LIBRARY U J*VE GAU SAN c 255 FORTY YEARS OF AMERICAN FINANCE A SHORT FINANCIAL HISTORY OF THE GOVERNMENT AND PEOPLE OF THE UNITED STATES SINCE THE CIVIL WAR 1865-1907 Being the Second and Extended Edition of "Thirty Years of American Finance" G. P. PUTNAM'S SONS NEW YORK AND LONDON Cbe ftnlcfcerbocfcer press COPYRIGHT, 1898 BY fc. P. PUTNAM'S SONS COPYRIGHT, 1909 BY G. P. PUTNAM'S SONS PREFACE SINCE this book was first published in 1898, under the title Thirty Years of American Finance, I have been repeatedly urged to bring the history up to date, in order to cover the remarkable financial episodes of 1901 and afterward. The undertaking did not then Beem feasible, because the movement of events in one direction was so swift that, so to speak, no stopping- place was obtainable for a broad and comprehensive survey of the period. Such a stopping-place seems to have been provided by the panic of 1907. I have therefore undertaken to treat the ten years in American finance, which followed 1897, as I had already treated the thirty years preceding. I take this opportunity to thank the numerous educators, public men, and others who have written to me since the publication of the first edition, for their interest in, and appreciation of, what this book has endeavored to accomplish. Their cordial recep- tion of a work which was not an economic treatise, but, as far as its author possessed the power of making it so, a fair and unbiassed history of our own times, has greatly encouraged me in taking up a period so iii iv Preface surrounded by economic controversy, political preju- dice, and confusion of financial ideas, as the decade from 1897 to 1907, - It is gratifying to be able to say that the facts and conclusions regarding the thirty years prior to 1897, set forth eleven years ago in the first edition of this work, have stood the test of criticism. I am making, in this edition, no important revision or alteration of either. One historical assertion, however, I have found it necessary to modify. In the original edition, on page 27, I spoke of John Sherman as "the author of the Resumption Act." First-hand evidence, com- municated to me after publication of the book, and not, I believe, made public up to the present time, has convinced me that Mr. Sherman, although it was he who reported the Resumption bill from the com- mittee, was not the author of the Act; that it was drawn by other hands than his; that its faults were due to an effort to avoid political obstacles, and that the law was passed exactly as it was originally constructed. I have therefore altered the reference to Mr. Sherman. Another point, to which some of the Treasury officers of the second Cleveland Administration have lately called my attention, is the assertion, on page 249, that the undertaking of the bankers' syndicate of 1895, to protect the Treasury gold reserve, had "broken down, " and that " apparently, the syndicate experiment had failed." Against this view of the matter, it has been urged that, since the syndicate's contract was tech- nically closed in June, by delivery of the stipulated sums Preface v of gold to the Treasury, the undertaking could not be said to have broken down. In so far as regards per- formance of the stipulated deliveries, this inference is correct; the bankers had even managed to "protect the Treasury against the withdrawal of gold pending the complete performance of this contract." The belief of the day was, however, that, as a result of the protective measures, the Treasury would be put permanently on its feet and the exhausting drain of gold ended. In this respect, the experiment was a failure; the subsequent loss of gold was probably greater because of the artificial damming up of gold exports in the spring. I therefore believe it to be strictly correct, as a matter of economic history, to say that the "undertaking to protect the Treasury had broken down," and I have not altered the passage. My treatment of the financial history of 1901 and 1907 is largely based on my own discussion of the two episodes, in articles published in recent years by the Quarterly Journal of Economics of Harvard University. I wish here to acknowledge the courtesy of the editors in permitting free use of the matter contained in those articles, but at the same time to point out that in sur- veying the period as a whole, as this book endeavors to do, the narrative has of necessity been almost com- pletely re-written. A. D. N. NEW YORK, March, igog. CONTENTS. I. THE INFLATION PERIOD ..... Reasons for writing the history of the past thirty years Distinctive character of the epoch Industrial expansion of the United States after the war Opening up of the West Rise of the American grain trade Origin of the nation's currency problems The Legal-Tender Act Pur- poses of its authors Congress resolves to retire the legal tenders The Contraction Law of 1866 Hugh McCulloch and the anti-contractionists Congress revokes the Contrac- tion Law The Presidential campaign of 1868 The repu- diation plan and the Public-Credit Act of 1869 Inflation at its worst The panic of 1873 Defeat of the Administra- tion party Congress passes the Resumption Act. II. THE STRUGGLE FOR RESUMPTION . . . *3 Character of the Resumption Act Its large grant of power to the Executive Its vague provisions Problems of its administration The question of a gold reserve John Sher- man in the Treasury His career as legislator and adminis- trator His skill in financial negotiation His relations with the banks Congress threatens the Resumption Act It passes the Silver-coinage Law Declares Government bonds payable in silver Sectional breach in the Adminis- tration party Attitude of President Hayes The elections of 1878 Gains of the Administration Final preparations for resumption. vii viii Contents. PAOB III. RESUMPTION OF SPECIE PAYMENTS . .48 Doubts over the maintenance of resumption The, com- pulsory re-issue of redeemed notes Secretary Sherman's equivocal attitude Unfavorable trade conditions of the re- sumption year The rise of foreign exchange Gold taken from the Treasury for export The grain-market situation Harvest failure in Europe Enormous American exports Trade revival and import of gold The return of prosper- ity Development of the interior The markets of 1880 Jay Gould and the railway speculation Great activity in trade Administration victory of 1879 The election of 1880 Hayes and Sherman on the legal tenders. IV. THE SILVER PROBLEM . . . . .73 Change in Secretary Sherman's views His prediction of a silver standard The silver dollars rejected from circula- tion The New York Clearing-House excludes silver from its settlements Congress prohibits national banks from joining in such exclusion Sherman succeeds in circulating silver certificates The culmination of trade activity Har- vest failure of 1881 Export of gold begins The reaction of 1882 Fall in prices The surplus revenue Tariff re- duction urged by President Arthur Extravagance of Con- gress Veto of the River and Harbor Bill The elections of 1882 Severe defeat of the Republican party The Tariff Act of 1883 Reduction of internal revenue Re- newed trouble with the silver currency The panic of 1884 Its peculiar features Its brief duration The low grain prices of 1884 Election of President Cleveland Discouraging Treasury outlook. V. THE SURPLUS REVENUE OF 1888 . . . 104 Solving the silver-coinage problem Gold obtained from the banks Pushing the silver into circulation Contrac- tion of the bank-note currency Rise of the public revenue Five years of heavy importations The active markets of 1888 Large railway construction The period of labor Contents. ix PACE disputes The labor movement in politics Rise of- the industrial trusts Europe buys American securities Eng- land's search for an export trade The Treasury surplus after 1886 Difficulty in releasing the Government's accumu- lations Public deposits with the banks Congress refuses to reduce the revenue Bond redemption at heavy pre- miums The Treasury and the currency. VI. THE Two LAWS OF 1890 . . . .127 The Presidential campaign of 1888 Declaration of the Re- publican party Of the Democratic party Two opposing plans to reduce the surplus Election of Mr. Harrison The party's policy The President's Message His advice on appropriations Congress raises the tariff rates In- creases appropriations Heavy fall in revenue Approach of a deficit The Silver-Purchase Act Its origin Its hasty preparation William Windom in the Treasury ' His previous official career His faults as an economist His purpose in framing the Silver- Purchase Bill His argu- ment in its favor Nature of his plan Confusion of its de- tails His views on currency contraction On silver coinage On the price of silver His mistakes of judgment House of Representatives modifies the bill Senate votes for free coinage The compromise committee Purpose of their measure Opinions of free-coinage Senators Gold redemption asserted Passage of the law. VII. THE EXPULSION OF GOLD .... 153 The Silver-Purchase Act and the silver market The law fails of its purpose Fall in silver bullion Altered views of Secretary Windom Of President Harrison The mar- kets of 1890 Violent expansion of the currency The for- eign speculation Deficient wheat crops and high grain prices London and its Argentine venture Failure of Baring Brothers The panic of 1890 Recall of English capital Continued increase in United States currency Gold export begins in quantity Various explanations offered The true cause Its menace to the Treasury x Contents. PACK Heavy gold payments by the Government Fall of the gold reserve The harvest of 1891 Its remarkable influences Situation changes for the worse The "hundred-million reserve" Its history Its legislative authority Displace- ment of gold with legal tenders Gold payments stopped by the New York banks By the Treasury The gold ex- porters and the banks They fail to get gold in New York Presentation of legal tenders for redemption Why it was unavoidable The elections of 1890 Sweeping oppo- sition victory The Fifty-second Congress It attempts to pass a Free-coinage Law To change the tariff It increases expenditures The election of 1892 The curious political platforms The Democrats and silver Breach in the party Rise of the Populist party Mr. Cleveland re-elected President. VIII. THE PANIC OF 1893 182 Last days of the Harrison Treasury administration Secre- tary Foster and the banks Problems of the new Admin- istration Secretary Carlisle and the gold reserve The hundred-million fund impaired Rumors of silver redemp- tion Their effect on the markets The Secretary's declar- ation The President pledges gold payments Precarious nature of the situation Outbreak of panic The corpora- tion failures The run on the country banks Heavy strain on the New York institutions Issue of clearing-house cer- tificates Cash payments suspended by numerous city banks The premium on currency Its good effects Its evil effects Heavy gold imports Gold the sole medium of exchange Extra session of Congress The Repeal Bill Attitude of the Republicans Of the Democrats The struggle in the Senate The Silver-Purchase Law repealed The effect on the silver market On general trade End of the panic Record of failures in 1893 Industrial de- pression returns Great increase of the money supply The Treasury and the gold imports Gold reserve paid out to meet the deficit Decrease in merchandise importations In revenue Attitude of Secretary Carlisle. Contents. xl PACE IX. THE GOVERNMENT LOANS AND THE TARIFF OF 1894 207 Secretary Carlisle's embarrassments His appeal to Con- gress Critical condition of the Treasury Congress refuses help The first bond-issue announced Attacks on the Treasury in Congress The courts sustain the Administra- tion Difficulties in floating the loan Mr. Carlisle's policy The banks finally subscribe Treasury gold withdrawn for subscription purposes Questionable character of the action Gold exports resumed Recall of foreign capital Discouraging commercial outlook The railway insolven- cies The labor uprising "Coxey's army" and the Rail- way Union strike Failure of the corn crop Fall in the price of wheat Tariff legislation begun Necessity for such legislation The question of a deficit Mistakes of the framers of the Wilson Act Motives of the House of Representatives Of the Senate The breach with the President Blunders in the revenue estimates The income tax before the Supreme Court Declared unconstitutional Grounds for the decision Probable yield of the tax overestimated Congress votes to coin the seigniorage The President's veto Continued fall in the gold reserve The second bond-issue The "endless chain" Heavy gold exports Crisis in the Treasury. X. THE BOND SYNDICATE OPERATION . . . 234 International bankers take the loan of 1895 Their remark- able contract Its harsh terms Its pledge to stop gold withdrawals Exasperation in Congress The President defends the contract Nature of the syndicate operation Its magnitude All the sterling bankers unite to protect the Treasury Skepticism of European critics Progress of the operation The gold reserve restored Change in the trade situation Rapid advance in prices Foreign buying of American securities Its connection with the London mining craze Decline in foreign exchange Bad results of the American speculation Balance of foreign trade re- xii Contents. PAG* versed The wheat market blockaded Europe sells back its American securities Defects in the syndicate plan come to light The redundant money supply increased Artificial rates for exchange The syndicate loses control of the ster- ling market Gold exports begin -again Situation at the close of 1895 The industrial outlook The political out- look The change in currency conditions Plans for a new loan The $100,000,000 bond sale Its curious influence on the money market Legal tenders at a premium Suc- cess of the loan of 1896 Great change in the commercial situation Conclusion. XI. THE "INDUSTRIAL BOOM" .... 257 A new chapter in world finance Increase of gold output and rise in commodity prices Its effect on the United States The free-coinage campaign of 1896 Influences which defeated Bryan Markets and the gold-standard victory Slowness of industrial recovery Illusions regard- ing the immediate effect of the electoral vote The Ameri- can trade in the early months of 1897 The Dingley tariff bill Its effect on the revenues On prosperity Europe's wheat famine and the great American crop Revival of business Import of foreign gold and final establishment of the gold standard of currency The " American invasion " of industrial Europe Reason for Count Goluchowski's warning Unprecedented expansion of our export trade Reconstruction of the insolvent rail- way systems How it was accomplished Its remarkable results The Spanish War of 1898 and the financial mar- kets The " Leiter corner " in wheat Outbreak of the Transvaal War Cost of the conflict England's financial situation America a lender on the European markets Continuous growth of the " foreign trade balance " Ex- traordinary situation in this country at the close of 1900. XII. THE SPECULATIVE MANIA OF 1901 . . 284 Events which brought about the public's craze American investors and the market for securities The company Contents. xiil PAGE amalgamations of 1899 Phases of the new trust move- ment Promoters and stock-watering Attitude of the investing public The second Bryan campaign Its shift- ing of issues Political chaos in the Democratic party of 1900 Influence of prosperity on the vote Outburst of speculation after the election The " Burlington & Quincy deal " Expedients of the great promoters Col- lateral trust bonds and " holding companies " Mr. Morgan's plan for the steel trade Efforts to buy out Andrew Carnegie His history, and the price demanded by him The billion-dollar Steel Trust organized Ex- pedients by which the stock was floated Craze for specu- lation seizes the general public Extraordinary Wall Street market of April, 1901 The Shipping Trust Atti- tude of foreign steamship lines Of the English public The " Northern Pacific corner" Morgan and Harriman in financial collision Northern Pacific stock goes to $1000 per share The "May gth panic' 1 Temporary crisis on New York Stock Exchange Crop failure and industrial reaction Insolvencies of 1903 among the new industrial trusts Steel Trust's market valuation reduced one half The " rich men's panic" Roosevelt's sweep- ing pluralities of 1904. XIIL WORLD-WIDE RISE IN PRICES . . .312 Place of 1903 in financial history Reasons for the coun- try's rapid recovery from depression Influence of ex- panding gold production The Transvaal mines after the war Extraordinary rise in cost of living between 1904 and 1907 Part played by the trusts By farmers' combi- nations By labor unions Outbreak of land speculation throughout the United States The Russo-Japanese war Cost of the contest Absorption of the capital of neu- tral states Japan places its bonds in this country Finan- cial and industrial activity stimulated throughout the world New securities on the English and German mar- kets Rapid expansion of the world's iron production Speculative excesses of 1905 and 1906 in Germany In xiv Contents. PAGE Egypt In Japan In South America In the United States The Wall Street capitalists and the Stock Ex- change Part played by American banks in the specula- tion Position of the general public World-wide tension in money markets American bankers raise great sums in Europe The New York money rate at 125 per cent. Predictions of a coming financial panic Leroy-Beau- lieu's analysis of the situation. XIV. SOCIAL AND POLITICAL RESULTS . . 