vania charter and its reckless loans did not improve the general situation. Early in 1836, credit was almost at the breaking point. October 23, 1836, a small panic in Wall Street heralded the coming crisis. President Jackson did the rest. Jan. 1, 1837, he began to call in from the banks the nearly $37,500,000 of the surplus revenue on deposit among them for distribution to the State treasuries. By April 1, half of the amount had been paid in, but to meet the payments the banks were obliged to contract loans. The country was on the brink of disaster. May 10, 1837, a frightful panic broke out in the financial world and all the banks suspended specie pay- ments. Prices of stocks, lands and goods fell in a twink- ling and fortunes vanished in a day. Extensive liquida- tion took place ; and there were over 300 failures in con- sequence of the crash. In New York, J. L. & S. Josephs, 66 HOW MONEY IS MADE agents for the Rothschilds, and, in Philadelphia, the United States Bank, went down among others. The dis- tress was caused, in a measure, and was aggravated, by a partial failure of the crops, high prices for grain and necessary imports of breadstuffs. A shortage in the annual contribution to the wealth of the country from the wheat and corn fields is never a greater calamity than when affairs are trembling in the balance. The crisis of 1837 is generally regarded as a "land panic. ' ' The prostration in trade lasted for several years. The bank crisis in the United States proved disastrous also to England. Insane speculation had been in progress there, precisely as here, and was ended in 1837 by panic, reaction and commercial distress. 1843 END OF THE DEPRESSION THE turn upward came in 1843, partly through the favor- able nature of the new tariff of 1842 and hand in hand with an enormous decline in imports. In 1843, foreign commerce yielded a net balance of $40,392,000 in favor of the United States, much the best showing in the history of the country up to that time. For fifty-three years pre- viously, there had been a balance in favor of the United States ten times only 1840 having been the best year, when excess of exports was $25,410,000. In all vocations, depression had been severe. Railroad building was a good barometer and had fallen off from 416 miles of new line in 1838 to 159 miles in 1843. Similar dullness existed in all other branches of enterprise. By 1843, liquidation had been completed. PROSPERITY AND DEPRESSION 67 CRISIS OF 1848 WHEN hope finally revived, men of ability gradually found courage to embark once more in the work of de- velopment. Factories and mills began to experience a bet- ter demand for their products. Pig iron making is always an indication of conditions, and this trade flourished in particular, the output rising from 215,000 gross tons in 1842 to 800,000 tons in 1848. Trade sprang up and profits were large. Railroad building was resumed and went for- ward with a rush. Good times soon reached every city and settlement ; and both capital and labor found full employ- ment and reaped a rich reward therefrom. The War with Mexico had little effect, but the seeds of trouble were planted when Congress adopted in 1846 a tariff for revenue only. Industrial plants were small in that era and machinery was crude; and the makers of iron, steel, textiles and other goods could not withstand the competition of the great and more advanced factories in Europe, without genuine protection. A large excess of imports soon appeared in our foreign trade and gold was drawn from the banks and sent abroad to pay for the goods. The activity of business had once more overburdened the banks with loans and a loss of specie made trouble. Matters were in shape for a reaction. In 1847, a great crisis arose in Europe, due to inflated credits, fraudulent stock companies and a frenzy of specu- lation. The reaction extended to the United States, in- vaded every part of the country and caused a halt and severe liquidation. 68 HOW MONEY IS MADE 1851 END OF THE DEPEESSION THE discovery of gold in California by Marshall brought about improved sentiment, although not at once. Thou- sands of Americans went wild over the prospect of sudden fortunes, however, and rushed to the Pacific coast over- land, across the isthmus and around Cape Horn. Mer- chants and ships followed to supply their needs. When it became evident finally that the mines were likely to supply fresh capital for business operations, railroad building was resumed. In a few years, California was actually sending $40,000,000 of gold per annum to the East. Whatever there was of doubt in the business situa- tion was finally cleared away by a small panic in stocks, Aug. 13, 1851, as a result of a break in Erie from $90 a share to $68%. The smash was soon succeeded by a genuine revival. CEISIS OF 1857 A BOOM in business broke out soon after 1851, in spite of the injury to manufactures by the low tariff. Trade had grown with rapid strides to keep pace with settlement of the West and the Pacific coast. Shipping had reaped a rich harvest in the traffic of the Atlantic during the Crimean War, 1854/5, and the finest clippers in the world had been built for the trade to California and often paid for themselves in one trip. Owners of merchantmen added enormously to their fleets in that prosperous period ; and ship carpenters were among the best paid of American workmen. PEOSPERITY AND DEPRESSION 69 The construction of new railroads was in full swing be- tween all important cities and the miles of new line put into operation annually had grown from less than 1,700 in 1850 to 3,642 miles in 1856. What this meant for the iron and steel industry hardly needs explanation. Good times were universal. Iron, dry goods and all other commodities brought high prices. Wealth was ad- vancing. European investors looked with favor on Amer- ican securities. Every one was making money. Wall Street discounted the good times in its chronic manner. An immense issue of new securities was finding its way into the stock exchanges and an active speculation in them was being conducted. Rich men were already engaged in the pursuit of greater wealth by watering stocks; and an increase of the capital of Erie from $3,000,000 to $38,000,000 was only one of the financial incidents of the period. With reference to securities, the top of the boom was touched in December, 1856, some time before the actual crisis. Dec. 5th, the rise in prices caused the failure of Jacob Little, who had been short of Erie more than 100,000 shares. The reaction which ensued might have ended in such a moderate downward turn as is usual in a bull market, were it not for changes in the credit situation, which the excited speculation of 1856 had done much to promote. Foreign trade had run steadily against the United States on account of the low tariff, and the yet lower tar- iff, then under discussion and finally enacted March 3, 1857, promised an aggravation of the trouble. Investment of European money here, California gold and the earnings of the merchant marine did not offset the demands of 70 HOW MONEY IS MADE foreign merchants upon our specie supply; and net ex- ports of gold ran all the way from $23,015,500 in 1853 to $58,578,000 in the fiscal year of 1857. Scarcity of cash soon made itself manifest, and when cash holdings had fallen to about SVa per cent of the loans, it was apparent that no more money could be placed at the command either of the mercantile community or of specu- lators. There was a trifling improvement in stocks in January, 1857, but the high prices for railroad securities, iron and goods of 1856 were not repeated until long afterward. In January, 1857, liquidation set in ; and falling prices were recorded for months. The tension in the financial world soon reached the snapping point. Aug. 24, 1857, the Ohio Life Insurance & Trust Company succumbed under the strain of reckless loans, official wrong doing and the stringency in money; and the crisis had arrived. Wall Street should not have been, but was, taken by sur- prise; and that busy center has seldom witnessed scenes of greater excitment than prevailed during the panic. In New York, loans had been in excess of