331 Conditions of American society in 1906 The speculative tendencies of the day Extravagance of living Hard- ship caused by the rise in prices of necessities The Pub- lic and the Trusts Attitude of the great capitalists Their determination to intrench themselves in power High-handed action in corporation affairs The Steel Trust's stock conversion The Metropolitan lease Mr. Morgan and Mr. Harriman on the new finance Harri- man's public declarations as to his purposes of railway ac- quisition Question if one group of men could get control of all the railways The life insurance scandal Equita- ble Life investigated by its own committee By the New York Legislature What was discovered and how the public received it Use of insurance trust funds in Wall Street promoting schemes Extraordinary testimony in the case The sale of the Equitable Life Roosevelt ad- ministration and the railways Assurances and warnings on Roosevelt's accession to the Presidency The Anti- Trust Law of 1890 How it came to be applied to rail- " ways The Northern Securities suit Merger dissolved by Supreme Court Effect of the decision Standard Oil's $29,000,000 fine The Hepburn Railway Rate Law Theory of President Roosevelt as a cause of financial panic. XV. THE PANIC OF 1907 355 Europe's attitude towards the United States on the eve of panic Enormous foreign loans to Wall Street Use of Contents. xv PAGB Union Pacific's surplus and credit to buy stocks Excited speculation stirred up by Union Pacific Strain on the world's money markets and recall of Europe's capital Col- lapse of the Wall Street speculation The Bank of Eng- land's warning Railways caught in the money market- James J. Hill's prediction Heavy borrowing on short notes Panic breaks out on foreign markets Financial crisis in Egypt In Japan In Hamburg In Chili In Holland and Denmark Beginning of trouble at New York Why the market had refused to recognize the signs of panic The symptoms of the crisis "Chain banking" Mercantile Bank's embarrassment The trust companies The law governing them, and their practices regarding de- posits, investments, and reserves Action of New York Clearing House in 1903 The sequel in 1907 The Knick- erbocker failure A run of depositors without a precedent New York in panic Treasury endeavors to help Enor. mous cash withdrawals Credit crisis on the Stock Ex- change Clearing-house loan certificates, hoarding of cash, and emergency currency Partial suspension of credit throughout the United States The premium on currency and the import of gold from Europe Futile experiment by the government After-effects of the 1907 panic The com- mercial failures and the industrial depression Illusions of 1908 The movement of prices in 1909 Conclusion. INDEX 381 FORTY YEARS OF AMERICAN FINANCE CHAPTER I THE INFLATION PERIOD A GLANCE over the financial history of the United States, from the close of the Civil War to the panic of 1907, will detect three separate periods. The first, which began in the currency depreciation era of the sixties, ended with specie resumption in 1879. The second continued up to, and a little beyond, the panic of 1893. The third had its begin- ning in the striking economic phenomena of the last few years of the nineteenth century. It is my purpose to review the history and ex- amine the underlying influences of all three periods. For dramatic interest, neither of the two earlier periods ranks with the third and last ; yet the events between 1897 and 1907 cannot be fully understood except by studying with them the thirty years pre- ceding. It was with the close of the Civil War that i 2 ' American Finance tie 65 financial America first became an influence of great importance in world-finance ; it was as a sequel to the Civil War that many of the problems with which the country is still wrestling economic, fiscal, and social had their origin. In these and other respects, the forty-year period properly calls for treatment as a whole. War which has ravaged a continent during a series of years cannot be suddenly abandoned without im- mense effect on industrial conditions, and the new conditions will never duplicate those which existed before the war began. This was the lesson which Europe learned in 1815. Such was the singular combination of events after the peace of 1865, how- ever, that almost at the moment when a million citi- zens were turned from organized destruction to pursuit of peaceful industry, the avenues of Ameri- can employment and production were widened in a degree unprecedented in the history of trade. Within eight years after Lee's surrender, the railway mileage of the United States was literally doubled. Only a fraction of this increase belonged to the trans- continental lines which linked the two oceans in 1869. Quite aside from the 1800 miles of the Pacific Railways, upwards of 30,000 miles of track were laid in the United States between 1865 and 1873. Four noteworthy economic developments accompanied this extension of the transportation system. A fer- tile interior domain, hitherto untouched, was opened up to industry. With the rush of population to these Western districts, not only did the disbanded army resume production without industrial over- 1867] Rise of the Grain Trade 3 crowding such as followed the Napoleonic wars, but provision was made for three or four hundred thou- sand immigrants annually. European capital in enormous volume was drawn upon to provide the means for this development. Finally, the United States rose from the position of a second- or third- class commercial state to the first rank among agri- cultural producers and exporters. Each of these several phenomena had its special influence on the period. The new West, the contented or discon- tented farmer, the foreign investor, and the export trade in grain, will come into very frequent view during the progress of this history. Not less immediately connected with this opening up and settlement of our agricultural West was still another phenomenon, of peculiar interest to the study of the ensuing period. The average price of grain had advanced with great rapidity during the Civil War. In 1867, the price of wheat, even on the Chicago market, reached the remarkable level of $2.85 per bushel; nor was this price very greatly above the annual maximum of the period. In a large degree, this advance resulted from inflation of the American currency. But the upward movement was world-wide; in 1867 and 1868 the average price, even in England, was close to the equivalent of two dollars a bushel. 1 That any such abnormal market could be maintained in the face of the new American supplies was at least improbable. The area of wheat, corn, oats, rye, and barley in the United States rose from 64,418,518 acres in 1867 to 86,287,- 1 Sauerbeck's tables of English prices. 4 American Finance 11972 648 in 1875, and to 100,283,160 in 1878.' The yield of these five crops increased from 1,320,236,000 bushels in 1866 to 2,290,008,000 in 1878, the annual wheat crop more than doubling in magnitude.* The increase in cereal production was twice as rapid as the country's increase in population ; the United States became therefore the leading figure in the world's export markets ; and this was certain to have important influence on prices. But prices did not yield at once. A series of de- ficient harvests, after 1870, accompanied by the suspended production of the Franco-Prussian war, abruptly checked the downward movement. After 1872, however, the new supplies made their influence positively felt. For in this increase of agricultural production, the United States was now not alone. Precisely as 1865 marked the end of war on the North American continent, so the Treaty of Paris in 1871 brought to a close the seventeen years of almost un- interrupted warfare among European states. As in America, so in Europe, production received imme- diate stimulus. While American capital was opening up the Mississippi Valley, European capital was similarly busy along the fertile river-basins of the Dnieper and the Danube. The Russian railway system grew during this period from something like 2000 miles to upwards of 13,000.' In Austro-Hun- gary, the percentage of increase was almost equally large. All of these new transportation lines, like our 1 Annual Reports, U. S. Bureau of Agriculture. * Ibid. 1 Official Russian Report on Railways, 18781 1878] The Fall in Prices 5 own new Granger railways, were at once engaged in carrying to the seaboard supplies of grain which never before had reached an export market. Commercial estimates placed the total wheat crop of 1875, in the world's ten chief producing states, at 1,501,000,000 bushels. In 1878, the same ten states produced 1,763,000,000, and another increase, equally large, was made within the next four years. 1 The problem of an earlier generation had been how to feed the constantly increasing population ; a wholly new problem was presently to arise, based on the question how to find a ready and profitable market for the year's output of breadstuffs. Prices, in short, which rose almost continuously throughout the world during the period of slack production from 1858 to 1873, receded almost as continuously in the ensuing generation. Nowhere was this phenomenon destined to have more immediate importance, economically, socially, and politically, than in the United States. In my examination of the thirty years after 1865, I shall endeavor to give due attention to the in- fluence of these grain markets on national politics and finance. The opinion is more or less widely held that the decline in prices, notably of grain, has resulted from legislation on the currency. Without for the present arguing that proposition, it may be affirmed with entire safety that a good share of the period's currency legislation has resulted from the decline in the price of grain. The fall in wheat has been the typical argument for arbitrary increase of the silver or paper currency in almost every Con- 1 Liverpool Corn Trade News estimates. 6 American Finance [tees gressional debate since 1872. What is perhaps even more significant, the division in almost every Con- gressional vote upon these subjects has been, not political but geographical the commercial East against the agricultural West. The questions of silver coinage and of Government issues of paper currency have had as profound an influence on public finances, during the last thirty years, as the question of agricultural prices and pro- duction has had on private trade. Both of these currency problems, in their later form, have arisen since the Civil War. There had indeed been silver coinage and suspension of silver coinage long before 1865; but there had been neither a " silver ques- tion ' ' nor a ' ' silver party. ' ' The legal-tender notes had been introduced and brought to their maximum issue before the return of peace, but there had never been a " greenback party," or a demand in any re- sponsible quarter for a permanent currency of Gov- ernment paper. During the eighty-four years after Washington's inauguration, only a trifle over eight million silver dollars in all had been coined at the mints of the United States; 1 when, therefore, in the statute re- vision of 1873 the silver dollar was dropped from the nation's coinage list, the action was received with indifference by the entire community. The ques- tion of " free coinage " was not so much as named in any Presidential platform, even as late as 1876. The sudden appearance of the " silver problem," only one year after the 1876 election, resulted very 1 U. S. Mint Report, 1893, p. 282. 1865] The Currency Problems 7 largely from the decline in agricultural prices. It resulted also, beyond any reasonable question, from the fact that silver production in the United States, reckoned prior to 1861 at less than a million dollars annually, and in 1869 at only twelve million dollars, had risen by 1878 to no less an annual sum than $45,200,000. It will be found that even in 1880 a conservative President was reciting, not without ap- proval, the maxim that the United States, producing " more silver than any other country, " was" directly interested in maintaining it as one of the two pre- cious metals." ' If silver coinage was not a political issue at the close of the Civil War, the policy of a permanent currency of Government legal-tender paper was equally unknown. Upwards of four hundred mil- lion notes of the United States were, it is true, in circulation at the return of peace. There were doubtless many individuals who approved the con- tinuance of exactly this form of currency. But no such proposition had been advanced by any public man of influence or by any political organization. The " greenback party," like the " silver party," was distinctly a product of hard times. The Specie- Resumption Act was a compromise with the extrem- ists of the fiat-money school, as the compulsory Silver-Coinage Act of 1878 was a compromise with the extreme bimetallists. Each created a currency system never imagined by the statesmen of the war. The theory of the authors of the Legal-Tender Act clearly understood. They held the issue of 1 President Hayes, Annual Message, Dec. 6, 1880. 8 American Finance these notes to be simply creation of a Government floating debt, the notes being endowed with special privileges only in order that they might be floated. 1 That the resort to legal-tender powers was an evil justified only by extreme emergency, and that the circulation of Government notes in any form was a purely temporary measure, were the unanimous con- victions of the statesmen who contrived the system.' The logical inference that these Government notes would be paid off and cancelled, as soon as the war deficiency had ended, was publicly accepted. This fact is clearly proved by the record. The statesmen of the day built up the national banking system on the express theory that the bank notes would pro- vide the requisite currency of the future, whereas the Government notes would not. 1 No better wit- ness could be had than the Legal-Tender Act itself, which provided, in its terms as first submitted to the Ways and Means Committee, that the notes should be issued " for temporary purposes," and should moreover be convertible at the holder's option into interest-bearing bonds. Such was the theory and purpose of the public 1 Secretary Chase, letter to Ways and Means Committee, January ag, 1862 ; Justice Bradley, opinion in Legal-Tender cases, 1871. 1 Spaulding, History of the Legal Tender Money Issued during the Great Rebellion^ p. 5 ; W. P. Fessenden, Senate speech, February 12, 1862 ; Charles Sumner, Senate speech, February 12, 1862 ; Sam- uel Hooper, House of Representatives speech, February 21, 1866 ; John Sherman, Senate speech, March 6, 1876. 3 President Lincoln, Annual Message, December i, 1862 ; Secre- tary Chase, Treas. Rep., 1863, p. 20 ; Secretary Fessenden, Treat. Rep., 1864, p. 24 ; Spaulding, Appendix, p. 16. 1865] Theory of the Legal Tenders 9 men through whom the Legal-Tender Act was con- structed and applied. Nor is the general position of our statesmen, at the close of the Civil War, any more obscure than their original position. The first financial resolution adopted by Congress, in Decem- ber, 1865, was an explicit promise to retire the legal tenders. The first legislation of that Congress gave discretionary powers to the Secretary of the Treasury for continuous contraction. Very few legislative victories are won without at least a temporary popu- lar endorsement, and the votes of December, 1865, and of March, 1866, were no exceptions. But the popular approval of contraction in that year, excep- tion as it was to all our subsequent legislation, is readily enough explained. Public opinion, when the war had ended, was governed by impatience with inflated prices ; inflation far beyond the Euro- pean level, and properly ascribed to the condition of the currency. 1 The cost of living reached during 1865 the highest point recorded in this country's history. From 1860 to 1865, inclusive, the average of European prices rose only 4 to 6 per cent. ; aver- age prices in the United States advanced, in the same period, no less than 116 per cent. 1 Even in 1866, a full year after Appomatox, the general average of our staple prices was more than 30 per cent, above the average of 1863. The erratic gold market of 1865, moreover, forced as a necessary measure of 1 Speeches of Morrill and Hurlburd, House of Representatives, February 21 and March 15, 1866. * U. S. Senate Report of 1892, Part I., p. 91 ; Sauerbeck's London tables ; Soetbeer's Hamburg tables. io American Finance [1865 precaution a large margin of safety in the retail price of goods, and this bore heavily on ordinary purchas- ers. With flour at $16 a barrel, butter at 55 cents a pound, coal at $10 a ton, and wages and salaries ad- vanced since 1860 hardly one third as far as prices, the demand for currency reform obtained ready endorsement from the people. This popular sentiment was further strengthened by the Administration's attitude at the opening of Lincoln's second term. Hugh McCulloch, then Comptroller of the Currency, and a well-known ad- vocate of retirement of legal-tender notes, was ap- pointed Secretary of the Treasury. He held this office up to the end of President Johnson's term. Mr. McCulloch 's first official Treasury report, dated December 4, 1865, took positive ground for the reduction of the legal-tender debt. Although con- ceding that contraction ought to be and must be slow, he declared that " there is more danger to be apprehended from the inability of the Government to reduce its circulation rapidly enough, than from a too rapid reduction of it." He asked, therefore, authority to issue bonds in his discretion, at six per cent, or less, " for the purpose of retiring not only the compound interest notes, but the United States notes." 1 The report containing this outline of policy was, like all Mr. McCulloch's public documents, a state paper of exceptional ability; it may be profitably read to-day for its broad and lucid treatment of the problem. Together with the Secretary's public 1 Treat. Rep., 1865, pp. 12, 13, 14. 1866] The Contraction Bill \ \ speeches, it had decided influence. Two weeks after the publication of this report, on December 18, 1865, the House of Representatives resolved, by a vote of 144 to 6, " that this house cordially concurs in the view of the Secretary of the Treasury in relation to the necessity of a contraction of the currency, with a view to as early a resumption of specie payments as the business interests of this country will permit ; and we hereby pledge co-operative action to this end as speedily as practicable." This resolution of 1865, however, marked the climax of the movement. Never thereafter did the policy of retiring the legal-tender notes even ap- proach success. The truth is, that the inflated prices had begun already, during the three months after' the resolution of December, to recede. This was inevitable, from the very nature of the previous expansion ; and it was a welcome movement to con- sumers. But it necessarily caused some derange- ment in the plans of trade, and politicians began to ask, when they had to face the fulfilment of their pledge through a formal act of Congress, how the contraction policy would be greeted by producers. The bill, as originally introduced, granted full powers to the Secretary of the Treasury to issue new bonds for the retirement both of interest-bearing and of non-interest-bearing debt. In the spring of 1866 this measure was defeated in the House of Representatives by a vote of 70 to 64. Reconsidered and amended so as to restrict contraction of the legal tenders to $10,000,000 in the first six months and to $4,000,000 per month thereafter, the compromise measure did indeed pass the House by 83 to 53, and ll American Finance [1866 the Senate by 32 to 7. But a victory thus won was ominous. Mr. McCulloch himself declared the amended act to be awkward and ineffective. 1 Still more significant was the character of opposition de- veloped in the course of the debate. It had a dozen varying grounds of argument, most of them pretty certain to appeal to popular prejudice later on. Some Congressmen objected to the discretionary powers as revolutionary, and, while conceding Mr. McCulloch's ability and conservatism, pointed out that a very different Treasury Secretary might suc- ceed him.' Some denounced the contraction policy in itself as a " double-quick march to bankruptcy " ' ; others, less extreme in view, nevertheless pronounced the notion of immediate resumption of specie pay- ments to be " Utopian in the extreme." 4 Much was heard of the comfortable theory that if Congress would " allow things to go on without active inter- ference," the " natural development of events " would automatically bring about resumption.* It was promised, indeed, by one eminent Congressman, destined later to take up McCulloch's uncompleted work, that if the Secretary would do nothing else but meet current obligations, " no power could pre- vent" resumption within twelve or eighteen months.' More than one legislator could not understand, " when we have $450,000,000 [debt] bearing no in- 1 Treat. Rep., 1866, pp. 8, 9 ; Men and Measures, p. 211. 8 Thaddeus Stevens, House of Representatives, March 16, 1866. 8 W. D. Kelley, House of Representatives, February 21. 4 Hiram Price, House of Representatives, March 16. 1 G. S. Boutwell, House of Representatives, March 16. ' John Sherman, Senate, April 9. 