deposits for some time, and while that was not an unfamiliar pheno- menon in those days of moderate banking resources, and while a reaction in stocks was inevitable from all the cir- cumstances of the case, the crash would not have been so disastrous had not a multitude of intelligent men fallen into a senseless panic and by their precipitate action de- stroyed their own fortunes and those of others. A panic is always unreasoning, however, and there is this to be said in justification of the fright, which swept the busi- ness world, that the banks had reached the limit of their ability to finance merchants and speculators; and the smash was promoted by a coterie of speculators, who had PROSPERITY AND DEPRESSION 71 foreseen trouble and gone short of stocks and whose profits were dependent upon exciting a frenzy of alarm. From the first of the year to October, good stocks dropped between $40 and $60 a share. Scores of business men were ruined by the reaction. There were runs on the banks and in October, a number of them suspended. Erie, Michigan Southern and Illinois Central went into the hands of receivers. Bank clearings in New York in 1857 were only about half of the total of the year before. The depression in business circles lasted practically for four years. Stocks appreciated in value, as above noted, in the early part of 1857, but after that, there was liquida- tion until 1858. 1861 END OF THE EE ACTION DULLNESS reigned in many important fields of enterprise after the terrible panic of 1857. All new work was stopped and falling prices and stagnation were experi- enced throughout the country. Iron fell more than $9 a ton from 1856 to 1861. Railroad building had received a staggering blow and fell from 3,642 miles of new line in 1856 to 651 miles in 1861. There was less demand for the output of the textile mills and thousands of men were out of work. Some small improvement appeared in 1860 but it was short lived. In consequence of political troubles, a turn for the worse occurred in May, 1860. Threats of secession were being made by fiery orators in the South, if a Republican President were elected in the Fall; and this brought about a serious state of affairs. Several years of frugality and careful management had led to more healthy condi- tions, when the difficulty of making collections in the 72 HOW MONEY IS MADE South impaired the credit of many Northern merchants. President Lincoln was elected in November, 1860, and the situation then became acute. Stocks fell from $7 to $16 a share in a month's time. For the first time in its history, the New York Clearing House was forced to issue loan certificates, Nov. 23, 1860, to the amount of $7,375,000, to carry the banks through the monetary stringency. After a rally in December from the low prices of 1860, stocks dropped until April, 1861, when there was a sudden semi-panic, caused by the firing on Fort Sumter and the outbreak of hostilities. From the low prices, then made, stocks rallied for three years. A powerful influence in favor of the improvement which then set in was the Morrill protective tariff, enacted March 2, 1861. Another was the new source of wealth, discovered in Pennsylvania, in the form of petroleum. A second issue of loan certificates, amounting to $22,- 585,000, was made by the New York Clearing House, beginning September 19, 1861, and this carried the banks through to better times, in spite of the general suspension of specie payments, Dec. 28, 1861. CEISIS OF 1864 EVENTS moved swiftly during the Civil War. The forma- tion of a large army in the North and its march to the South created a demand for supplies and breadstuffs ; and the shipment of troops and munitions to different parts of the country added to railroad earnings. A strong impulse had been given to manufactures by the Morrill tariff and the requirements of the army; and PROSPERITY AND DEPRESSION 73 hundreds of tons of pig iron, which had been stacked in the yards of the furnaces, for years, were bought by the mills at prices which dazzled the mind and enriched hundreds of men. Pig iron rose $55 and $60 a ton from 1861 to the Summer of 1864. All other com- modities sold at high prices. In 1862, a great bull market in stocks began and prices rose excitedly, with scarcely a halt the whole year. An effective cause in this wild whirl upward in prices was the issue of $431,000,000 of greenbacks by the Govern- ment and the expansion of paper money circulation from $207,000,000 in 1860 to $833,719,000 in 1864. Trade was extremely active. Wages were high, as might have been expected after a legion of young men had left the farms and workshops and gone away to the front. Every one who had not shouldered a rifle to fight the battles of his country made money, as never before in his life. In Wall Street, in manufactures, army contracts and trade, fortunes rolled in upon thousands of men ; and money was spent with open handed prodigality. Speculation required the use of such unheard of sums of cash, that the banks in New York were forced, for the third time, to resort through the Clearing House to loan certificates, $11,471,000 being issued, dating from No- vember 6, 1863, to relieve the strain on credit. In the Spring and Summer of 1864, stocks were bulled to extraordinary prices. Top of the boom was actually reached in April, although a few securities went higher in June. Everything on the list was from $70 to $80 a share higher than in April, 1861, and the speculative favorites from $100 to $189 a share. Delaware & Hudson had felt the enormous demand for anthracite coal and was 74 HOW MONEY IS MADE manipulated to $254 a share. Erie for the same reason rose to $126 and Beading to $165. Those prices have never been seen since in the more than forty years which have now elapsed. In June, Harlem was cornered by Commodore Vanderbilt and went to $285 (a price, singu- larly enough, the same to which gold was forced in July, the highest quotation for the metal) . Harlem went off the list of the stock exchange for several years and did not sell at $285 again until 1896. Michigan Central touched $157 and ever thereafter until 1891 ranged below that figure. In looking over the record of 1864, one finds a number of other stocks, which sold at prices not again equalled for a whole business generation. As for the market, as a whole, taking the average of the broad trading stocks, it has required forty years to reach once more the high level of 1864. The speculative revel went madly on, even while the money market was working into a dangerous position and when every cautionary signal of finance pointed to a cer- tain, early and frightful collapse. Grim and relentless war was raging in all the border States, pain and sorrow had entered thousands of homes, the public debt was run- ning up into the billions. But swept away by the wild enthusiasm of the times, speculators and business men be- lieved the boom would last forever. Paper money inflation had been steadily expelling gold from the United States; and net exports of the precious metal during the fiscal year of 1864 were $89,484,800, the heaviest in recollection. Foreign trade was running strongly in favor of Europe; and an adverse balance of $157,600,000 was rolled up against us in 1864, which also broke all previous records. Money worked close again, as PROSPERITY AND DEPRESSION 75 was natural ; and a fourth issue of loan certificates was re- sorted to, in New York, dating from March 7, 1864, amounting to $17,728,000. When the break in Wall Street finally came, the im- mediate cause was a reaction in Fort Wayne stock. That security had been bulled in the interest of Anthony W. Morse from $82% in January to $152% in April, and, after the failure of Mr. Morse, April 18th, it fell suddenly, de- clining to $47% by May. The pools were taken aback by this performance; and while they did not relax their ef- forts on the bull side for a month or two, yet manipulation was no longer effectual, and a bear market set in during June, which lasted for several years. More than one cause contributed to the result, but the excessive loans at the New York banks, and the high premium on gold, were two of the most important. The scarcity and high price of gold, then of almost more consequence than high rates of interest on money, combined with other adverse influences, caused a semi-panic in the Fall, and stocks fell violently until well along in October. After a moderate rally, they then went lower; and by the Spring of 1865, leading stocks had declined from about $40 to $80 a share. Delaware & Hudson had fallen $121. Heavy losses were incurred by hundreds of speculators ; and the reaction extended to the country at large. 1867 LOW POINT OF THE DEPRESSION AFTER the passionate excitement and reckless speculation of the Civil War period, calm ensued for two or three years. The country had been exhausted by the long and 76 HOW MONEY IS MADE cruel conflict ; and the financial debauch was over for the moment. President Lincoln had been assassinated ; and a million of men had gone back from the armies in the field to their old homes or to new ones in the West. Iron and other manufactures had been depressed by a sudden end- ing of the demand for war ships, arms, munitions and supplies. Contraction of the paper circulation was in progress, the volume being reduced from $983,300,000 in 1865 to $827,000,000 in 1868. A brief period of rest and adjustment to new conditions was imperative. Stocks rallied to some extent in 1865, as usual after an abrupt decline, but underlying conditions were not favor- able to an immediate resumption of the bull market. Im- ports were heavy ; and in the fiscal year of 1866, gold went abroad in the amount of $63,001,000, next to the most serious outward movement on reccrd. Stocks fell off again in the Spring of 1866. May llth, 1866, Overend, Gurney & Co., of London, failed, precipitating a sudden panic at that center and a depression, which had no little sympathetic effect here. Writers refer to this chapter of finance as the Crisis of 1866. Practically, it marked the turning point here. After a rally, and one more reaction in the Spring of 1867, the trouble was ended. Twenty selected stocks had fallen an average of $58 a share from the high prices of 1864, and individual stocks had declined from about $40 to $130 a share. The collapse in England caused two thirds of the speculative stock companies there to go out of business. In 1867, large fortunes were brought to the support of stocks and general business and better times prevailed for several years, although the banks were not yet in a position to finance a sustained bull market in stocks. PROSPERITY AND DEPRESSION 77 Every burst of business activity and the requirements of the railroad companies called for every dollar the banks could loan and the burden was borne with difficulty. CEISIS OF 1873 IMPROVEMENT, once begun, went forward rapidly. Rail- road building, which had fallen to 738 miles of new line in 1864, grew to 7,379 miles in 1871. The protective tariff was working out good results ; and while stimulating pro- duction, it had given the country the advantage of moderate prices for iron and other goods. A genuine boom soon manifested itself, especially in iron and steel. Mills and shops of every description were rushed with orders. No workman was denied who sought a market for his services. New lands were being settled, partly by veterans of the war. A number of fortunate crop years added to the wealth of the States. In the fiscal year of 1873, exports had passed $522,000,000, which was more than thrice the amount of the last year of the Civil War and the greatest business the country had ever done up to that time. The rebound in stocks from the low levels of 1866 and 1867 was vigorous and ran on unchecked until the Summer of 1869. A few stocks went higher in 1871 and some others in 1872. The real culmination of the bull market was in 1869, when high priced railroad shares were from about $30 to about $100 higher than during the depres- sion. The coal shares were exceptions; they hung heavy and some of them were actually lower. The period from 1869 to 1872 was one of distribution. General prosperity 78 HOW MONEY IS MADE was unchecked until 1873 but stock speculation drooped. A variety of untoward events occurred. Black Friday panic, September 24, 1869, caused by a corner in gold, sent stocks tumbling, led by a decline in gold from $162^ to $133. Clearings at the Gold Exchange Bank were so entangled and confused that the bank went into the hands of a receiver and its doors were closed for several days. Many failures occurred in Wall Street and hundreds of business firms were crippled or obliged to wind up their affairs. The Chicago fire, October 9, 1871, and the Boston fire, Nov. 11, 1872, each caused a heavy waste of invested capital and a break in stocks. In spite of all disasters, the stock market was measur- ably strong until 1872. Not only were powerful cliques energetic in sustaining prices until they could sell their holdings ; but extra dividends were voted by railroads, the most unheard of watering of stocks was announced from time to time, and a few important consolidations were effected, like that of New York Central with Hudson River, all contributing to awaken hopes of higher prices yet to come. Rivalry in the buying of shares 'for control added to the excitement. A number of desperate battles were fought in Wall Street between rival factions. Corners were engineered, one after another; and there were three on one day, September 17, 1872, yet remem- bered as the "day of three corners." While the trend of stocks was downward, business re- mained in a healthy condition. Business men were doing extremely well, crops were good, and pig iron production in 1873 rose to 2,560,900 tons, so far the high water mark in that industry in America, while the price had risen over $20 a ton by the Fall of 1872. PROSPERITY AND DEPRESSION 79 Various influences had come into play, meanwhile, to weaken the credit situation. Reckless overtrading in Wall Street invariably adds to the weight of other forces in this direction. In spite of enormous grain exports, the United States had been buying foreign goods in even greater quantity ; and gold had been going to Europe at the rate of from $21,000,000 to $63,000,000 a year since 1867. Bank reserves were low, and scarcity of cash caused a money flurry in September, 1872. Loans were made at ^ per cent a day and 2^ per cent was paid for carrying Erie stock. Later in the year, the market was unsettled by a break in Chicago & North Western. The Woodward party had bought and cornered that stock, driving the price from $68^ in October to $230 in November, but the corner failed almost at the moment of success and the stock broke to $81*/2 in December. A semi-panic ensued, with many failures. For a short time, the banks stopped the issue of weekly statements of their condition. Early in 1873, money worked close again. Call loans could not at times be made for less than 7 per cent, with % per cent a day commission added. Bankers charged % to 1 per cent a day for carrying stocks. Time loans went to 12 per cent. The crisis was at hand, promoted by the overbuilding of railroads. The public, already nervous, was startled on April 26, 1873, by the failure of the Atlantic Bank ; and then began a financial and commercial panic, which was due entirely to the excesses of the previous five years. The echoes and consequences of a panic in Vienna, May 9th, growing out of reckless speculation in doubtful securities, made matters worse here. Frantic selling of stocks began at the New York Stock Exchange and prices crumbled away, week after week, without more than one brief pause in the Fall. 80 HOW MONEY IS MADE September 8, 1873, the New York Warehouse Company succumbed. On the 17th, the New York Midland became bankrupt and Jay Cooke & Co. failed on the 18th. This last calamity capped the climax. Fright and excitement swept the whole country. In Wall Street, pandemonium reigned. So terrible was the panic, that the Stock Ex- change took the perfectly unprecedented action of closing its doors on the 20th, not to reopen them until the 30th. Time loans were 15 to 24 per cent in October and call money was 7 per cent, with *4 P er cent a day added. For the fifth time, the New York Clearing House issued loan certificates, dating from September 22, 1873, in the amount of $26,565,000. With a view to relieve the tension to some extent, the United States Treasury reissued about $26,- 000,000 of greenbacks, there being slender warrant in the law for this action. The smash in stock prices ended in November and a great rally followed. But the financial storm had wrecked many fortunes and thrown a number of banks and hun- dreds of business men into bankruptcy, as well an the Northern Pacific and the New York, Chicago & St. Louis railroads. It is said that seventy-nine members of the New York Stock Exchange failed during the panic. In the country at large, failures among business men grew more numerous, every year thereafter, until 1878, in- clusive. The Credit Mobilier investigation intensified the general uncertainty. 