1866] Opposition to Contraction 13 terest, and which need bear no interest, why it is to be taken up and put into bonds." ' The excellence of a circulating medium " that rests on the property of the whole country, and has for its security the faith and patriotism of the greatest and freest country on the face of the globe," " played its usual part in the discussion; so did the argument that "the amount of legal tenders now outstanding is not too much for the present condition of the country."* In short, all the arguments which have been made familiar by the twenty subsequent years of contro- versy, cut a figure in this opening discussion. Even the peculiar virtues of a high protective tariff, through which the country might by a short cut reach a situation where resumption would be easy, were recited in this debate of 1866.* As a matter of fact, even the restricted powers of note retirement granted under the law of March, 1866, were revoked within two years. Little or no progress had meantime been made towards resump- tion of specie payments. The Secretary himself had officially pointed out that two commercial influences must be removed before resumption would be pos- sible; the excessively high prices in the United States and the heavy balance of foreign trade against us.* But prices continued above the Euro- pean level, and, as a consequence, export of mer- 1 Thaddeus Stevens, House of Representatives, March 16. * W. A. Darling, House of Representatives, March 16. 8 John Sherman, Senate, April 9. 4 W. D. Kelley, House of Representatives, February 21 ; W. A, Darling, House of Representatives, March 16. > Treat, Rep.> 1865, p. 13 ; 1866, p. 11. 14 American Finance M866 chandise was checked and imports greatly stimulated, The entire gold product of each year in the United States was sent abroad. Some effort had indeed been made to accumulate a specie reserve in the Treasury, obtained through the required payment of customs dues in gold. But part of this fund was disbursed again for interest on the public debt ; the mercantile community protested urgently against the hoarding of any excess, with gold selling at 1 50 ' ; and in the end, the Treasury was forced repeatedly to throw its own coin surplus on the market, simply in order to check the disastrous operations of the speculators.* Resumption, in short, which Mr. Sherman had predicted as a certainty within eigh- teen months of March, 1866, was, if anything, further off than ever. Contraction of the inflated currency, even if pur- sued under the limitations of the Act of 1866, would in time have brought about conditions under which resumption might have been planned. But events outside of the United States now moved in such a way as to turn the entire financial community against the Secretary's policy. Hardly two months after the vote of March came a wholly unexpected crisis in the foreign money markets. The London col- lapse, precipitated by the Overend-Gurney failure of May, 1866, was in some respects as complete as any in the history of England. It affected every nation with which Great Britain had commercial 1 Memorial of New York banke.s and shipping merchants to Sec- retary McCulloch, July, 1866. * Treat. Rep., 1866, p. 9. 1867] Congress Stops Contraction 1 5 dealings ; not least of all the United States, of whose securities it was estimated that European investors even then held $600,000,000.' During three months the Bank of England kept its minimum discount rate at the panic figure of ten per cent. ; the conse- quent sudden recall of foreign capital put a heavy strain on the American markets. With the familiar disposition of the trade com- munity to lay the blame for disordered markets on some move of public policy, the Treasury's opera- tions to reduce outstanding notes were made the scapegoat.* Politicians with an eye to popularity were quick to catch this drift of public sentiment. Some of them honestly believed that McCulloch's action in the currency was the cause of the trade distress ; others, better informed but equally politic, avoided personal declaration of opinion, but charac- teristically announced that whether the theory was correct or not, the public believed it, and that in deference to the public, currency contraction ought to cease.* The usual result ensued. Under the previous question, and without debate, a measure revoking absolutely the Secretary's power of contrac- tion passed the House of Representatives in Decem- ber, 1867, by a vote of 127 to 32. In the Senate there was an able show of opposition, but it was plainly put on the defensive. Even its very mild amendment hinting at future return to the contrac- 1 McCulloch, Treas. Rep., 1866, p. 12. O. P. Morton, Senate speech, January 9, 1868; A. G. Cattell, Senate speech, January 10, 1868. * John Sherman, Senate speech, January 9, 1868. 1 6 American Finance naea tion policy was promptly rejected by the House, and on January 22, 1868, the resolution passed both chambers in its original and final shape. This was the end of the McCulloch plan. It was the end of all serious debate upon resumption, for at least six years. It was also, and very logically, the beginning of the fiat-money party and of the plan to pay the Government's bonded debt, wherever prac- ticable, in notes. This second proposition was thrown into the arena of a Presidential canvass within six months of the vote of January, 1868, being formally proposed in the platform of the Democratic party. Governor Seymour, it is true, rejected this financial plank of the convention which nominated him, and rejected it as plainly as General McClellan had rejected the " peace plank " of the same party four years before. But the repudiation issue was fought out, in the canvass, nevertheless. The Republicans were forced into open defence of sound financial principles by the very recklessness of their opponents. As happened under very similar conditions twenty-eight years later, the compromis* ers and waverers, who had cut so prominent a figure in the debates of 1866 and 1868, were compelled to show their colors, and the result, for the time at any rate, was salutary. Helped by the great personal prestige of its candidate, General Grant, the Repub- lican party won a sweeping victory. Having won, the party's representatives hastened, while still under the excitement of the canvass, to make their public pledge for the future. President Johnson, who was then at open odds with bis party, had pro- 1869] The Climax of Inflation 17 duced in his Annual Message of December 7, 1868, the extraordinary suggestion that 4< the six per cent, interest now paid by the Government " on its debt " should be applied to the reduction of the principal in semi-annual instalments"; in other words, that the plan of repudiating interest obligations since adopted, with no agreeable results, by Turkey and Greece should be formally approved by the United States. This remarkable utterance was first con- demned by an overwhelming vote in both House and Senate; next, by an almost equally decisive vote, on March 3, 1869, Congress adopted the Public Credit Act, promising coin redemption of both notes and bonds, and concluding with the declaration that the United States " solemnly pledges its faith to make provision, at the earliest practicable period, for the redemption of the United States notes in coin." The promise was as easily made as the similar pledge of December, 1865; it was still more easily broken. No such arrangement was made, nor any serious attempt in that direction, until the matter was forced on the party by the exigency of politics. Not only was no effort made to reduce outstanding legal tenders, but the supply in circulation was heavily increased; rising from $3 14, 704,000 in the middle of 1869 to $346,168,000 in 1872, and two years later, as a result of the Treasury's weak ex- periments in the panic, to $371,421,000. The period was congenial to such juggling with public credit and legislative pledges. Socially, financially, and politically, it stands out quite apart from any other decade of the century. It comprised, 1 8 American Finance 0973 in the United States, such a succession of episodes as the plundering reign of the Tweed cabal in New York City; the impeachment of President Johnson for purposes of political revenge ; the infamous gold- market conspiracy of 1869, into which the ringlead- ers very nearly dragged the Federal Administration ; the rise of vulgar and dishonest railway speculators to public eminence ; the notorious corruption of the courts by such adventurers ; scandal fixed upon Con- gress by the Credit Mobilier disclosures and on the Administration by the Belknap impeachment trial. Moral sense seemed for a time to have deteriorated in the whole community ; it was a sorry audience, at Washington or elsewhere, to which to address ap- peals for economy, retrenchment, and rigid preser- vation of the public faith. The Government's financial recklessness was readily imitated by the community at large ; debt was the order of the day in the affairs of both. As the period approached its culmination, foreign trade reflected the nature of the situation. Merchandise imports in the fiscal year 1871 rose $84,000,000 over 1870; in 1872 they in- creased $106,000,000 over 1871. This movement was the familiar warning of an approaching crash ; but the warning fell on deaf ears, as it usually does. In 1873 the house of cards collapsed. The panic of 1873 left the country's financial and commercial structure almost a ruin. It had, how- ever, several ulterior results so valuable that it is not wholly unreasonable to describe the wreck of credit as a blessing in disguise. American prices, long out of joint with the markets of the world, and thoroughly 1874] Attitude of Congress 19 artificial in themselves, were certain to be eventually brought down. They would have been lowered, necessarily, under the McCulloch contraction plan, but the fall would have been gradual. This means of readjustment Congress and the people rejected ; there was left, therefore, only the severe alternative of sudden and violent liquidation. But this very liquidating process served a useful double purpose ; it disclosed the nation's true resources, and it placed the United States on equal footing with the com- mercial world at large. With the bursting of the bubble of inflated debt and inflated prices, the ex- cessive importations ceased. Simultaneously the export trade, which had halted during 1872, in spite of the continued agricultural expansion, rose to pro- portions never before approached in our commercial history. In 1874, the balance of foreign trade, which during the twenty-five preceding years, with only four exceptions, had been running heavily against the United States, turned permanently in our favor. In the fiscal year 1872, imported mer- chandise exceeded exports by $182,417,000; in 1878, the export excess reached the unprecedented sum of $257,814,000. By 1876, even the continuous out- flow of gold was checked. In short, the two condi- tions fixed by Hugh McCulloch, ten years before, as indispensable to resumption of specie payments, had now been realized. Congress was not by any means disposed, however, to seize the opportunity. The first result of the money market crisis in 1873, as in all similar years, was urgent public clamor for more currency. The 2O American Finance [is?4 Supreme Court had decided finally, in 1871, for the constitutionality of the legal tenders ; the Secretary of the Treasury, in 1873, had so far yielded to the prevalent excitement as to reissue legal-tender notes already formally retired. 1 The first response of Con- gress, therefore, was an inflation measure. By a vote of 140 to 102 *n the House of Representatives, and of 29 to 24 in the Senate, a law was passed for the permanent increase of the legal-tender currency by $18,000,000. The Republican party controlled Congress by unusually large majorities; but sixty per cent, of the party's vote in each chamber was cast in favor of the bill. Only the interposition of Grant's Presidential veto prevented this first positive backward step in the direction of fiat money. It is reasonable to suppose that this curious vote of the Administration party, which occurred in April, 1874, measured the party's political despera- tion. They were about to receive, in the Congres- sional elections, the usual chastisement experienced by a dominant party when the people vote in a period of hard times; the inflation act was an anchor thrown desperately to windward. The experiment was in all respects a failure. Even the party's own State conventions failed to say a good word for the inflation bill, and it gained no mitigation of sentence in the November vote. In the Forty-third Congress, the House of Representatives had been Republican by the unusual plurality of 110; in the Forty-fourth, chosen in 1874, the Democrats controlled the House by 74 plurality. 1 N. Y. Financial Chronicle, Dec. 6, 1873. 1875] The Resumption Act 21 The Forty-third Congress had three months of existence left to it after the vote of November, 1874. Already defeated overwhelmingly at the polls, it had nothing to risk by a move in sound-money legis- lation, and possibly much to gain. It used this three-months' period to enact a law of the first im- portance, not only to the nation, but to the Repub- lican party's future history a law which must fairly be described, however, under the circumstances of the time, as an expression of death-bed repentance. This was the Specie-Resumption Act, drawn up by a party committee, and submitted to Congress, in December, 1874, by Senator John Sherman. 1 It fixed the date for resumption of specie payments at January i, 1879, provided for the reduction of legal- tender notes from $382,000,000 to $300,000,000, but made nb provision for any further retirement of the notes. It conferred, for redemption purposes, the discretionary bond-issue power, afterwards employed by Secretary Sherman in 1878 and 1879, and by Sec- retary Carlisle in 1894 and 1895. It went through Congress on January, 7, 1875, and with its enactment this chapter may properly be closed. Unlike most subsequent financial measures, the Resumption Act won its majorities in both Houses by the strictest kind of party vote. Not one Democratic Congress- man supported it in either chamber; but the large Republican majorities of the 1872 election were still available. The bill passed the Senate by a vote of 32 to 14, and the House by 136 to 98. When it passed, it was generally declared by financial critics 1 Recollections of John Sherman, i., p. 510. 22 American Finance [1675 that specie resumption under the measure was im- possible, and it was openly promised by the opposi- tion party, about to come into control of Congress by a large majority, that they would make short work of the Act of 1875 on their return to power. CHAPTER II THE STRUGGLE FOR RESUMPTION THE Resumption Act is one of the most curious laws in financial history. It was plain in its requirement that on and after January I, 1879, tne Treasury should " redeem in coin the United States legal-tender notes then outstanding, on their pre- sentation for redemption " ; but it left the Treasury to make whatever arrangements it might choose. The law, it is true, conferred ample powers. In order " to prepare and provide for the redemption in this Act authorized or required," it empowered the Secretary of the Treasury " to use any surplus revenues, from time to time, in the Treasury not otherwise appropriated, and to issue, sell, and dis- pose of, at not less than par in coin, either of the descriptions of bonds of the United States described in the Act of Congress approved July 14, 1870." ' This power was not only enormous in its immediate possibilities, but it was perpetual. The notes re- deemed were not, as in 1866, to be cancelled or retired, but to be reissued. When reissued, they 1 U. S. Statutes, 43d Congress, 2d session, chap. xv. 24 American Finance [1975 must necessarily become again redeemable in coin, with all the provisions of the Resumption Act again applying. This fact was recognized even in the de- bate upon the bill. Since the discretionary power of bond-issue was granted " not only to prepare for but to maintain resumption," l it followed that the power might legally be exercised by any future Administration.* Now laws which make such extraordinary grants to the Executive commonly specify with the minu- test care how the powers granted shall be employed. The Resumption Act does nothing of the kind. It places in the Secretary's hands, as the author of the law correctly pointed out, " the whole credit and money of the United States," ' but it does not give the slightest hint as to what use he shall make of it. Resumption of specie payments is associated, in the average mind, with the accumulation of a coin re- serve, out of which, when necessary, notes may be ledeemed. But the Resumption Act makes no men- tion of a coin reserve. This omission left it wholly to the discretion of the administrator of the law how much gold he should accumulate for the purpose. He might, in strict accordance with the law, use his powers so as to throw the money market into con- vulsion. He might, on the other hand, either through choice or necessity, make such inadequate provision, that after January I, 1879, n ' s entire 1 John Sherman, Senate speech, December 22, 1874. * Treas. Rep., 1879, p. xi.; 1880, p. xi. ; Report H. R. Judiciary Committee, July 6, 1892. 'John Sherman, Senate speech, December 22, 1874. 1875J Provisions for Resumption 25 stock of gold would be withdrawn for hoarding or export purposes. There was involved, there- fore, a double problem of great delicacy: could a large gold reserve be acquired and kept in the Treasury before 1879, an< ^ could it be protected afterwards ? At first glance, it would appear that the Treasury's discretionary power in the loan market, under the Act of 1875, made it an easy matter to obtain a suffi- cient coin reserve* But there was no such certainty when the law was passed. On the basis solely of domestic loans, the operation was impossible. As late as 1 877, it was officially estimated that the total stock of gold in the United States, outside the Treas- ury, was less than $100,000,000,' and of that sum the two thousand national banks, on which the Treasury must mainly depend for a domestic gold loan, held only $22,658,820.' This was a wholly in- adequate supply, and, what made the matter worse, the country had been losing annually, through ex- port, more gold than it produced from its mines. In 1875 and the four preceding years, the United States produced $182,000,000 gold, and exported, net, $204,000,000.' So far as could be judged in 1875, an attempt to hoard in the Treasury even a moderate sum of domestic gold would revive the commercial dissatisfaction of 1866. In fact, the Treasury was more than once compelled, even after 1 Director of the Mint, Annual Report, 1877. * Comptroller Knox, Treat. Rep., 1877, p. 163. 1 Annual U. S. Mint Reportt ; U. S. Bureau of Statistics, Annual Reforts. 26 American Finance [1875 the passage of the Resumption Law, to throw part of its gold fund on the market. 1 There remained the foreign markets from which to obtain a gold supply. It was possible to buy gold abroad, even with foreign exchange against the United States. But Secretary Bristow expressed, in 1875, the very general doubt as to whether such an operation would not be deliberately obstructed by foreign institutions. 1 Nor was this apprehension groundless. France and Germany were already ac- cumulating specie for exactly the purpose contem- plated by the United States,' and it was common belief, even three years later, that the Bank of Eng- land would resort to extreme measures for the protection of its own reserve. 4 I have said that the Law of 1875 involved the double problem of providing for resumption at the stipulated date, and of maintaining it afterward. It is the first of these undertakings which we shall survey in the present chapter. There were, as we have seen already, two influences at work in 1875, which made possible the achievement as it would not have been in 1866. These influences the shift- ing of the foreign trade balance in favor of the United States and the subsequent check to gold ex- ports were factors on which no finance minister could have reckoned. Both in fact developed after the passage of the Resumption Law. But even after allowing for these accidental commercial ad- 1 Treat. Rep., 1875, p. xxii. * Ibid., p. xxi. ' Letters of Treasury's London agent, August 1 1 and 15, 1877. /fry., Augutt 10, 1878. 18761 Problems of the Treasury 27 vantages, the credit for the return to specie payments on January i, 1879, belongs individually and with- out dispute to John Sherman. As one of the authors of the Resumption Act, Mr. Sherman was responsible both for its virtues and its vices. His appointment to the Treasury, there- fore, in the Administration under which resumption must by law be carried out, was entirely logical. It is true, the Presidential canvass of 1876 was not conducted on the issue of resumption. The Act of 1875, a Republican party measure, and passed with- out one Democratic vote in either House of Con- gress, was not so much as named in the Republican national platform of 1876. But in politics, the can- didate often counts for quite as much as the platform, and Mr. Hayes had won the Ohio Governorship, only a year before, after a contest pivoting wholly on the specie-payment issue. The choice of Mr. Sherman for finance minister in his national Admin- istration was a normal sequel. Yet the practical efficiency of Mr. Sherman, in an administrative office, could not then have been foretold. The Sec- retary's previous career, though useful and indus- trious, had been marred by weaknesses which did not promise well. As a legislator, he belonged to the school of compromisers who have indirectly been responsible, in a score of critical emergencies, for the gravest mischief in our history. If his con- cessions had been proposed only after aggressive contest, when deadlock or defeat was the only alter- native in sight, the criticism might be qualified. But it was Mr. Sherman's unfortunate policy as a 28 American Finance \\yn legislator that he either opened the contest with a plan of compromise thereby surrendering most of his legitimate vantage-ground or else abandoned his position long before the battle was fought out. So eager was he, in the initial currency debate of 1866, to fix upon this middle ground, that he played directly and effectually into the hands of the op- ponents of resumption. He openly confessed his deference to public clamor in the vote of 1868.' He defended, on the explicit ground of evasion of a disputed point, the obscurity of the Resump- tion Act regarding reissue of the legal tenders." It is impossible to harmonize with one another his public utterances and his public votes. He acknowl- edged freely, on various occasions, that extinction of the legal-tender notes was the simplest road to specie payments * ; he declared with equal frankness that inflated prices must come down in the move- ment towards resumption, and that the shrinkage would be positive advantage to our industries.* Yet he made these very incidents of the McCulloch con- traction movement the basis of a determined opposi- tion. From the floor of Congress he attacked this plan, the only alternative to the fiat-money carnival of the next five years, with arguments which were effectively used in behalf of every future movement of inflation.* 1 Senate speech, January 9, 1868. * Senate speeches, December 22, 1874 ', March 16, 1876 ; Rccolltc* tions, i., 510. 1 Senate speech, December 22, 1874. 4 Senate speech, January 15, 1868. * Senate speech, April 9, 1866. 1878] Secretary John Sherman 29 For a Secretary of the Treasury, at a peculiar crisis in the Government's finance, these were unpromising antecedents. But Mr. Sherman was not the first of public men to show that the faults or weakness of a legislator, whose purpose is to obtain enactment of a policy, will sometimes disappear in the administra- tor, who presses settled policies into execution. As Secretary, he was unwavering in pursuit of the resumption goal; practical, resolute, and adroit in the means employed. His official correspondence gives consistently the picture of a public officer of foresight and decision. It was in the face of the repudiation clamor that he declared officially for payment of the Government bonds in gold. 1 This action fixed a precedent of the highest value. Equally distinct was the Secretary's public declara- tion that the Act of 1875 conferred the power to issue bonds after, as well as before, resumption * ; another precedent which did invaluable service six- teen years afterward. Only on one conspicuous oc- casion, hereafter to be noticed, did he revert to his old-time juggling with a public question, and then the strong good sense of the President overruled him. What was perhaps still more essential, at this juncture in the Government finances, was the faculty displayed by Mr. Sherman, of keeping the mastery of outside negotiation. This was no small achieve- 1 Letter to Colgate & Co., December i, 1877 ; Specie Resumption, pp. 22, 23, 24, 80, 81, 201, 709; TretK. Rep., 1877, p. ix.^ 1878, p. xiv. * Treat. Rtf. t 1878, p. x. ; 1879, p. x. ; 1880. p. xiv. 30 American Finance [1878 ment ; for, in addition to the doubts surrounding the resumption operation at the start, angry and bitter opposition from Congress confronted the Secretary at every step. The banking community was not enthusiastic in its offers; even the domestic institu- tions believed that the risk was great enough to call for large concessions from the Treasury. Mr. Sher- man made no such concessions, and the banking interests were presently aware that a cool head and an experienced hand were in control of the Govern- ment's side of the bargain. He sounded all parties before committing himself to any, forced reluctant interests to bid through fear of losing entirely the prestige of the operation, and held his own position by compelling them to bid against each other. The manner in which the Secretary, in his loans of 1878 and 1879 particularly, played off the London syndi- cate against the hesitating New York banks, and the city banks against the syndicate, gave him, from first to last, the advantage of the situation. 1 This ad- vantage he retained in the face of adverse movements of international exchange,' stringency in the London discounts,* and distinctly hostile operations on the gold market. 4 Results, in cases of this kind, speak for themselves. To say, therefore, that Secretary Sherman's management of the Treasury achieved 1 Rtcollec tions, ii., 638; Specie Resumption, 291, 665; letter of August Belmont, February 13, 1879. 1 Specie Resumption, pp. 280, 358. 1 London Economist, October 19, 1878 ; Treasury's London cor- respondence, August 3, 10, and 17, 1878. 4 Letter of August Belmont to Sherman, April 26, 1878. 1878] Mr. Sherman's Operations 31 during his time precisely the results proposed, and achieved them promptly, is to concede his adminis- tration's practical success. Nor were these results attained through extravagance or waste. In his re- funding and resumption operations, Mr. Sherman placed the bonds of the United States on better terms than any of his predecessors. 1 On one note- worthy occasion, he sold to a foreign syndicate a considerable block of bonds at a figure virtually above the price of the same bonds on the open market, and he did this after banking acquaintances had warned him that the achievement was impos- sible.* It was through Secretary Sherman that the plan of sales direct to the investor, without the intervention of a syndicate, was afterwards intro- duced.* Some mistakes in detail policy usually occur in any complex banking operation, and criticism has by no means spared Mr. Sherman. But even in these disputed questions, the Treasury had a good defence. The blunder of fixing a thirty-year term to the $741,000,000 4 per cents., frequently laid at his administration's door, was in fact decreed arbitrarily by the Funding Act of 1870, and was in- serted in that statute against Mr. Sherman's own advice. 4 Conceivably, the extension of maturing 6 1 Treat. Rep., 1877, p. viii ; Recollections, i., 570, 571. 1 Letter of H. C. Fahnestock, March 23, 1878 ; Specie Resump- tion, pp. 279, 281, 283, 284, 285, 294. 1 Recollections, i., 574; letter to the Senate, March 26, 1879; H. C. Adams, Public Debts, 236. * Ricollections, i., 454. 32 American Finance ne78 per cents, at 3$ subject to call, arranged a few months after Secretary Sherman's term expired, might have been feasible in 1877 and 1878. Yet it must be remembered that the credit of the United States, after two years of specie payments, was a very different thing from its credit in the earlier period. Congress, moreover, true to its record of the whole Administration, used the 3$- per cent, pro- viso as a means of deliberate embarrassment to the Secretary's operations. It loaded down its new re- funding bill, in which that rate was authorized, with stipulations of a character so wild as to necessitate a Presidential veto. 1 Of all the criticism on the Secretary's policy, that which clung longest was the charge that in the use of Government deposit funds, he granted undue favors to the banks. That Mr. Sherman was at times politically indiscreet, in permitting concentra- tion of the bulk of his deposits with a single bank, cannot be doubted. But it by no means follows that the action was unwise financially. The syndi- cate of foreign bankers, through whom the large resumption loan was placed, were allowed to name their own depository, and the institution named by them had been the most efficient agent of the Gov- ernment.* Politically, the Secretary would have played a wiser part had he distributed this deposit ; from any other point of view, it was a matter of complete indifference. If the example of foreign 1 Rtcollec turns, ii., 758, 796. * Recollections, ii., 798 ; letter to a New York banker, January 13, 1879 ; Specie Resumption, p. 459. 1878] Government Bank Deposits 33 governments had any bearing on the matter, the selection of a single bank was preferable. As for the general policy of bank deposits, that was not only sustained by precedent in this and other coun- tries, 1 but it was indispensable. When any block of new refunding bonds had been sold and paid for, ninety days had to elapse, under the formal notice, before the old bonds could be taken up. In the British Government, all such surplus of the ex- chequer goes, as a matter of course, on deposit with the Bank of England. Common prudence required that the purchase money in our Government's pos- session, during these three-months intervals, should be similarly kept on the open market. 4 In extend- ing these deposits, always abundantly secured, Mr. Sherman not only followed common-sense and precedent, but had the best advice, legal and finan- cial, to sustain him. 8 I have spoken of the obstacles thrown in the Ad- ministration's way by Congress. The circumstances under which the Hayes Administration entered office were in all respects discouraging. Administrative plans and policies have frequently enough been ob- structed by opposition majorities in one or the other branch of Congress, by dissension in the Administra- tion party, or by the popular discontent arising from hard times. The Hayes Administration had to meet all these obstacles at once, and at a time when its 1 Report of Treasurer Spinner, Annual Treas. Rep., 1866, p. 171. ' Letter to the Senate, March 26, 1879, 8 Opinions of Attorney-General Devens, of Comptroller Knox, of Geo. S. Coe ; Specie Resumption, pp. 117, 135, 136. 3 34 American Finance [1877 own official prestige was marred by its disputed title. Whether Mr. Hayes was entitled to the two doubtful States whose votes were eventually awarded to him, and without which he could not have been elected, is a question regarding which opinion will probably always differ. The elaborately constructed Electoral Commission, to whom the question was referred, divided almost exactly on the lines of party affiliation. But that the actual majority of the voters was against Mr. Hayes in 1876, and in favor of Mr. Tilden, there is no doubt whatever. The Republican count itself awarded to Mr. Tilden a popular plurality, in the whole United States, of 252,224. The tangible res'ult of this popular minor- ity was a House of Representatives containing an opposition plurality of twenty votes. Nor was this opposition content with a mere blockade of Administration measures. It under- took to wreck the entire policy of the President. The Senate was Republican by a plurality of three, but on questions of finance, this slender plurality could not be trusted. The first year of the new Administration was a period of stagnant trade and popular unrest ; its second year was a period of fall- ing prices. The Pittsburg railway riots, which rose for a time to the proportions of industrial insurrec- tion, broke out hardly four months after the inaugu- ration of President Hayes. Business failures were more numerous and serious in 1877 than in 1874, the increase being particularly rapid in the younger Western States; and in 1878 the record of insol- vencies far exceeded even that of the panic year 18771 Congress Attacks Resumption 35 1873.' Four years of prostrated enterprise had ut- terly discouraged the people; when, therefore, politi- cians laid the blame on the Treasury's operations, they had no trouble in getting a hearing. The oppo- sition to Mr. Sherman's plans, which in Tact included many well-known Republican Congressmen, believed itself to be backed by an overwhelming popular sen- timent. It therefore laid its plans deliberately to upset the pending negotiations. The attack began with a bill revoking all power of bond-issues for resumption purposes, and in effect repealing the Resumption Act. This measure went through the House in November, 1877, by a major- ity of thirteen votes. Before its fate in the Senate was at all certain, the House had challenged public attention with another bill to open the mints of the United States to the free coinage of silver. This measure was not entirely new. In the summer session of 1876, several bills had been introduced, providing for increased silver coinage and for re- monetization of the silver dollar. None of these propositions came to anything; they were chiefly remarkable from the fact that they first gave vogue to the theory of the " crime of 1873 " a theory which assumed that the dropping of the silver dollar from the list of coins in the statutes of that year was the outcome of a conspiracy which carried its legis- lation through in secret. The entire baselessness of this assertion has been demonstrated often enough and in convincing detail ; this very provision regard- ing the silver dollar was a subject of public discussion 1 Dun's Review, annual tables. 36 American Finance in the House, and met with no serious opposition. 1 The assertion in itself is so patently absurd that I shall not pause to discuss it. The truth is that silver in 1873, and during a generation before that date, was worth more to its owner in the form of bullion than in the form of coin. In 1872 the silver requi- site to coin a dollar at the established ratio was worth $1.02." For years, therefore, nobody thought of bringing his silver to the mint for coinage ; he sold it in the commercial markets. As we have seen, the total silver-dollar coinage of the United States, be- tween 1789 and 1873, was barely eight million dollars, and when, in 1873, tne ^ aw provided that except for the so-called trade dollar coined for export, " no deposit of silver for other coinage shall be received," no one had interest enough in the matter to offer criticism." But in 1874 and 1875 came one of those curious coincidences which render possible for all time con- flicting theories of an economic event. Germany, having adopted the gold standard of currency injuly, 1873, began to sell its old silver coin as bullion. At exactly the same time, Mackay and Fair, in the heart of the Nevada Mountains, were opening up the Great Bonanza. The Pacific Coast was in fact going wild over the rise in mining shares while the East was financially and industrially paralyzed. For one instance, the famous Consolidated Virginia mine, 1 White, Money and Banking, p. 213 ; Laughlin, Bimetallism, p. 98 ; Congressional Globe, April 9, 1872. * U. S. Mint Reports, annual tables, 1 Treat. Re$>, 1878, p. 1877] Agitation for Silver 37 which produced in 1873 only $645,000 of silver ore, turned out $16,000,000 in 1875.' In the three years following 1874, the two mines of the " Comstock lode " yielded $42,000,000 silver.' The statute dropping the silver dollar from this country's coin- age list was enacted February 12, 1873 ; the German law for retirement of silver coinage was adopted July 9, 1873; and a year later the news of the rich Nevada " ore-finds " became public property. Be- tween the German sales and the sales at Nevada City, the price of silver yielded. In 1 874, for the first time in a generation, 412^ grains of standard silver would have been worth more when coined into a legal-tender dollar than when sold in the bullion market.' The motive of the mining interest in the free-silver coin- age agitation of 1876 and 1877 was not mysterious. The motive of the anti-Administration party in Congress was somewhat different. There is not the slightest question that the silver-coinage movement, in the agricultural West particularly, had the same origin and the same following as the paper inflation movement of a few years before. Mr. Bland him- self, the author of the silver bill, declared that the question was presented as between what he called " honest resumption " with silver coinage, " or on the other hand a forced unlimited inflation of paper money." * In the heat of debate on the silver bill, the same statesman declared in Congress that if his 1 Shinn, The Story of the Mine, p. 191. * Lindermann, U. S. Mint Report, 1877. * Annual Reports, U. S. Mint. * Congressional Record, Aug. 5, 1876* 38 American Finance H878 coinage plan could not be passed, he was " in favor of issuing paper money enough to stuff down the bond-holders until they are sick." ' The point of these remarks lies in their frank assumption that ihe free-silver sentiment and the fiat-money sentiment were interchangeable. So much, then, for the origin and nature of the silver movement. The Bland Bill passed the House on November 5, 1877, under the previous question and without debate, by a vote of 164 to 34, and the resumption operations of the Government came to an instant halt. The market price of silver then was such that the legal-tender dollar of the Act would have been worth intrinsically less than ninety cents. Foreign subscribers to our resumption bonds sus- pected instantly that payment of the Government debt in a depreciated coin was planned by Congress ; their suspicions were confirmed by a resolution in- troduced December 6th by Stanley Matthews, Mr. Sherman's own successor in the Senate, and passed by both Houses. The resolution explicitly declared that in the opinion of Congress, all the bonds of the United States, " issued or authorized to be issued," were payable in the silver dollars of the Bland Law. The extraordinary character of this resolution may be judged from the fact that it was proposed and passed in both Houses while the Coinage Act was still pending, and while, therefore, there was not in existence the coin which was duly declared a legal tender for settlement with public creditors. 