1877 END OF THE DEPBESSION THE reaction in business lasted until the latter part of 1876 and in some lines until the Summer of 1877. Pig PROSPERITY AND DEPRESSION 81 iron making fell off from 2,560,900 tons in 1873 to 1,868,- 900 tons in 1876 ; and there was no important recuperation in price until 1878, when there had been a fall of about $40 a ton from the high prices of 1872. New miles of railroad constructed dropped from 7,379 in 1871 to 1,711 miles in 1875. In all other vocations, dullness, lower prices and smaller profits were reported. January 14, 1875, President Grant signed the bill, pledging the Government to resume specie payments, on the 1st of January, 1879, and while this was a reassuring incident, its good effects were not felt immediately. Men of large means were greatly disturbed during this period by the so-called granger laws of several Western States, which aimed a hard blow at the railroads in the interest of farmers and sought to regulate and reduce freight rates. Partly in consequence of these laws and also as a sequence of the hard times and loss of freights, all agreements as to rates came to an end between rail- road and coal companies; and open wars broke out be- tween several important systems. Slackening of traffic had already impaired earnings and the damaging compe- tition of 1875 and 1876 cut them down yet more. Com- modore Vanderbilt died, January 4, 1877, and a trunk line agreement which he had brought about a month or two before was abandoned. Loss of earnings sent Central of New Jersey into the hands of a receiver in February; and Reading was obliged to apply to creditors for con- cessions. The trend of the times was so unmistakably downward in Wall Street in this period, that a strong bear party came into existence, and its untiring attacks caused prices (after a rebound from the bottom in 1873) to reach a lower level in the Spring of 1877, than for the previous 82 HOW MONEY IS MADE twenty years. The last drive in the month of June ended the reaction in the stock market. Taking the whole body of active stocks, all the gain since 1861 had been wiped out; the average was lower than then; 20 selected stocks had declined $76 a share since 1869 and individual stocks were down from $14 to $116 a share, the high priced ones the most. A change in outside conditions was then ush- ered in. Call money was remarkably low, the trunk line railroads made a new agreement in June, and such evils as prevailed in the business community seemed near their end. The turn had come. A powerful speculative com- bination was formed in Wall Street and the buying of stocks for a bull campaign began. CRISIS OF 1884 BETTER times trod upon the heels of 1877. Confidence re- turned slowly, indeed, but it did return; and the tide of prosperity rose steadily until its inspiration had pene- trated every city and hamlet in the country. The fertile lands of the West and South brought forth bountiful harvests, and ocean commerce expanded under the stimulus of good crops. The excess of American exports was only one of the features of this golden period in our affairs, which broke all records. During four years, end- ing June 30, 1881, foreign trade yielded an average balance of more than $230,000,000 per annum in favor of the United States, a marvel to which our people were not accustomed. A number of new railroads were required; building broke out afresh and once more surpassed all precedent, the miles of new line rising from 2,665 in 1878 to 11,569 PROSPERITY AND DEPRESSION 83 in 1882. The transportation of materials for railroad con- tractors and a larger volume of goods and grain led to a striking improvement in the earnings of all lines. Meanwhile, mills and factories were busy, and furnaces could hardly meet with promptitude the orders for metal. The tonnage of pig iron turned out in 1882 was the enormous total of 4,623,300, or nearly three times the record of 1876. In the sale of goods, merchants reaped large profits. Farmers were paying their debts. Energy pervaded the entire commercial world. The mines were taxed to the utmost and the output of coal was nearly twice that of the dull years which preceded the boom. Betterment in the stock market was delayed by strikes and riots at Pittsburgh and elsewhere in 1877, but the time was ripe for a bull movement in stocks and after a few months the bull party had the situation under control. Stocks began their rise in the Spring of 1878. In 1879, men of means awoke suddenly to the fact that railroads were of value as investments after all and a marvelous buying of securities sprang up, which electrified the financial world and led to a boom in prices. A powerful factor in behalf of higher prices was the undoubted fact, that the heart-breaking wreck and reconstruction of corporate finances had been finished for the time being. Rate wars had ceased and earnings were on the upward grade. Money was fairly low, barring the customary flur- ries at the planting and harvest seasons; and time loans could be negotiated at an average of 4 to 5 per cent. As soon as the boom started, there was no hesitation on the part of investors and traders. Orders to buy poured into every brokerage office in a flood; and brokers were in danger of being utterly swamped with business. Stocks 84 HOW MONEY IS MADE rushed upward with a whirl until November. In 1880, especially, the stock exchanges were the scenes of furious trading, such as brokers had never witnessed. Fortunes were made by every one connected with Wall Street. Scarce a cloud flecked the sky for two or three years, and the swelling tide of the boom rolled on practically un- checked until 1881. A number of striking railroad con- solidations were arranged by Jay Gould and others. The buying of stocks for control, stock dividends, rights on new issues and strong manipulation by operators, pro- moted speculation and kept it at the boiling point. In 1880, stock dividends were declared to the amount of more than $40,000,000. The good times were not allowed to pass without a few unfortunate incidents, however, among them being a re- ceivership for Reading, May 24, 1880, and a strong specu- lative shake out in stocks in that month. Activity in Wall Street and general business circles was exhibited by the circumstance, that, throughout the whole of 1880, reserves were extremely low in the New York banks. But gold began to flow in from Europe and in the fiscal year of 1881, all records were broken by a net importation of $97,000,000 of that coin. The boom in stocks culminated in May and June, 1881. Shares had then risen, in some cases $40 and in others as high as $120, averaging about $60, from the low prices of 1877. After the shooting of President Garfield, July 2, 1881, stocks did not rally back to the high level of the Spring in more than a few exceptional instances. For particular reasons, a few did go higher in 1882. A direct cause of the halt was undoubtedly the enormous issue of new stocks and bonds, put forth as a consequence of the marvelous increase in miles of railroad PKOSPERITY AND DEPRESSION 85 line in operation and the union of old companies. The market was overweighted with those securities. All were pressing for sale ; and some of them held out no hope of an income to the owners for years ahead. Another source of disturbance was a partial failure of the wheat and corn crops in 1881. Rate wars again blasted the hope of larger earnings in the latter half of 1881; and freight was carried by the trunk lines from the West to the seaboard at rates which barely paid the cost of transportation. Ex- ports of American produce began to fall off. Uold not only ceased to come into the country, but on the other hand went out. Every effort was made to neutralize the effect of less favorable conditions; and leading men, like Mr. Vander- bilt and Jay Gould managed to lift prices somewhat in 1882. Large fortunes were brought to the support of the market. March 13, 1882, Mr. Gould made his famous exhibit of securities to a few friends, spreading out before them about $50,000,000 of stocks and offering to show them $30,000,000 of bonds. No efforts, however spectacu- lar, sufficed to stay the downward trend in Wall Street. In the Fall of 1882, money ran up to 20 and 25 per cent, and once to 30 per cent, for call loans. By this time, the public had become seriously alarmed. Thousands of men opened their eyes to the fact that they were loaded with stocks and bonds, which could not be sold at a profit and were not worth keeping as invest- ments. Liquidation set in; and this selling imposed a burden upon the market too heavy to be sustained. A heavy shrinkage in values took place; and in the Fall of 1882, a number of stocks reached the lowest prices known for more than a year. Confidence was greatly unsettled by this decline; and 86 HOW MONEY IS MADE although the earnings of some of the railroads were good yet nothing sufficed to stay the liquidation. New and troublesome factors came into play in 1883. A revised tariff law of March 3, 1883, deranged the iron and textile trades and general business slackened. Prices of commodities fell, iron leading the way. Another of the disturbing influences of the time was the fact that some of the new railroads were exact parallels and competitors of the older systems. The crisis arrived in 1884. In January of that year, Henry Villard, and in April, James R. Keene failed. In May, in quick succession, came the suspensions of the Marine Bank, Grant & Ward, and the Metropolitan Bank, coupled with startling revelations of fraud, which stunned the public mind. Brokers and traders were frantic ; and a panic took place, memorable not only for its violence but because the prestige of Gen. U. S. Grant, the idol of the nation, was involved in the ruin of Grant & Ward. First class stocks were thrown overboard and sacrificed, equally with the weak ones, and prices declined from $17 to $54 below the levels at which they had sold a few months before. In the midst of the excitement, May 11, 1884, the New York Clearing House lent its strong sup- port to the financial community by a sixth issue of $24,- 915,000 of loan certificates. During the latter part of 1884, the trunk line railroads again went to war with each other and cut rates heavily, making matters worse. It is to be noted that the panic was the direct outgrowth of three years of declining prices. Loss of confidence in various great magnates of finance had slowly driven thousands of men out of the stock markets. Their buying no longer lent support. PROSPERITY AND DEPRESSION 87 1886 END OF THE KEACTION BOTTOM was touched in the stock market in June, 1884. In three years, many active stocks had fallen from $30 to $75 a share and Union Pacific was down $103. A few stocks went lower in the early part of 1885 but the mar- ket at large was then on the road to recovery. Traders were discouraged, however, and sales on the New York Stock Exchange ebbed from more than 117,000,000 shares in 1881 to 96,000,000 in 1884 and 93,000,000 in 1885. Nevertheless, in 1884, the foundations were laid for a bull market, lasting until 1890. The set back in business was of short duration. It ended in 1886. So brief and trivial was the revulsion, that it might almost be said there was none. Liquidation brought its usual panacea for the woes of Wall Street and the financial world, in the form of easy money. Call loans fluctuated between 1 and 3 per cent, as a rule, during the whole of 1884 and 1885. In stocks, there was a good rally in August, 1884, and then while business men were taking breath and examin- ing the grounds for taking hold again, dullness and sag- ging prices prevailed for six months or more. Easy money and low rates of interest finally encouraged some tentative buying of stocks for a rise. In June, 1885, a mysterious buying of Vanderbilt stocks and West Shore bonds began to be noticed, which really foreshadowed the absorption of West Shore by the New York Central and the formation of a new pool among trunk line roads for maintenance of rates. A sharp advance in stocks took place, running on into November, and this initiated a 88 HOW MONEY IS MADE sustained rise, which did not end until the disastrous year of 1893. Wm. H. Vanderbilt died December 8, 1885, but the ef- fect on stocks was limited. The progress of good times was interrupted briefly in 1886 by fierce strikes in New York, Chicago and elsewhere, accented by the bomb outrage in Chicago, May 4th. There was also a sharp reaction on account of agitation in favor of the proposed Inter-State Commerce Commision bill, when Congress met in December. Gold exports in 1886 were not a cheerful feature. But underlying conditions had grown better. Magnificent crops, fresh imports of gold, a revival of railroad construction, and new life in the iron and coal trades inspired the public finally with courage; and the bears in Wall Street became uncertain of their position. CRISIS OF 1893 IMPROVEMENT in the times was aided by harmony among the railroads, defeat of successive bills in Congress aim- ing at a lower tariff, and the concerted work of bankers and financiers. In 1887, there was added to the railroad systems of the country 12,876 miles of new line ; and this record has ever since remained the high water mark of railroad building in the United States. The bull market worked gradually upward after 1885. In 1887, a number of sensational movements in stocks en- livened Wall Street ; and Aug. llth of that year marked the finish of Henry S. Ives, who failed, to the delight of every one else in the financial community. There were the inevitable set backs, peculiar to every PROSPERITY AND DEPRESSION 89 bull movement, no unfavorable circumstance being al- lowed to pass without an impetuous drive at stocks by men like James R. Keene, whose talents shone the brightest in a bear campaign. In 1888, St. Paul - passed its dividend, and a sharp slump in prices resulted. January 10, 1889, J. P. Morgan finally effected the famous "gentle- men 's agreement ' ' between trunk line officials as to rates ; and there was a good recovery in prices. The bull market culminated with the Spring rise in 1890. A swarm of troubles then cropped up. A partial failure of the harvests and various corporate receiverships were among them. In July, Congress passed the act for monthly purchase of 4,500,000 ounces of silver and re- demption of silver notes at the Treasury in gold. In the Fall, the Democrats swept the country. To leave nothing lacking, the Baring banking house in London suspended in November. Before this last disaster, heavy foreign sell- ing of American securities had mysteriously broken out, due to a fear that the United States could not maintain the gold standard, to financial troubles in Buenos Ayres and to private knowledge in London of the Baring embar- rassment. Gold was heavily exported, money grew scarce in New York, and the Clearing House was compelled to issue $16,645,000 of loan certificates to sustain the banks. November 15th, when the startling news of the Baring failure reached New York, a panic Hurst forth in Wall Street, the break in stocks being urged furiously by a bear party, having James R. Keene as its leader. The break was soon over and December saw prices mounting again rapidly. But the drop had cancelled more than half the rise since 1884. The life was gone from the bull move- ment. Some good stocks did not return to the high prices of 1890 for years afterward. 