1 To the 1 Congressional Record, February 21, 1878. * Benjamin H. Hill, Senate speech, January 25, 1878. t878] The Matthews Resolution 39 conservative portion of the public, the resolution seemed a piece of financial lunacy ; to the Treasury, it was not , only embarrassing but humiliating. Hardly a month before, in his annual report to Congress, the Secretary had repeated his official statement, previously made to bond subscribers, that payment of the bonds in gold might safely be anticipated. 1 The publication of this statement in New York and London had been followed by greatly increased subscriptions to the bonds, in payment of which gold was required by the Government.* The Matthews resolution amounted, so far as Congress was concerned, to repudiation of a formal bargain of which the Government had already obtained the fruits. The debate was such as might have been expected on a measure of the sort. It centred re- peatedly on denunciation of Government bond in- vestors.* Foreign subscribers were treated with especial scorn ; indeed, our foreign customers in general were not spared. It was this debate which drew forth Senator Matthews's somewhat celebrated query : " What have we got to do with abroad ? " a remark which was perhaps as typical of the session's deliberations as any utterance made from the floor of Congress. 4 In each of these three controversies the Adminis- 1 Treas. Rep., 1877, ? v>- 9 Sherman to F. O. French, June 19, 1877 ; Specie Resumption, pp. 80, 8 1, 84, 91. 1 Speech of D. W. Voorhees, Senate, January 15, 1878 ; of F. M. Cockrell, Senate, January 23, 1878 ; of W. H. Felton, Senate, November 14, 1877. 4 Senate speech, December 10, 1877. 4O American Finance [1878 tration was deserted by a good part of its natural supporters. Twenty-seven Republicans voted in the House for the virtual repeal of the Resumption Act. Sixty-seven out of the 164 votes for the free- silver coinage bill were Republican. The Matthews resolution was not only proposed by a Republican, but Senators and Representatives of the Adminis- tration party took the floor to advocate it. Indeed, the party chaos during the session of 1877 and 1878, on all financial questions, can find no parallel short of the stormy legislative days of 1894 and 1895. The personality of debate and vote, during this earlier upheaval, is extremely curious. The vote in the House of Representatives, for instance, on the original free-coinage bill of 1877, was non-partisan and almost wholly sectional. From districts west or south of Pennsylvania, only six votes were cast against the bill, two of these votes being cast by Democrats ; from Pennsylvania and the districts east or north of it, the bill received only nine supporting votes, and three of the nine votes were Republican. The representatives from Ohio, Indiana, Illinois, Wisconsin, Iowa, Kansas, California, and Minne- sota, so far as they answered to the roll-call, voted solidly for the free-coinage bill; the New England States voted solidly against it. Not least remark- able, in the alignment of our public men during the session, was a coincidence which made the proposed repeal of the Resumption Act an example in the irony of history. The Treasury Secretary whose authority the bill assailed had in 1868 led a similar movement to break down the Administration's re- 1878] Passage of the Bland Bill 41 sumption plans. The future Secretary of 1894, destined to issue under the Resumption Act more bonds than even Secretary Sherman, sat in the House in 1877 and voted to revoke the power of issue. The situation; during the early months of 1878, was in fact extremely critical. For the time the three direct assaults on the public credit were warded off. The Matthews resolution was " concurrent," and hence a mere expression of opinion without binding force. The bill repealing the Resumption Act of 1875 was killed by disagreement in the Senate. Meantime the Silver-Coinage Act was modi- fied by the Senate into a compromise requiring pur- chase and coinage by the Government of two to four millions' worth of silver monthly. Even thus modified, it encountered the veto of the President, but was passed over his veto, without a day's delay, by the requisite two-thirds majority. Executive conservatism seemed to be fruitless; nevertheless, there is no doubt whatever that the steadfast policy of Mr. Hayes did much to stem the current of reac- tion. Although his veto did not prevent enactment of the silver-coinage policy, his Annual Message of December 3, 1877, submitted when Congressional majorities were not yet defined, so plainly intimated veto that it obstructed efforts to force the absolute free-coinage measure through the Senate. The President's services certainly do not merit less of recognition, from the fact that his Secretary of the Treasury gave him at this point only nominal sup- port. For once at least in his executive career, Mr. 42 American Finance [1878 Sherman's comment on the reactionary policy, even before the Allison substitute bill had been framed, was as faltering in its tone, and as thoroughly im- bued with timid compromise, as if its author was again the Sherman of the Senate. 1 A personal letter of the Secretary, in September, 1877, to the author of the Matthews resolution, contains the most extraordinary quibbling with the question.* Mr. Sherman himself confessed, seventeen years after the struggle of 1878, that the veto message did not meet with his approval.' Congress adjourned on June I9th. Even before Congressional adjournment, the canvass for the November State elections had begun. The State Convention platforms, in the summer of 1878, were not in all respects such as the session's work in Congress would have suggested. It is true, the Democrats throughout the West and South went to extremes in denouncing the Administration's policy. The Ohio Democrats, for instance, demanded " ab- solute repeal of the Resumption Act," " removal of all restrictions to the coinage of silver," and " sub- stitution of United States legal-tender money for national bank notes," * and Democratic Conventions in Indiana, in Iowa, and in most other Western and Southern States, made exactly similar declarations. The policy set forth by the Ohio Democrats was 1 Treat. Rep., 1877, p. xxi. Ltter to Stanley Matthews, September II, 1877 ; Recollections, ., 593- 1 Recollections, ii.. 623. * Ohio Democratic Convention of June 36. 1878] Party Conventions 43 certainly no more reactionary than what had been proclaimed that very season on the floor of Congress, and by eminent Republicans. 1 It was the policy which the majority of public men, in both parties, had indicated, two or three months before, as certain of popular endorsement. But the Republican Con- vention leaders, in Ohio and in other Western States, were shrewder. Signs of protest against the anti- Administration Republicans in Congress, more omin- ous because they came from staunch and life-long supporters of the party, were visible even before Congress adjourned. The great business communi- ties were speaking out with considerable emphasis, and this indication was not lost on the Republican managers. With much political adroitness, the Western Conventions of the party based their chief appeal on " opposition to further financial agita- tion," as " injurious to business and devoid of other than evil results."* Republican platforms in the Eastern States were even more distinct in declaring for the Administration's policy ; endorsement of the specie-resumption plan, for instance, as carried out by Secretary Sherman, was voted without a qualify- ing word. The trend of public sentiment, in fact, very soon showed itself to be unmistakably in that direction, and this was shown by the altered tone of the oppo- 1 W. D. Kelley, House of Representatives, November 3, 1877 \ J. J. Ingalls, Senate, December 6, 1877 ; W. A. Wallace, Senate, January 29, 1878 ; T. O. Howe, Senate, February 5, 1878. 1 Platforms of the Indiana and Ohio Republican Conventions, June 5 and 12, 1878. 44 American Finance 11878 sition Convention platforms, in the fall. Some of these platforms made obvious attempts to square their party with the voters. The financial plank of the New York Democratic Convention, for instance, on September 25th, reads like actual endorsement of the Republican Administration. It was too late, however, for such manoeuvres to be of any value. The opposition had gone too far in Congress, and popular opinion to that effect was expressed with sufficient emphasis in November, 1878. The Ad- ministration party gained what amounted to a de- cided victory. New York, Connecticut, and Ohio, which had been carried by the Democrats in 1877, now swung back to the Republicans, New York leading with a majority of 34,661. In 1877, the Democratic party had captured Pennsylvania by nearly 10,000; it lost the State now by upwards of 22,000. The opposition still retained control of the House of Representatives, but by a reduced plural- ity. There were but four States, East or West, where opposition majorities were increased in 1878 or Administration majorities diminished, and these were agricultural States, where the season's sharp decline in wheat had stirred up discontent. There was not much danger from the closing session of a Congress whose earlier ventures had re- ceived this response from the people. Without in- terruption or annoyance from the legislative body, the Secretary of the Treasury now put the final touches on his arrangements for resumption. Partly by accident and partly through stress of circum- stances, the Treasury gold reserve was defined, in 18781 The Elections of 1878 45 later years, at a fixed and arbitrary minimum. The theory adopted by Mr. Sherman, however, in his early operations, was different and undoubtedly better. Following probably the practice of the Bank of England, he fixed his reserve at forty per cent, of outstanding notes " the smallest reserve," he wrote to Congress, " upon which resumption could be prudently commenced and successfully maintained." ' On this basis he held in the Treas- ury, on December 31, 1878, $114,193,000 gold in excess of outstanding gold certificates, which was a trifle over forty per cent, of the Government notes then circulating outside the Treasury." Of this gold reserve, $95,500,000 had been obtained through sale of bonds, 8 part of the coin being procured in Europe. There remained now to be settled only the formal machinery of exchange between the Treasury and outside institutions. The city banks were naturally willing to lend all possible aid to the achievement. But the mere good-will of the banks has proved largely useless to the Treasury on two not at all dis- similar occasions in 1861 and in 1894 and at both those junctures the fault distinctly lay in lack of timely business management by the Treasury. It is conceivable that with the vacillating policy of those two years applied in 1878, the Government's financial schemes might even now have broken down. 1 Letter to President of the Senate, May 17, 1879; inten ew with H. R. Banking and Currency Committee, April 18, 1878 j Recollec- tions ii., p. 631. * Treasurer's Annual Report ', comparative tables. * Treat. Hep., 1878, p. ix. 46 American Finance [1878 If, for example, the Treasury had left the banks to pursue unchanged their policy of keeping special gold deposits, the Government reserve would have been at once imperilled. If the banks had con- tinued to present their individual drafts for redemp- tion across the counter of the Sub-Treasury, any timid or blundering banker might have started a general drain of gold. Against these possibilities Mr. Sherman now took measures. He applied for the admission of the New York Sub-Treasury as a member of the clearing-house. Nowadays, when the Government's participation in this privilege has be- come a matter of every-day routine, it is easy to underrate the work of the Administration which effected it. In 1878, however, the project was both new and startling. This occasion, it is true, was not the first on which the clearing-house proposition had been mooted. But the previous Administration which considered the suggestion had abandoned it. 1 Even in 1878, the judgment of the Secretary's own associates was against the plan 9 ; nevertheless, he brought the matter to a head with business-like directness, and within two weeks after the project was officially submitted, arrangements had been made. At New York and Boston, the clearing- houses modified their rules, agreed to abolish " gold deposits " after January 1st, to accept the legal tenders freely in discharge of balances against one 1 Letter of Assistant-Treasurer Hillhouse ; Specie Resumption, p. 398. ' Letter of Assistant-Secretary French, November 5, 1878 ; Specie Resumption, p. 396. 1878] Arrangements for Resumption 47 another and against the Government, and to admit the New York Sub-Treasury into regular member- ship. 1 At the same time, the requirement of coin payment of customs duties was revoked, and public officers were directed to receive coin or legal tenders at the payer's option a move of obvious propriety, since refusal to take notes in payment would merely send the importer to the Treasury's redemption office to convert them into coin.* All these prelim- inaries had been formally and positively settled before the close of 1878. On December i/th, the premium on gold disappeared, for the first time since 1861 ; on January ist, specie payments were quietly resumed. Whether resumption could be maintained without fresh purchases of gold, without new bond issues, and without recurrent strain on financial confidence, ^depended on influences no longer subject to the Government's control. 1 Resolution of the clearing-house at New York, November 12, 1878, Specie Resumption, p. 401 ; at Boston, November 15, Specie Resumption, p. 408. * Treas. Rep., 1878, pp. xii., xiii.; Treasury circular to disbursing and receiving officers, December 14, 1878. r I^HE danger to the Treasury's redemption fund 1 lay, as every one understood, in possible gold exports. As it happened, there was no gold move- ment in progress at the time of specie resumption; but foreign exchange was only a trifle below the normal gold-exporting point, and no spring season for eighteen years had passed without gold ship- ments. In the first half of 1877, nearly twenty millions gold had been exported from New York, chiefly obtained from the city banks. On January i, 1879, these New York banks held in specie only $19,781,400, but they held twice as much in legal- tender notes redeemable at the Treasury in gold. Supposing, then, a further rise in exchange and a heavy export of gold, there was not the least doubt over what would happen to the Treasury reserve. Now it is true that every bank of issue is con- fronted continually with this possibility. In 1878 and 1879, while gold exports from London were in progress, the exporters carried their Bank of England notes to the Bank as a matter of course for redemp- tion in gold, and shipped the gold. What was true 1879] Dangers to Resumption 49 of the London gold operations then is true to-day. But the Bank of England, like all properly managed banks of issue, exercises the power of holding back from circulation the notes redeemed, whenever its reserve has been drawn down too far. This prac- tice, in the case of the Bank of England, automati- cally checks a large gold export movement, through the resultant contraction of the money market. So far was the United States Treasury, in 1879, from enjoying any such precautionary power, that it was expressly forbidden to hold back notes after redemp- tion. As originally passed, the Resumption Act was ambiguous on this question. It did provide for redemption of notes, prior to 1879, " until there shall be outstanding the sum of three hundred million dollars of such legal-tender United States notes, and no more." This provision obviously meant cancellation of $82,000,000 out of the $382,- 000,000 existing legal tenders, and it was so applied. But the question of retirement was purposely left in doubt as regarded notes redeemed in gold after re- sumption. 1 Before even the notes in excess of $300,- 000,000 had been retired, moreover, Congress took the matter in hand, and as it made its move in the midst of the legislative hurly-burly of 1878, its pur- pose was likely to be plain enough. The law of May 3 1, 1 878, declared that cancellation of the notes should cease at once. The amount outstanding was then $346,681,000, instead of the $300,000,000 maximum fixed by the Resumption Act ; and to this extent 1 Recollections of John Sherman, i., U>; John Sherman, Senate speech, December 22, 1874*-. .... - ;. .;..-.; 4 50 American Finance [1879 the Resumption Law was positively revoked. It was further provided, in this Act of 1878, that " when any of said notes may be redeemed or re- ceived into the Treasury under any law, from any source whatever, and shall belong to the United States, they shall not be retired, cancelled, or de- stroyed, but they shall be re-issued and paid out again and kept in circulation." It is impossible to mistake the meaning of this provision. It not only fixed the minimum of legal- tender notes, but expressly forbade the Treasury to exercise any power of even temporary contraction. Mr. Sherman's attitude as regards this measure is difficult to understand. He openly approved the compulsory re-issue clause of the Act of 1878,' and in fact admitted that he had himself entertained some purpose of the kind. He was, however, too intelligent a financier not to foresee its dangers, and as we shall presently see, these dangers were seri- ously impressed upon him by certain incidents of the resumption year. In his annual report of Decem- ber, 1879, h therefore set up a theory of his own that notes redeemed out of the gold reserve could not be used for ordinary purposes, and therefore, with the reserve impaired, were not subject to re- issue." There is, unfortunately, not the slightest ground for such a contention. The reader must have perceived that the compulsory re-issue clause, cited above from the Act of 1878, is framed with particular care to exclude any such interpretation. 1 Rtcollcctions, ii. , p. 659. Tft**. Xtf. t 1879, p. x. ; 1880, p. xiii. 18791 Discouraging Trade Outlook 5 1 Mr. Sherman's assumption in his report of 1879 was as unwarranted as his criticism of a later Secretary of the Treasury for not claiming precisely the same discretionary privilege. 1 The ordinary banking safeguard, then, was wholly withdrawn from the Treasury. Under such circum- stances, the resumption experiment was necessarily hazardous, and its success, even in its first year of operation, was bound to depend very largely on the commercial situation. In this regard, the resump- tion year did not begin auspiciously. In 1878, the merchandise trade balance in favor of the United States had been very large ; in the first five months of 1879, it decreased steadily. " These figures," wrote a commercial firm of which an ex-Secretary of the Treasury was the head, " indicate the begin- ning of a change in the relative volume of imports and exports."' Domestic markets were unfavor- able. In the cotton-goods industry, demand had slackened so far that wage reductions were impend- ing.' The iron trade, a traditional barometer of industrial situations, opened the year with so little activity that prices fell below the actual average cost of production.* With hardly an exception, the country's staple' industries sank, during the early months of 1879, mto complete stagnation. Three months after resumption, the leading financial weekly of New York remarked : " ' Where is the prosperity 1 Forum for April, 1896. Circular of McCulloch & Co., New York, May, 1879. ' Ellison & Co.'s cotton circular, January, 1879. 4 Annual Report^ New York Chamber of Commerce, 1879, p. 104. 52 American Finance H879 promised with that event ? ' is the question fre- quently coming to us. ' Wheat is no higher. Corn is no higher. There is no money in any of the earth's products. Where is the promised pros- perity ?' " l It is true, formal resumption of specie payments was reflected, in the home security markets, by a re- covery in prices. This recovery, though extremely irregular, was permanent. But foreign capital gave no assistance to the movement ; on the contrary, the higher range of domestic prices served to stimulate sales for European account, and there was abundant opportunity for such sales because of the very large amounts of United States Government bonds floated abroad during 1877 and 1878. In February, 1879, the London agent of the Treasury reported that, since the opening of the year, $43,000,000 of these bonds, and $7,000,000 of a single American railway stock, had been re-sold by London to the United States. 1 These sales were reflected in a rise of foreign exchange almost to the normal gold-export level. 1 In London, the most experienced inter- national bankers, including the Rothschilds, who had placed the bulk of the recent American loans, predicted that gold was about to move in quantity from the United States to Europe.* By the middle of March, the Secretary was disturbed enough to set 1 New York Financial Chronicle, March 8, 1879. 1 London correspondence of Treasury, February 22, 1879 ; Specie Resumption, p. 525. 8 Fry to Sherman, January 13, 1879 ; Specie Resumption, p. 461. 4 Treasury's London correspondence, February 22 ; Specie JKt< sumption, pp. 5*5, 536, 723. 1879] European Crop Failure 53 on foot inquiry into the possibility of controlling specie exports through sales of Government ex- change. Such recourse, Mr. Sherman plainly in- timated, might become necessary " in preventing popular alarm." * Not even this expedient was feasible; sterling continued to advance, and finally, in the second week of June, a million and a quarter gold was shipped. This gold was obtained from the Treasury in exchange for notes ; it reduced to pre- cisely that extent the Government reserve.* London financial judgment of the time was thus expressed : ' The effect of resumption has passed off, and we may expect to find gold steadily drifting from that side to this." " The wheat harvest of 1878, in England and on the European continent, had been, as we have seen, one of the largest on record. When 1879 was well ad- vanced, wheat from the English farms was still moving in quantity to storage-points. At the close of March, the stock of wheat at Liverpool was larger than at any time within five years ; the same was true of every cereal product. 4 Frosty weather and heavy rains in England had indeed advanced the price of wheat sixpence a bushel, and it was then admitted that the English crop of 1878 would not be duplicated. BJut meantime the reserved supply was ample, demand from consumers was only 1 Sherman to Conant, March 15 ; Conant to Sherman, April 3; Specie Resumption, pp. 569, 602. 1 Trtas. Rep., 1879, p. 338. London Statist, June 7, 1879. * Annual Report, New York Produce Exchange, 1879, p. 447. 54 American Finance [1879 moderate, and early in March observers of the market predicted that prices had reached their high level for the year. 1 This forecast seemed for some time to be correct. Wheat had advanced nine cents per bushel on the New York market since the open- ing of January; the price now fell from $1.17^ in March to $i. 10 in the second week of April. Little by little the foreign situation changed. As is usual with highly speculative markets, the news was contradictory, and the truth developed slowly. But it was evident in May, while the outlook for this country's harvest was steadily improving, that the European grain markets were beginning to stir with apprehension. In France, snow fell heavily late in the spring; in England, after a late and de- structive frost, rain set in and continued almost in- cessantly through the summer. It was literally a sunless season. At the opening of July, people were wearing heavy overcoats in London, and in the country all the crops were moulding.* By this time the impending harvest failure had begun to assume the dimensions of a national calamity. On Sunday, July 6th, by the Archbishop of Canterbury's direc- tion, prayers for fair weather were offered in the English churches.* In another month the time was past when even favorable weather would help, and by August it was made clear to all the markets that, while the United States would yield the largest 1 London correspondence, New York Financial Chronicle, March 7, 1879. '/# * New York Clearing-House statements, 1 Records of the Treasury. 1879] Excesses of the Speculators 59 The Government's gold reserve accordingly rose from $119,956,655 at the close of June to $157,140,- 1 14 at the opening of November. As early as Sep- tember, Secretary Sherman notified agents of the Treasury that " gold coin, beyond the needs of the Government, having accumulated in the Treasury," they were thenceforward to pay out gold freely on ordinary disbursements. 1 The industrial, social, and political results of this extraordinary year were permanent and far-reaching. The series of commercial windfalls which gave the United States the upper hand in half the foreign markets came, as we have seen, on top of a five-year period of economy and liquidation ; there was, there- fore, a firm substratum on which to build. Enough of an impulse was given to industry to have carried forward the movement of prosperity beyond 1879, even if succeeding years had not been equally favor- able to our producing markets. But the good for- tune of the American farmers did not end with 1879. Conforming to a principle old as the days of Pharaoh, Europe passed through a series of lean years, of which 1879 was only the first. The disastrous foreign shortage of that year was not indeed re- peated, but the European harvests did not soon duplicate the yield of 1878 again. In 1880 the out- put of the world's chief wheat-producers rose some 30,000,000 bushels over that of 1878 '; but this was solely because of a seventy-million bushel increase in the American harvest ; so that this country still 1 Circular to disbursing officers ; Specie Resumption^ p. 780. ' Liverpool Corn Trade News estimates. 60 American Finance [1880 had the advantage in the foreign trade. Even in 1 88 1, when a good part of the American crop was destroyed by drought, the foreign harvest too ran short, and what our farmers could spare for export was sold at the highest prices in nine years. The prosperity enjoyed by the United States was real, and its foundation solid ; a fact which nothing proved more clearly than the manner in which the markets sustained reactions from excessive specula- tion. With all the increase in real capital and in commercial demand, the speculators forced prices repeatedly beyond the ability of capital to sustain or of demand to meet. Had it not been for the solid foundation underlying the trade revival of 1879, they would have wrecked the movement. They began with an attempt, in the winter months, to make their own price for wheat, and did succeed in forcing the market up to such a figure that for a time exports were actually blocked, and a fleet of grain vessels, sent to New York for charters, lay idle for weeks at the city wharves. 1 The result of this experiment was a demoralized wheat market, and eventually, in the early part of 1 880, a break of thirty-four cents a bushel. In the iron market a similar attempt was made. The price at the close of 1879, after a rise of nearly one hundred per cent, in eight months, was $35 per ton; the speculators put it up to $42 by February, 1880, and by so doing attracted from every iron-producing foreign state not only huge supplies of new material, but of old scrap- * New York Chamber of Commerce, Annual Report, 1880-81, p. 85. 1880] The Railway Speculation 61 iron.' Of course this bubble too collapsed ; by June, the price had fallen to $23. But after each of these speculative collapses, with the individual disasters which attended them, the underlying strength and healthf ulness of the markets was asserted. The spectacular market for corpora- tion shares was in a high degree typical of the general situation. This market broke sharply in November, 1879; m May and June of 1880, what seemed to be a sudden and wholesale wreck of values swept over the Stock Exchange. But from each of these reactions, which measured the previous excesses of the speculators, values recovered and moved up again under the stimulus of real invest- ment, reaching eventually a much higher level. The movement of the railway shares responded normally to the immense increase in opportunities and profits for these enterprises, as the interior lands were opened up. Not even during the development of the Western States after the war did population of these districts in particular, and of the country as a whole, increase as rapidly as it did after resumption. Annual immigration doubled in 1880 as compared with 1879, an d quadrupled in the next two years. The highest annual record in the country's previous history was 459,803, in the twelve months before the panic of 1873. In 1882, the immigration was 788,- 992, a total which has never since been equalled, and nearly one third of that year's immigrants were Germans, the most useful of all our foreign popula- tion. 1 New York Chamber of Commerce, Annual Report, 1880-81, p. 99. 62 American Finance [1880 This rapid interior development gave legitimate opportunity for extension of the transportation in- dustry, and prompt use was made of it. Unfortu- nately, the spirit of speculation which pervaded all other markets governed the railway market also, and though it served at the time only to emphasize the seemingly irresistible movement of prosperity, its permanent results were mischievous in the extreme, and will be found playing an important part in episodes which we shall review later. The seeds of so many future disasters to this important industry were sown in the resumption period that it will be advisable to notvce here exactly what happened at this epoch of its history. The performances of 1868 in the railway market were not, to be sure, repeated. The open robbery, the fraudulent stock issues, and the judicial corruption which marked the earlier history of the Erie, for instance, had disappeared with the other appurtenances of the vulgar inflation period. They were replaced, however, by another form of plunder on a larger scale. The combination of scattered railways, covering half a dozen interior States, into systems under single managements, was a normal and necessary outgrowth of the new expan- sion of the West. In many instances it was wisely and prudently managed. But with the prevalent spirit of speculation, it gave almost boundless oppor- tunities to shrewd and unscrupulous capitalists with one hand on the Western railway coalitions and the other in the stock market. Most unfortunately for the transportation indus- try, the leader in the movement was Jay Gould, whose 1880] Gould and his Methods 63 disreputable record in the railway and gold markets of the inflation period made his appearance in the field after resumption sufficiently ominous. Few properties on which this man laid his hand escaped ruin in the end. He mastered more completely than any other promoter in our history the art of buying worthless railways for a song, selling them at fancy figures to a solvent corporation under his own control, and then so straining the credit and manipulating the books of the amalgamated com- pany as to secure his own safe retreat through the stock market. He was not a builder, he was a de- stroyer, and the truth of this statement may be easily demonstrated by tracing out the subsequent history of the corporations which he got into his clutches. That Gould had a genius for making combinations is unquestionable ; but in almost every instance the Wabash Railway, the Union Pacific, the Missouri Pacific, and the elevated railways of New York City are notable examples he obtained this power by tempting other men to join him in a speculation for personal profit acquired through methods which sapped the financial resources of the properties con- cerned. In some properties, as with the Western Union Telegraph, he forced a reputable concern to admit him to partnership through the shrewd and daring use of a species of corporation blackmail, in which he was always an adept. His favorite method of operation was exemplified in the purchase of the Kansas Pacific in 1880 by the Union Pacific on the basis of new Union Pacific stock exchanged on equal terms for shares of the smaller company, notwith- 64 . . A merican Finance tl880 standing the fact that Kansas Pacific stock was earn- ing nothing while Union Pacific was earning and pay- ing six per cent, per annum. Gould and his confed- erates of course played this particular game through the stock market, where it was easily possible for any one aware of the purposes of the two companies to buy Kansas Pacific stock at nominal figures and sell it out in the advance accompanying the announcement of the combination. At the close of 1880, it was possible to say that Jay Gould controlled every im- portant through railway route west and southwest of St. Louis, except the Atchison, Topeka, and Santa F and the Atlantic and Pacific. 1 The oppor- tunities for mischief of this kind, with such power in the hands of such a man, were almost unlimited. The reckoning for all this chapter of railway plunder came in 1893, when the extraordinary list of railway bankruptcies cannot easily be explained without tracing the history of the companies back to 1880. For other companies were bound to imi- tate the methods of this arch-plotter; going so far, in one notorious instance, as to sell to share- holders a new issue of six-per-cent. thirty-year bonds at twenty cents on the dollar, when the shares themselves were selling between 80 and par. Yet the extent to which all these companies continued to prosper and profit under this load of improperly incurred liabilities was perhaps the strongest of all testimony to the soundness of the trade revival. The Chicago, Rock Island, and Pacific company, for 1 instance, doubled its stock in 1880 through a " scrip 1 New_ Yoijc Financial Chronicle, January 8, l88l. i860] Politics of Resumption Year 65 dividend " of one hundred per cent., and continued to pay seven per cent, per annum on its doubled stock; the Louisville and Nashville paid six, after a similar increase ; the Chicago, Burlington, and Quincy, after a twenty-per-cent. " stock dividend," paid eight per cent. Actual increase in the total stock and bonds of railways in the United States, during 1880, was $524,411,843 ; but net earnings increased no less than $39,000,000.' What was true of railway profits was true also in other lines of trade, and 1880 was undoubtedly the most prosperous year of the generation. This may be fairly judged by that faithful index, the record of business failures. In 1878, there were 10,478 such commercial deaths; in 1880, there were only 4735. The liabilities involved fell from $234,383,- ooo in 1878 to $65,752,000 in 1880.* The people were contented, employment was abundant, and the industrial agitation of the preceding years had ap- parently disappeared. No one who has followed thoughtfully the influ- ence of trade conditions on the sentiment of voters, as already reviewed in our study of 1866, of 1874, and of 1878, will doubt what was the reasonable political expectation after the trade revival of 1879 and 1880. If the elections of 1879 nac ^ been held in June, it is doubtful what the verdict would have been. Resumption was then denounced in many quarters as a failure. The best financial plea that the Ohio Republicans could put forward, in their 1 Poor's Manual of Railroads, 1880. * Dun's Review, annual tables. 66 American Finance convention platform of May 28th, was the saving of interest charges through the Administration's re- funding operations. On June 4th, the Democrats of that State retorted by demanding " the full restora- tion of silver ... as a money metal," and " the gradual substitution of Treasury notes for national bank currency," and by nominating for Governor Thomas Ewing, the author of the bill of 1877 to repeal the Resumption Act. This attitude was imitated, to a greater or less extent, by the op- position party in other Western States. It affected even the East. On July 1st, the Democrats of Maine declared for " the free and unlimited coinage of sil- ver" ; as late as July i6th, the Pennsylvania Demo- crats adopted a platform framed to suit anybody and mean anything on the currency. But the situation, long before election day, was wholly reversed. By the early autumn months, the Administration could point out results following specie resumption even larger than what had been promised in advance, a very unusual advantage. In 1878, the party had lost heavily in many Western constituencies ; mainly, as we have seen, because of the low price of grain. In 1879, election day came at the very climax of a violent rise in agricultural prices, paid for the largest crops ever produced in the United States. Naturally, the autumn party declarations changed their tone along with the rapidly changing business outlook. The proclama- tions of Republican conventions began to strike a note of triumph. " We congratulate our fellow- citizens upon the restoration of confidence and the 18791 The Fall Elections 67 revival of business," were the words in which the Massachusetts convention of September i6th intro- duced its eulogy of the Administration. ' The suc- cessful resumption of specie payments followed by returning national prosperity," was the theme of the New York Republican declaration on September 2d. As in the preceding year, so in 1879, tne autumn Democratic conventions in the East were forced to a sullen echo of this rejoicing. 1 There was an occasional effort, such as that of the New York State Democratic convention of Septem- ber nth, to divert the issue into condemnation of the Secretary's " speculative methods," " question- able favoritism " to particular institutions, and " extravagance " in refunding. In the West, the opposition, engaged in the same losing fight against the odds of a great harvest and a profitable grain market, declared that the Treasury's achievement was a stroke of luck. " Now that resumption is a success," Secretary Sherman himself remarked in a campaign speech, " Democrats say the Republican party did not bring it about, but that Providence has done it; that bountiful crops here and bad crops in Europe have been the cause of all the prosperity that has come since resumption." * As we have seen, there was more or less truth in this allegation. But the public mind does not trouble it self with such subtleties ; it rewards or punishes, usu ally, on a strict basis of post-hoc reasoning, and in the vote of 1879 ^ recognized properly enough the 1 Massachusetts Democratic convention, October 7, 1879. Speech at Cooper Union, New York, October 27, 1879. 