90 HOW MONEY IS MADE In spite of every set back, the bull party persisted until 1892 in an effort to put the market higher. Some stocks had not had their proper rise; and a number of them made their highest quotations in 1892. By the Spring of 1892, leading stocks had risen from $12 to $30, or $50 to over $100 a share (according as they were the low or the high priced favorites) from the level of 1884. But the two years of 1891 and 1892 were devoted entirely to dis- tribution. Sagging prices were the rule; and after the moderate January rise of 1893, even the dullest mind was aware of the fact that the bull market had ended and that much lower prices were ahead. The Crisis of 1893 was indicated by nearly all the customary factors. The times had been good. Enact- ment of the McKinley protective tariff in 1890 had stimu- lated manufacturing. Every vocation nourished. For- tunes had been acquired ; and money was being spent with reckless and even vulgar ostentation. Wealth had been added to b>y an enormous sale abroad of American pro- duce; and exports had passed the billion dollar mark in 1892, for the first time in history. Then, the current of commerce changed. From an excess of exports of $202,- 875,000 in 1892, the balance of trade dwindled, and in 1893, there was an excess of imports of nearly $19,000,000. Mr. Cleveland was elected President in November, 1892, and Jay Gould died, December 2d. The silver purchase law had excited serious fears that the United States could not maintain gold payments; and, as the Democrats had come into power at Washington, every man of political ex- perience fully expected a speedy downfall of the protec- tive tariff. The situation was full of dangers. The bank- ing situation was strained. Prudent men in Europe were selling their American securities. As payment for this PEOSPERITY AND DEPRESSION 91 flood of foreign liquidation could be made only in gold (in view of the disappearance of a favorable balance in the foreign trade) there was shipped abroad in the fiscal year of 1893, net, $87,506,000 of gold, a sum only once be- fore exceeded and never since. The drain upon banking re- sources forced the calling of loans in December, 1892 ; and rates for temporary accommodations rose to 25 and 40 per cent. Conditions were ripe for a swift rending asunder of the speculative structure, which had been reared with so much labor since 1884. The crash came, soon after the collapse of the McLeod deal in Reading, February 20, 1893, and the bankruptcy of the company. Reading fell $22 a share within a week. In March, Mr. Cleveland was inaugurated and attacked monopolies in his address. The banks began to call loans again and interest ran up to 60 per cent. A genuine cur- rency famine prevailed. The strain in financial circles was terrific. May 4th, National Cordage went into the hands of a receiver; and next day, S. Y. White announced his inability to meet his obligations. Panic reigned in Wall Street and there has seldom been a more precipitate decline in stocks than ensued, lasting three months. Good stocks fell rapidly and bad ones more swiftly yet. The big men were out of stocks and did noth- ing to support the market. In June, an old time remedy was called into play; and the New York Clearing House made its eighth issue of loan certificates, a total of $41,- 490,000. In other cities, the Clearing House banks took a similar course to relieve the tension. The stock market steadied itself in July and the worst was over so far as securities were concerned. The ruin and distress in the country at large were, however, indescribable. Failures were announced, day after day, in nearly every State, and 92 HOW MONEY IS MADE many banks went down. The trouble was world wide and great banks also failed in Italy and Australia. The blight upon business is illustrated by the record of commercial failures, which numbered 10,344 in 1892 and 15,242 in 1893, liabilities in the first named year being $114,000,000 and in 1893 over $346,000,000. Scarce one active business man came through unscathed. About one fourth of the railroad mileage of the United States went into the hands of receivers. Reading, Atchi- son, Erie, Union Pacific, Northern Pacific, and New York & New England were among the bankrupt roads. One favorable outcome of 1893 was the repeal of the silver purchase law, at a special session of Congress, called by Mr. Cleveland for that purpose. 1896 END OF THE DEPEESSION THE years of 1894 and 1895 constituted a period of great gloom. The benefits of the repeal of the silver purchase law were nullified only too soon by agitation for demolish- ing the protection of the tariff to manufactures. The Wilson tariff, in fact, was enacted in August, 1894, and the friends of home industry were despondent. Senti- ment was farther depressed in the Summer of 1894 by the strike at Pullman, Ills., and the crimes and outrages per- petrated by the unions and the march of Coxey's army of tramps to Washington. The iron and steel trades suffered a serious reaction; and times were hard everywhere. Railroad construction was at a low ebb, in consequence of previous reckless overbuilding ; and a smaller mileage was added to the lines in operation, in each year, until, in 1896, the total of new construction was only 1,654 miles. A deficit in Government revenues soon occurred and PROSPERITY AND DEPRESSION 93 therefrom sprang a fresh cause for alarm. The Treasury began to be apprehensive lest it should become necessary to encroach upon the $100,000,000 gold reserve for ordin- ary expenses of the Government. By January, 1895, in spite of sales of bonds to replenish the gold reserve, the Treasury stock of the coin had fallen to $44,000,000. No sooner would the gold reserve be recruited to a proper point than withdrawals would commence again, the coin being taken out in exchange for greenbacks. The gold standard was once more in danger. In January, 1895, a virtual run on the Treasury set in ; and gold went out at the rate of $3,000,000 a day and $30,000,000 was taken out not required for export. Hoarding of the metal by banks and private citizens began. This was so serious an evil that radical measures had to be taken ; and in Febru- ary, a contract was entered into with the Morgan-Belmont syndicate of bankers in New York, who agreed to accept the bonds of the Government, stop the export and hoard- ing of gold, and maintain the reserve intact. The action of the syndicate was as good as its word and its notable achievement did much to reassure .business men. A distinct revival of the iron trade was experienced in 1895, although dullness prevailed in most other vocations. Stocks made a start on the highway to recovery, but pub- lic confidence had not fully returned. The market was ripe for a reaction; and, at this juncture, December 17, 1895, President Cleveland sent to Congress his famous message on Venezuelan affairs, which seemed to contain a threat of war with Great Britain under certain contin- gencies. In the uncertain state of feeling, this message proved a shock to the public mind. A genuine, even if short lived, panic broke out in Wall Street, and there was a more than fifteen-point slump in stocks. 94 HOW MONEY IS MADE In 1896, tKe banking situation was bad. The net ex- port of gold in the fiscal year rose to $78,884,800, a figure exceeded only twice before and happily never since. Cash holdings of the banks were low. In July, 1896, the historic Bryan scare threw Wall Street into a fresh panic. Every one sold stocks and in August prices touched the lowest level for ten years, go- ing below that of 1893 and 1894. The decline from 1892 ranged from $20 to more than $90 in most stocks. Union Pacific sold for $4 a share; Northern Pacific for $3.50; Heading for $6; Atchison for $8.25, and so on. Senti- ment was extremely depressed that Summer. The Balti- more & Ohio was in the hands of receivers, the iron trade was dull, other industries were suffering, and the free silver mania was raging throughout the country and seemed about to sweep all before it. August was however the turning point. Bumper har- vests, wheat exports, a cessation in the outflow of gold, some imports of the metal, and finally the triumphant election of McKinley as President in November, put an end to depression and revived hope throughout the country. Everybody scrambled for stocks, manufac- turers began to prepare for a larger business and a bull market was quietly set on foot, which, after a little, gained headway and which ran on for six years. CRISIS OF 1903 The better times did not gain momentum until after July 24, 1897, when the Dingley protective tariff received the signature of President McKinley. Swiftly a boom broke out in stocks. The iron and dry goods trades PROSPERITY AND DEPRESSION 95 revived ; and all classes of mills and shops were soon run- ning on full time in order to satisfy buyers, who sent in an avalanche of orders. Bank reserves increased enor- mously. Call money loaned at nominal rates of interest in 1897 and did not harden greatly for several years. The clouds of gloom fled before the bracing winds of pros- perity in every part of the United States and the better- ment gained headway as time wore on. In cities, the erection of new buildings attained marvellous propor- tions; and the increasing use of iron and steel in these structures spurred the iron trade. On the lines of trans- portation, the rails hummed with the passing of throngs of heavily laden trains and railroad earnings grew stead- ily larger. Good times blessed the whole country. Every business man was doing well. Labor enjoyed ample em- ployment at good wages. New ventures of all kinds were launched by the score. All the phenomena of profitable times were visible on every side. Personal expenditures were lavish in the extreme and men dressed their families with a magnificence never before witnessed in this re- publican country. During this fortunate period of six or seven years, no influence seemed to be lacking to promote the welfare of our people. Community of interest, an old principle under a new name, developed among the railroads. Rate wars were no more. Gold exports were moderate and ex- cited no concern. American breadstuffs and other prod- ucts found a ready and ever growing market abroad ; and by 1901, excess of exports had reached the astounding total of $664,592,000. Meanwhile, a great bull market was in progress at the stock exchanges. With the inevitable reactions, prices mounted steadily; and brokers reaped a golden harvest 96 HOW MONEY IS MADE of commissions in the execution of orders to buy from every State in the Union. Never before had been witnessed such interest on the part of the general public. Transac- tions were in enormous volume, from time to time ; and on one day in 1901, sales at the New York Stock Exchange reached 3,000,000 shares. Clerks were forced to work nights and holidays to make out Clearing House sheets and post the books, in order not to be swamped with the stream of business. Fortunes were made by every trader. It was enough to buy "any old thing" on any reaction to be sure of large profits on the next rally. Petty traders and big operators divided among them the rich profits which were made every week. It is not to be supposed for a moment, that the tranquil progress of good times and the boom in stocks was not interrupted, now and then, by sinister incidents. No such period has been devoid of them. Good times were never more sharply tested than during the last half of the cycle under review. Frauds in New York in 1897 and the collapse of the E. S. Dean Co. in the latter part of 1897 set back prices for a time and called out from Thomas W. Lawson of Boston, who was already striving for publicity, a two-page article in a New York daily newspaper, headed the Most Gigantic Conspiracy since the Credit Mobilier." The trans-Missouri decision, March 22, 1897, chilled enthusiasm for several months. War with Spain in 1898 was responsible for a sharp reaction. May 12, 1899, Roswell P. Flower died in the midst of a boom in certain stocks, with which his house had been identified, and the collapse of those specialties admin- istered another set back to the market. PROSPERITY AND DEPRESSION 97 In December, 1899, British defeats in South Africa startled the English public ; and a sudden scare developed, heightened here by failure of the New York Produce Ex- change Trust Co. and Henry Allen & Co. During this panic, call money was quoted at 186 per cent. In April, 1900, John W. Gates caused the mills of the American Steel & Wire Co. to be closed, on account of a falling off in orders for their products and there was another momentary chilling of hopeful feeling. The corner in Northern Pacific in May, 1901, and the attendant panic of the 9th are memorable for the swift and remarkable break at the Stock Exchange and the sud- den recovery. Speculative favorites dropped $25 to $80 a share from the high prices made a few days previously. In a month's time, the loss had practically been recovered. A crop scare in 1901, several suspensions in Wall Street and Canada, the shooting of President McKinley, and the collapse of various wild cat securities, all aroused public concern and contributed to render the market wild and irregular So great was the momentum of the good times, how- ever, that the current of prosperity ran on undismayed until the Fall of 1902. Wealth accumulated in this era as never before. Hundreds of men obscure until the boom in stocks had made them rich took their place among old time leaders of finance, with possessions such as they had not dreamed of twenty years before. At the very height of the good times, forces came into play in the old, old way, which foreshadowed a coming crisis. Reckless speculation had forced stocks to a dangerous pinnacle of prices, much beyond their investment worth, supplying an exact parallel to the year of 1864. A multi- 98 HOW MONEY IS MADE tude of gigantic corporations had been created, most of them a union of smaller ones, with inflated capitalizations, the common stocks of many being given away as a bonus. Over $2,000,000,000 of railroad securities alone had been issued in addition to the amount afloat. Banks, pools and syndicates were loaded with a mass of "undigested se- curities " of which so much was said in the newspapers of the day. "Indigestible securities "they were called by James J. Hill, and that was their character. They could not be sold at a profit and all were seeking a market in vain. Banking capital had been overtaxed by the require- ments of legitimate business and the pools in Wall Street strained the resources of every financial institution almost to the breaking point. In New York, five brokerage houses alone were borrowers of more than $100,000,000 of money. The pools began to find themselves in a dangerous position. The top of the bull market came in August and Sep- tember, 1902 Stocks were from $25 to about $170 higher, than in 1896 and the main body of shares was near to the highest level they had ever attained in the history of the country. Desperate efforts were made to carry prices farther, but the task was too great. The public took alarm and would not buy. When call loans rose to 25 and 35 per cent in October, the end had come. The United States Treasury was appealed to for relief and something was done in the way of anticipating interest and buying bonds. While stocks reacted in the latter part of 1902, no serious trouble developed until after the January rise in 1903, although liquidation was going on steadily. The banking situation remained bad all through 1903, PROSPERITY AND DEPRESSION 99 loans being in excess of deposits every month except the first two. Interest rates were high. Importing merchants bought enormously abroad and imports passed the billion dollar mark for the first time in history, the balance of trade in favor of the United States being reduced to $394,422,000. Gold exports were avoided only by the con- certed action of leading banks. James J. Hill startled the public at this juncture by de- claring in a speech that the "crest of the wave of prosper- ity" had passed. A conviction that this was true gradu- ally forced itself into an incredulous public mind. Rail- roads were seen to be economizing in their purchase of rails and equipment. Reaction set in, in the iron and other trades. In April, 1903, a unanimous decision