68 American Finance n879 really great achievement of the Administration. The three political battle-grounds of the year were Maine, Ohio, and New York, in each of which States a Governor was to be elected. Maine led off in September with a Republican plurality 6000 greater than in 1878. Ewing was beaten in Ohio by a plurality of 17,129, the Republican plurality of the year before having been only 3154. In New York State the opposition party had already split up into factions, and Cornell was elected by the sweeping plurality of 42,777, the largest Republican majority in the State since 1872. Meantime the Western States, which had gone quite uniformly against the Administration in 1878, made a similar response. In Michigan, one of the largest winter- wheat-producing States, a fusion of Democrats and Greenbackers, whose votes combined would in the previous year have carried the State by 25,000, was squarely beaten in November, 1879, by a Republi- can majority of 6043. I n Iowa, the corn-growing State, the Administration majority increased over 1878 by 14,221 votes. The Administration's victory was complete. After five years of almost uninterrupted contest over the standard of value, the battle was ended. This fact was tacitly conceded in the Presidential platforms of both parties during the summer of 1880. On the 6th of June the Republican National Convention at Chicago endorsed in the most unqualified language the financial achievement of the Hayes Administra- tion. Both the Stanley Matthews wing of Repub- licanism and the timid jugglers with the issue in the 1880] The Presidential Campaign 69 Western Republican conventions of 1878 and 1879 were repudiated; there was not inserted in the party's Chicago platform of 1880 a single word to favor even silver coinage. Instead, appeal was made in behalf of a party which had " raised the value of our paper currency," " restored upon a solid basis payment in coin for all national obligations," and " lifted the credit of the nation." No protest was made against these declarations, even by those un- lucky Republicans who had sustained the Congres- sional resolution, two years before, to pay the Government bonds in silver, and who had urged repeal of the Resumption Act. Still more signifi- cant was the platform of the Democratic party at Cincinnati, three weeks later: whose only declara- tion on the currency was a plank for " honest money, consisting of gold and silver, and paper convertible into coin on demand ; the strict maintenance of the public faith." In short, what the Hayes Adminis- tration had achieved, the Administration party, reasonably enough, appropriated to its own advan- tage, and the opposition could not contest its right to do so. Except for the disputed claim involved in the 1876 election, the party had small reason to appre- hend the national vote of November, 1880. The event proved even this misgiving to have been ex- aggerated. But for this same clouded title, President Hayes would logically have sought renomination, and would have deserved it. When Mr. Hayes re- fused to submit his name, there seemed to be some probability that Secretary Sherman's services would 70 American Finance [1880 be recognized by the nomination. But there was an instinctive distrust of Mr. Sherman in his own party, which can only be explained by his record as a politi- cal opportunist in the years before his Cabinet career. Those who did not question his sincerity doubted his stability a doubt not wholly unwarranted by his repeated change of front before what seemed to be the ruling popular sentiment. There was, moreover, an equally instinctive feeling that the nominee of the Chicago convention would certainly be the winner at the polls in November. This conviction always leads to a sharp convention struggle. Into the de- tails of the very singular preliminary contest at Chicago it is needless to enter here. Only on the thirty-sixth convention ballot was the deadlock be- tween the adherents of Secretary Sherman, of ex- President Grant, and of Mr. James G. Elaine broken by concentration upon General Garfield of nearly all delegates, except the Grant contingent. At Cincinnati, three weeks later, the National Democratic convention was a gathering as tame as the Chicago convention had been exciting. The rank and file were full enough of confidence, but the party's experienced leaders were well aware that with industrial contentment on all sides their case was hopeless. The manner in which a candidate manoeuvres for the nomination, or his friends in his behalf, is governed wholly by the prospect of success. For nomination and defeat, especially if the defeat be overwhelming, commonly lead in the United States to political oblivion. In the party's National Convention of 1868, with a somewhat parallel situa- 1880] Predictions for the Future 71 tion, nearly all of the shrewdest Democratic leaders avoided nomination, and Horatio Seymour was eventually forced to take it against his will. The case of 1880 was similar. The party's strongest candidates were named to the Convention in a per- functory way, there was little or no contest, and on the second ballot General Hancock, who with his purely military record had nothing to lose through a political defeat, was readily placed in nomination. The result of the November ballots amply justified such misgivings. Against the 185 electoral votes awarded to Hayes in 1876, Garfield in 1880 captured 214. Tilden, in 1876, obtained on popular vote a plurality over Hayes, even by the Republican count, of 252,224; Garfield's plurality over Hancock, in 1880, was 9464. The party whose most sagacious leaders had fought and won the resumption battle seemed, in brief, to be surely seated in the control of public matters, from which the panic of 1873 and the resultant trade stagnation had so nearly banished it. But the prob- lem of the currency remained. The silver question was not the only cloud on the party's horizon. The problem of resumption had been solved for 1880, and for many subsequent years, by a happy accident of nature. Far-sighted public men recognized, how- ever, even at the climax of the party triumph of 1880, that the system on which resumption had been founded still left the national finances at the mercy of future commercial accidents. In almost the last official papers of the Hayes Administration occur two declarations very remarkable for their positive 72 American Finance contradiction of one another. In his annual Treas- ury report of December 6, 1880, Secretary Sherman remarked: " United States notes are now, in form, security, and convenience, the best circulating medium known." ' In his message to Congress on the same day, President Hayes declared : " The retirement from circulation of United States notes is a step to be taken in our progress towards a safe and stable currency, which should be accepted as the policy and duty of the Government and the in- terest and security of the people." The President, in short, condemned as unsafe and mischievous a currency which his financial minister, enjoying the full personal confidence of the President,* declared to be safe, satisfactory, and worthy of perpetuation. The incident was sufficiently singular; one of the (wo responsible leaders in the financial reform of 1879 must have been mistaken. We shall discover, before our study of the ensuing period is completed, which of the two was right. 1 Annual Treat. Rep., 1880, p. xiv. * Recollection* , ii., p. 808. CHAPTER IV THE SILVER PROBLEM A LTHOUGH President Hayes and his Secretary l\ of the Treasury differed radically in their opinion of the legal tenders, they were agreed, at the close of the Administration, in their judgment regarding compulsory coinage of silver dollars. This was the more noteworthy, in view of Mr. Sherman's expressed disapproval of the President's veto mes- sage of 1 878. But the Secretary had begun to change his own mind, even before the year was over. When the Act of 1878 was passed, Mr. Sherman held that the Senate amendments " seemed to remove all serious objections to the measure." ' A few months later, he took a very different view. He began by suggesting compromises, recommending, first, " the addition of one tenth or one eighth to the thickness of the silver dollar,"' a singular proposition to make on a steadily declining silver market, and one for which, curiously enough, he obtained the Presi- dent's approval. 1 Congress having paid no attention to this proposition, the Secretary made a still more 1 Recollections, ii., p. 623. * Treas. Rep., 1878, p. xvi. 'President Hayes, Annual Message, December 6, 1880. 73 74 American Finance definite appeal for the " importance of further limit- ing the coinage of the silver dollar. ' ' ' But the Law of 1 878 was left in force, and so rapidly now did the Secretary's misgivings deepen, that in the summer of 1880 he privately declared that " the silver law threatens to produce within a year or so a single silver standard. ... I could at any moment, by issuing silver freely, bring a crisis." * Let us see what was the reason for this remarkably pessimistic judgment, at the very time when outside trade was moving towards the high tide of prosper- ity. When President Hayes vetoed the Silver Act of 1878, he expressed his judgment that circulation of a dollar worth intrinsically less than the gold dollar would sooner or later " put an end to the re- ceipt of the revenue in gold," and thus deprive the Government of the means of paying its gold obliga- tions.* It was this objection to the law which presently turned out to be the matter of serious con- cern. The Silver Coinage Act had been only a very short time in operation before the President's predic- tion was confirmed by the movement of events. The legal-tender notes were redeemable in coin, and since the Resumption Act was passed when the only authorized United States coin, except the trade dollar, was gold, it was quite universally conceded that gold redemption was peremptory. Even the Congressional resolution of January, 1878, which declared for silver payment on the bonds, had made 1 Treas. Hep., 1879, P- xiv. ; 1878, p. xv. * Letter to Janies A. Garfield, July 19, 1880. ' Veto Message, February 28, 1878. 1880] Silver Dollars not Wanted 75 no such suggestion regarding the legal-tender notes. Being redeemable in gold, the notes could not de- preciate so long as the Treasury had the power and means of providing gold for such redemption. They therefore circulated freely, and were not only used for banking purposes in the cities, but were absorbed in the every-day interior exchanges, being easily portable and issued in convenient denominations. But the silver dollars established by the Law of 1878 stood on a different basis. To begin with, it developed almost immediately that the people did not want this heavy coin for their every-day change. If any kind of currency is needed constantly by the customers of a bank, it is the business of the bank to keep that currency on hand. But if its customers do not want a given kind of currency, and ask for something different, the bank will necessarily try to pass over to other institutions the currency not in request among its depositors. This is exactly what occurred with the silver dollars throughout the United States. City and country trade alike ob- jected to settlements in the silver dollars. At the time, the legal tenders forwarded from the East were sufficient as a basis for trade exchanges ; the silver dollars were not necessary, as they might have been with materially larger trade. Every bank of deposit, therefore, passed them along at the earliest opportunity to its neighbor. Eventually, as Presi- dent Hayes had predicted in his veto message, silver began to fill the channels of public revenue, which are the final outlet for a superfluous or unpopular currency. As early as 1880, it had proved to be im- 76 American Finance tieeo possible to keep in circulation more than thirty-five per cent, of the dollars coined. 1 Now it is true that what the Treasury receives in revenue whether paper, gold, or silver it can pay out again for public expenses. If the silver dollars would not circulate in the interior, they could be forced into circulation at the large Eastern disbursing centres, especially at New York, where the National Government's monthly expenditure at the time ran as high as twenty to thirty millions. But for a very interesting reason, this outlet was virtually blocked. The New York Sub-Treasury, it will be recalled, was a member of the Clearing-House of the New York Associated Banks. On November 12, 1878, when the Clearing-House admitted the Sub-Treasury to membership, and arranged for the free exchange of United States notes and gold, it formally resolved to " prohibit payment of balances at the Clearing- House in silver certificates, or in silver dollars, ex- cept as subsidiary coin, in small sums." * To this condition the Treasury authorities had raised no objection.* So long as the silver circulation was small, and the return of the silver coin from interior circu- lation had not yet become active, the New York Clearing-House rule was regarded as a mere rou- tine banking arrangement. When, however, sil- ver dollars began to crowd the channels of public 1 Secretary Sherman, Treat. Rep., 1880, p. xviii. * Specie Resumption, p. 401. 1 Sherman to George S. Coe, November 13, 1878 ; Specie Resump- tion, p. 403. 1882] Silver Bullion Depreciates 77 revenue, the Treasury's inability to get rid of its silver through the Clearing-House became a matter of considerable moment. Its stock of legal tenders was already very low, and except for the legal- tender notes, gold was the only medium for these New York payments. As a result, the silver surplus in the Treasury increased during the early months of 1880 with great rapidity, while its surplus gold fund, which had been materially enlarged during the harvest movement of the previous autumn, decreased even faster. With the Treasury's mass of gold ob- ligations, this was a serious sign of danger. This policy of the New York Clearing-House came in for a round of angry denunciation on the floor of Congress. It was declared to be a conspiracy of Eastern bankers, designed, first, to discredit the silver currency, and second, to get the advantage of the Treasury. It was formally proscribed in July, 1882, when the twenty-year charters of the national banks, about to expire under the banking law, were renewed by Congress. In granting extension of these charters, Congress added the positive stipula- tion that " no national banking association shall be a member of any clearing-house in which such [silver] certificates shall not be received in settlement of clearing-house balances." In all this controversy, the New York banks seemed to be on the defensive. Let us see, how- ever, what was their actual motive. The New York banks perform for the United States the office which the London banks perform for England ; they man- age the country's settlements on foreign exchange 78 American Finance and they act both as depositories and remitters of funds for the interior. We have seen that the in- terior banks and their customers did not wish the silver currency; silver dollars were therefore super- fluous in New York reserves for their inland busi- ness. But, on the other hand, silver dollars were useless, except at a heavy discount, for settlements in foreign exchange. Had the silver dollars, like the legal tenders, being convertible at the Treasury into gold, the problem would have been somewhat altered ; but they were not thus convertible. 1 If the silver dollar's bullion value had advanced to equa- lity with the gold dollar, either coin might possibly have been used for remittance against bankers' ex- change. But there was no such advance. The pur- chase of two million dollars' worth of silver bullion monthly did indeed temporarily raise the price of silver. The rise, however, was only slight. There was an instant increase in the output of the silver mines, production in 1878 rising four million ounces over the previous year in the United States and eleven million in the world at large. India and China, which had absorbed 17,000,000 silver from the London export market in 1877, took in the next year only 5,842,000.* Even without allowing for the sales of old coin by the German Government, the new demand for coinage purposes by the United States Treasury was more than offset by these plain commercial factors. 1 Secretary Sherman, letter to President of New Orleans Clearing* House, December 10, 1878 ; Specie Resumption, p. 420. 1 Pixley & Abell, annual London tables. 1880] Clearing-House Rule Revoked 79 These influences, it may be observed, were con- tinuous; export of silver to the East never again reached the total of 1877, and within twelve years the world's annual product had exactly doubled. 1 Even in 1878, the average intrinsic value of the silver dollar on the bullion market was barely eighty- nine cents; in 1879, it was I GSS than eighty-seven." The silver coin was unavailable, therefore, for settle- ments in foreign exchange, except at a discount of twelve per cent, or more. It was rejected from in- terior circulation. In the event of a year of dull interior trade, it was reasonably certain, first that the surplus silver currency of the interior would heap up at New York City, and second, that gold ship- ments to Europe would grow heavy. If to this double movement were to be added Government disbursements wholly or chiefly in silver dollars, the time must eventually come when all the bank exchanges at New York would be conducted in silver coin. That this was no idle fear, but a correct view of the situation, the experience with another form of redundant currency proved conclusively in 1892. But the inevitable result of such conversion of the New York banking reserve into silver coin worth in- trinsically less than gold would be that gold for pur- poses of foreign settlements could be had only at a premium. In other words, the entire currency would depreciate. It was to avert this possibility that the Clearing-House framed its rule of 1878. It was a most unusual move, and it could hardly in the 1 U. S. Mint, Annual Reports. * Ibid. 8o American Finance [1882 end have prevented a fall to the silver standard, if the country had remained unable to absorb the two millions' monthly coinage. At New York, never- theless, it was regarded as a measure of self-preser- vation, and this was what Secretary Sherman meant when he said in 1880 that by issuing silver freely he could at any time bring on a crisis. Both the banks and the Treasury recognized the nature of the situation, even in 1882. When the New York Clearing- House, after the passage of the law for- bidding national banks to co-operate in a clearing- house which excluded silver, resolved that the institution's rules " be amended so far as they con- flict with section 12 of the Act of July 12, 1882," not only did no bank take advantage of the op. portunity to tender silver for its balances, but the Treasury itself, in its transactions with the Clearing-House, pursued exactly the same policy. 1 It pursued it, notwithstanding the fact that the re- turn of silver currency from circulation, in the nine months after the harvest season of 1879, increased the Government's silver surplus eleven million dol- lars, while its gold reserve, which had to be drawn upon for Eastern settlements, declined from $157,- 000,000 to $i 1 5,000,000. But the crisis predicted by Mr. Sherman did not come, and we shall readily discover why. The trouble in the summer of 1880 arose partly from the fact that the new silver issues were in excess of the needs of interior trade. But a money supply which is sufficient, or even superfluous, for the trade ex- 1 Treasurer Wyman, Treas. Ref. t I&84, p. 414. 