was rendered by the United States Circuit Court of Appeals that the Northern Securities merger was illegal. This decision, which had been feared for several months by financiers, unsettled confidence by threatening that the harmony in the railroad world would be broken. Banks, pools and syndicates began immediately to unload some of the securities they were carrying and loans were freely called. Liquidation was stimulated by a formidable bear party, which included some of the most daring and keen- est minds in Wall Street. By June, the "rich man's panic" was in full swing. Stocks fell with hardly a halt until September, 1903, when with a final smash amid great excitement, the reaction terminated, having run its course in one year's time. The decline ranged from $20 to $75 or more a share. Fortunes shrank heavily during the twelve months and many business men and specu- lators went to the wall. In business circles, the reaction lasted until the Summer 100 HOW MONEY IS MADE of 1904. Enforced closing of many mills and shops was reported. Retrenchment was the order of the day. Thou- sands of workmen were discharged from railroads and industries and nearly as many clerks from offices. A new era of prosperity was ushered in during 1904. Liquidation of speculative accounts and the inaction in trade had produced a striking result in the banking situa- tion in New York. Surplus deposits rose from $40,000,- 000 below zero in November, 1903, to a surplus of $111,- 000,000 in August, 1904, and interest rates were forced down by the plethora of funds to 1 and 2 per cent for call loans and 2y 2 to 3% for time money. The great abun- dance of available cash led, as always, to a bull market. PANIC OF 1907 TOP of the boom was touched January 24, 1906. Stocks then declined. Business was in a high state of prosperity in all parts of the country. Crops were abundant. Every one was making money. The railroads were crowded with traffic and the number and length of freight trains was a marvel. Almost all the trunk lines and some others voted larger dividends, Union Pacific going on a 10 per cent basis. Wage advances were granted by the railroads ag- gregating about $100,000,000 and an advance equal in amount was conceded by the industries. Over $2,000,- 000,000 of charters of the million-dollar class were taken out, and over $1,000,000 of new securities were authorized. The old, old story of the conditions forerunning a crisis was repeated in all other particulars. Bank reserves in New York fell to a low ebb. Interest rates rose, and the enormous excess of loans over deposits alone foreshadowed the turn in the tide. In spite of rallies, stocks ended the PROSPERITY AND*DEPREsi'6&"' '101 year lower than at the start. In 1907, after a feeble January rally, and especially after Congress had ad- journed without relieving the financial stringency, liquida- tion set in. In March, a panic 'broke out in New York; and stocks and bonds fell at times furiously, never stop- ping until November 21st. The slaughter of prices was terrific. The advance of the previous six years was wiped out; and the panic brought to light the usual ex- posures of rottenness in various financial quarters. The fall in the prices of bonds was not the least striking fea- ture of the panic of 1907. IN confirmation of the cycle theory, allusion may be made to the assertion of a financial writer of repute in New York City, a few years ago, that "an operator, to have been supremely right, would have changed his position on the market only eight times in forty years ; the turning points have been 1861, 1867, 1872, 1877, 1881, 1885, 1892 and 1896." It is singular that 1864 should have been omitted from this summary ; but the remark agrees in sub- stance with the ten year cycle theory. The recital on the foregoing pages calls attention, first of all, to the ten and twenty year periods. In a less strik- ing way, it points to the four or five year periods. Every crisis is preceded by money stringency, growing out of the very prosperity which prevails. In good times, every active man, whose business is capable of extension, applies to the banks for a loan of money, wherewith to carry on his operations. This force acting in all parts of the country gradually brings into action the funds which the banks have accumulated. The volume of surplus de- posits begins to decline. The good times have been seen to be favorable to new enterprises, and these are set on 102' ' HOW MONEY IS MADE foot in every direction. New corporations are organized whose united capital will aggregate millions, and even billions. Their securities are placed upon the market for sale. Pools and syndicates are formed to carry the securi- ties and market them, and, to secure the end in view, the securities are made active at the stock exchanges and a lively speculation is begun in them. Of course, new securities are created in order to be sold; and the "big men" look forward to a time when they can transfer the whole load to the shoulders of the public. Syndicates and pools must have money, and their borrowings add to the burdens of the banks. Finally, interest rates rise, owing to the growing scarcity of available supplies of capital. Meanwhile, business is booming and every one is making money. Wages and the prices of commodities rise. Car- ried away by the optimistic spirit of the times, it is uncon- sciously held that prosperity will last forever and great extravagance of personal expenditure is seen on every side. These features have all preceded every crisis in American business affairs. At this point, it requires only a serious shock to public confidence to give a grave set-back to prosperity or actu- ally to overturn the whole fabric. Foreign trade may begin to run against the United States, depleting money supplies at the very time when they are most needed. Some rude exposure of recklessness or fraud on the part of trusted institutions, the bankruptcy of a railroad or failure of an influential bank or operator in stocks, the outbreak of war, a drouth in the West, or some one of the numberless other calamities which may overtake the financial world, may bring about the crash. If the bank- ing situation is sound, the country will withstand a good many shocks with equanimity; but if credit is strained, PROSPERITY AND DEPRESSION 103 and especially if the big men have sold their surplus stocks, the crisis is inevitable. Conversely, a period of severe liquidation in stocks and business enterprises and a large accumulation of idle funds in the banks, with a fall in interest rates to a mini- mum, has always preceded a turn for the better. It is to be noted, as a distinct and logical phenomenon, that the decline in stocks antedates the actual turn in business, and sometimes brings about the crisis. The top of a boom in stocks occurs at least one or two, sometimes three, years before the actual crisis. On the other hand, recovery in stocks sets in before im- provement is at all marked in trade circles. Just as stocks are extremely apt to be bulled far above investment worth in a great rising market, so they tend to go much below it in a prolonged reaction. A circumstance of momentous interest is the fact, that the price of good securities has steadily moved higher, on the average, since 1877, in spite of all the trials to which they have been subjected by panics and reaction. It is true that they decline in every serious crisis ; but, without a single exception in the last thirty years, the average has not fallen as low as in the last preceding period of depres- sion, whereas they have tended in each new period of pros- perity to go higher than ever before. Stocks seem now to be established on a level, permanently higher, than during the whole period from 1865 to 1901. A table will illustrate the effect of crises on stocks during the last forty years. Ten denominations have been selected, which have been traded in, under one corporate name or another, since 1860. The ten named serve all practical purposes, because they have moved up and down, substantially in harmony with the general list. 104 HOW MONEY IS MADE III MJOO 01 CO O O rH rH O IO OS III Oi rH O O O CO CD IO rH