1880] Silver Currency Circulated 81 changes of one season, may be only large enough in another, when the volume of trade has greatly ex- panded. Something like this happened in the au- tumn of 1880, when interior trade, as we have seen, rose to unprecedented volume. Not only did the West and South retain in permanent circulation a large part of the legal-tender notes shipped to them in the harvest movement of 1879, ^ ut they now drew heavily on the East for fresh remittances. Again, as is usual under such conditions, the Eastern banks drew gold from Europe and shipped their own legal tenders inland. But the absorption of Government notes in the two preceding active seasons had largely drained the East of this form of currency. During the autumn of 1880, the legal-tender reserve of the New York banks fell to the very low aggregate of $i i ,989,000, only half as much as they had held a year before. 1 Their gold holdings, on the other hand, were very large, and they now applied to the Treas- ury, as they had done in 1879, to exchange its own surplus of legal-tender notes for gold. Meantime, however, the very causes which had drained off the legal tenders from the Eastern banks had also reduced the Treasury's supply to small pro- portions. At the close of 1880 the Government held less of the legal tenders even than the New York banks. This was the opportunity for relieving the Treasury's stock of idle silver, and it was promptly utilized. In September, 1880, Secretary Sherman offered, in return for deposit of gold at seaboard 1 Weekly statement, New York Associated Banks, November 6, 1880. 8 2 American Finance cities, to supply exchange on interior sub-treasuries, payable at those points in silver coin. The offer, under the circumstances, was very generally ac- cepted. The silver shipments, it is true, were ex- pensive to the Government, and the coin, even when delivered, would not stay in circulation, but was promptly tendered again for silver certificates. ' This was interesting evidence, at the height of the interior demand for currency, that silver dollars were un- popular, even in quarters where the silver advocates had pictured the trade as eager for that form of cur- rency. The silver certificates, under the Law of 1878, could not be issued in denominations smaller than ten dollars ; nevertheless, these bills were obviously preferred to the coin itself by the interior trade. But even in this form, the operation served the Treasury's purposes. During the twelve months following the issue of the circular, this arrangement with the Eastern banks put $23, 560,000 of the Gov- ernment's silver surplus into circulation from the sub-treasuries of New Orleans, St. Louis, Cincinnati, and Chicago, and replaced it with imported gold.* In the five last months of 1880 almost immediately after Mr. Sherman's despondent prophecy, the silver surplus in the Treasury fell from $46,256,000 to $18,246,000, and its surplus gold fund rose from $115,000,000 to $150,000,000. The danger of a sil- ver standard had apparently disappeared. I have gone thus fully into this introductory silver- coinage episode, at the risk of wearying the reader 1 Treasurer Gilfillan, Annual Trtas. Rtp., 1881, p. 439. ' Ibid., p. 436. 1880] " Turn of the Tide" 83 with particulars, because no chapter of our financial history is so widely misunderstood. The fact that the Eastern banks in 1878 and 1879 virtually refused to accept silver dollars from the Treasury, whereas in 1880 they paid gold for them, is often cited as proof that the Clearing-House rule against silver payments was unwarranted. From the fact that the interior trade absorbed the silver currency in the autumn of 1880, it has been inferred that only the op- position of the banks prevented its ready interior circulation a year before. The reader will now, I think, be able to understand the reason for both these seeming discrepancies. The silver currency was superfluous in the spring of 1880; therefore it was thrown back upon the Treasury and the East. It was not superfluous in the winter of 1880, be- cause the volume of trade had expanded even more rapidly than the increase in the currency. Ob- viously, the question of the future was, whether interior trade would continue to expand with suffi- cient uniformity to absorb the $25,000,000 annual silver coinage of the future, as it had apparently absorbed the coinage of 1880. There were some signs of a change in the move- ment of prosperity, as early as 1881. Most people, in succeeding years, were accustomed to date back the " turn of the tide " to the assassination of Presi- dent Garfield on July 2, 1881. Undoubtedly this event was a shock to the financial markets ; particu- larly to markets in which excited speculation for the rise had cut so large a figure as it did in those of 1880 and 1 88 1. But Gar field's death was not a de- 84 American Finance cisive influence on the situation; it was in fact a coincidence rather than a cause. A far more per- manent influence was exerted by the destructive drought of 1 88 1 in the entire harvest district of the United States. The country's wheat crop of that year turned out only three fourths as large as the crop of 1880; its corn crop was the smallest since 1874.' To the farmers, there was an unexpected com- pensation for this shortage ; a wet harvest season in England and on the European continent cut down the wheat yield of the foreign producers also. Foreign and home demand for grain was very heavy, and what could be spared for export was sold at high prices. According to the Agricultural Bureau's estimate, the total market value of the year's American grain harvest, small as its volume was, exceeded the value even of the great crop of 1880. But in two other directions, the harvest short- age of 1 88 1 had more unpleasant results. The rail- ways suffered severely from the decrease of grain supplies on which they relied for traffic. Their freight earnings, in the ensuing year, decreased no less than $45,600,000.' At the same time, the scarcity of grain for export cut down the country's export trade. This happened at a time when im- ports of foreign merchandise had been excessively stimulated by the protracted speculation for the rise in almost every market, and, as a consequence, the excess of exports over imports, which in the twelve 1 Annual Reports, U. S. Bureau of Agriculture. 1 Poor's Manual of Railroads, 1882. 1882] Reaction on the Markets 8:5 months ending with June, 1881, had reached the enormous sum of $259,700,000, fell in the next twelve months to less than $26,000,000. By the close of 1 88 1, the foreign exchanges, so long held down in favor of the United States, began to move against us. By March, 1882, heavy export of gold began; before the close of the fiscal year, in June, $32,500,000 had been shipped, the largest export of gold since 1876. This decided change in foreign trade meant, of course, that the country's command over foreign capital was lessened. But the impetus to industrial prosperity, in the two preceding years, had been so great that the reaction was slow in developing. What was lost in foreign capital seemed to be made up in home support, and the earlier markets of 1882 appeared to reflect actually increased prosperity. So far as prices were an index to the situation, the average level of 1882, on all the American commod- ity markets, was the highest in half a dozen years. 1 Unfortunately, these very commodity prices were fixed and sustained by the use of credit on a highly speculative basis. " It could not be regarded as a favorable circumstance," one contemporary critic wrote, in reviewing 1882, " that so many parties in various kinds of business, and even professional men, were engaged in carrying stocks, produce, cotton, petroleum, and so forth, on margin." * Before the year was half over a movement of liquidation was ap- parent. It was disguised, as such operations always 1 U. S. Senate Report on Prices and Wages, p. 9. * New York Financial Chronicle, January 6, 1883. 86 American Finance (1862 are, but the facts might easily be inferred from actual results. The investment markets were then, as usual, typical of the general situation. During a good part of the year, the strongest capitalists and speculators were kept busy denying reports that they had been selling securities. Most of them, like Mr. William H. Vanderbilt, answered the accusation by liberal pre- dictions of prices still higher than the inflated values lately prevalent. Mr. Jay Gould evolved the charac- teristic expedient of exhibiting to a select committee the contents of his safe, comprising $53,000,000 rail- way and telegraph share certificates made out in his own name. This, too, was designed to prove that the owner of the shares was not a seller. Nothing, however, to an experienced eye, could better have proved the existence of liquidation than these care- ful efforts to disprove it. As a matter of fact, all of the markets were moving downward by the middle of 1882. In the produce markets, the movement was emphatic, and it reflected the very patent fact that the United States was now losing the singular advantage which it had for three years enjoyed in the foreign trade. The American grain harvest of 1882 was only a trifle smaller than the great harvest of 1880. But in 1 880 the European crops ran short, whereas in 1882 the foreign states produced the largest total wheat crop in their history. 1 For the first time since 1878, the American farmer met urgent competition in the export market, and the price of wheat, which in May, 1882, had touched $1.40 per bushel in Chicago, fell in December to 91$ cents. 1 Liverpool Corn- Trade News estimate* 1882J Surplus of Revenue 87 The cotton crop met with an exactly similar experi- ence, the American yield of 1882 being by far the largest on record, in the face of flagging demand from the foreign cotton-spinners. 1 In almost every staple market, the course of events was identical ; notably in the iron and steel trade, where production and speculation had been forced to the highest pitch at the moment when, as a result of i88i's unsatisfac- tory earnings, orders for new railway construction slackened.* In short, production in the majority of industries had outrun consumption; a readjust- ment of prices was inevitable, and producers who were slowest to reduce their prices had to make in the end the largest sacrifice. Meantime the wind was rushing out of the balloon of American specula- tion. The bearing of this altered trade situation on the silver-currency problem we shall presently notice. For the time, the currency problem was in a con- siderable measure obscured by the question of the surplus revenue. The enormous importations of foreign merchandise, which in 1882 were larger by sixty per cent, than those of 1879, an< * the conse- quent increase of the customs, had now intro- duced that unique problem of American finance, a revenue too large to be conveniently disposed of. The surplus of public revenue over expenditure was $6,879,300 in the fiscal year 1879 5 m ^82 it was $145,543,810. Now it is true that the funded debt 1 Ellison's Annual Cotton Review, January, 1883. ' Annual Reports, American Iron and Steel Association, 1882, I8S3. 88 American Finance of the United States, even after the large redemp- tion of bonds in the ten preceding years, remained at a billion and a half of dollars, and that nearly one third of these outstanding bonds were redeemable at par at the pleasure of the Government. 1 But the surplus revenue, if continued at the annual rate of 1882, would extinguish all this redeemable debt within three years, leaving no outlet for the surplus except purchase of unmatured bonds at whatever price they commanded in the market, or enormous increase in expenditure." The Administration reasoned that such an out- look pointed distinctly to reduction of the taxes, and to that end the President and the Secretary of the Treasury earnestly urged on Congress a revision of the customs tariff. ' President Arthur went beyond the mere question of the surplus, and submitted a strong plea for the relief of " industry and enterprise from the pressure of unnecessary taxation." Un- fortunately for this apparently reasonable advice, the customs taxes were protective, and the Republican party, then in power in all branches of the Govern- ment, was committed to protection. Rather than reduce the surplus revenue, therefore, Congress began to spend it. Out of the forty-four millions increase in the annual Government expenditure, be- tween 1879 an d 1883, only a trifling part arose from 1 Secretary Folger, Treas. Rep., 1882, pp. xxx., xxxi. ' President Arthur, Annual Messages, December 6, 1881, Decem- ber 4, 1882 ; Secretary Folger, Annual Treas. Rep. t 1882, pp. xxvii., xxix. 1882] Extravagance of Congress 89 larger outlay for the Civil List, the Federal arma- ment, or the Indians. In 1872, when reporting the session's appropriation bill, General Garfield had de- clared in the House of Representatives: " We may reasonably expect that the expenditures for pensions will hereafter steadily decrease, unless our legisla- tion should be unwarrantably extravagant." ' And in fact, between 1872 and 1878 the annual expendi- ture of the Pension Bureau did decrease some seven millions. Now, however, the annual disbursement on that account increased from $27,137,019 in 1878 to $61,345,193 in 1882, and the new Congress, in its session during the spring of 1882, appropriated for pensions in the ensuing fiscal year no less a sum than $100,000,000. In similar spirit, these legis- lators had applied themselves to Federal outlay for river and harbor work. During previous ad- ministrations, such appropriations had ranged from $3>975>ooo in the session of 1870 to $8,201,700 in 1878. The budget began to rise, even before the Forty-seventh Congress, elected in 1880, came into power; but this body, once assembled, broke all records. In its first session, river and harbor ap- propriations reached the wholly unprecedented sum of $18,743,875. Angry criticism at this extrava- gance was already spreading in the press and in popular discussion, and the nature of the policy now pursued by Congress was powerfully illustrated by the veto episode of 1882. In August of that year, President Arthur refused his signature to the River 1 Congressional Globe, January 23. 1878. 90 American Finance (1882 and Harbor Bill, on the grounds of its unconstitu- tionally and unwarranted diversion of public funds. 1 Within twenty-four hours the bill was passed over this Presidential veto, and the majority of votes to override the veto came from Administration Congressmen. This incident happened at an unfortunate moment for the ruling party. Up to this time the annual elections had been influenced by the remarkable prosperity of the country, which served, as such con- ditions usually do, to sustain the popular approval of the party in power. Severe reactions of public sentiment are not unusual in the year after a Presi- dential victory; but the vote of November, 1881, had been decidedly favorable to the Republican party. Even in such States as Ohio, New Jersey, Iowa, Wisconsin, and Michigan, the dominant party had retained its advantage of 1880. We have seen, however, that the trade advantage was largely lost before the autumn of 1882. The fall in wheat and Cotton, however inevitable, had aroused a feeling of discontent in the West and South. In the East, the large gold exports and the irregular money market had embarrassed trade sufficiently to make the people willing to listen to criticism of public policy. When the action of Congress was as vulnerable to criticism as was that of the spring session of 1882, it is not surprising that the opposition party made the recent legislative extravagance the text of its campaign declarations. Partisan use of the " spoils " of 1880. and the very rash attempt of the Executive to control 1 Veto Message, August i, i88a. 1882] The Congressional Election* 9 1 the nomination for Governor of New York, were also called into public question ; but since Congres- sional elections were impending, the record of Con- gress itself naturally played the leading part. The Republicans themselves could not fail to recognize the importance of this issue. So peculiarly embar- rassing was the veto episode to the Administration party, that even the New York Republican State convention formally applauded the President's " courage in resisting the enactment of the River and Harbor Bill, which violated the accepted rules of constitutional power." ' This was hardly a serviceable "plank" for a Congressional campaign. Meantime the opposition not only assailed the extravagant expenditures, but demanded that the excessive revenue which made them possible should be cut down by remission of taxation. In short, the Administration party, no longer helped by seemingly unlimited prosperity, was clearly on the defensive, and the result was an over- whelming Republican defeat. A Republican plural- ity of twelve in the Forty-seventh Congress was turned in the Forty-eighth into a Democratic plural- ity of seventy-seven. Congressional delegations from States such as New York and Ohio, in which a large majority of the successful candidates in 1 880 had been Republicans, were returned in 1882 with an almost equally large majority of Democrats. Alonzo B. Cor- nell had been elected Governor in New York State in 1879 by a Republican plurality of 42,777; in 1882, Grover Cleveland was chosen Governor on the 1 September 21, 1883. 92 American Finance [1882 Democratic ticket by a plurality of 192,854. Robert E. Pattison, running for Governor of Pennsylvania on the Democratic ticket, carried that Republican stronghold by 40,202 plurality. In States as widely separated as Connecticut, Michigan, Kansas, Colo- rado, and California, the Democrats reversed majori- ties from the previous elections and carried their candidates for Governor into office. The tide of political reaction ran so high in Massachusetts that General B. F. Butler, who had captured the Demo- cratic nomination despite his inflationist record, was chosen Governor by a plurality of 13,949. This sweeping opposition victory was at once accepted as a verdict for revision of the revenue. It was publicly admitted, even by recognized friends of the protective system, that a " substantial reduc- tion of tariff duties " was " demanded, not by a mere indiscriminate popular clamor, but by the best conservative opinion of the country. " ' In Congress, however, there was a strong minority, determined to resist, by whatever means, any concession from the protective-tariff theory. This faction had so far anticipated the situation as to secure in May, 1882, the appointment of nine commissioners from civil life to investigate the entire question of the tariff, and to report its findings to Congress in December. The move was clever; for the President named a protectionist commission, with the president of the Wool Manufacturers' Association at its head,* and when Congress assembled in December, the com- 1 Report of Tariff Commission, 1882, i., p. 5. 8 Taussig, Tariff History of thtJJjnted States, pp. 230-333. 1882] Tariff Revision Demanded 93 mission's voluminous report and recommended bill were ready. The commission's recommendations were not, however, altogether what its creators had expected. According to its own statement to Congress, the commission's bill aimed at an average reduction in tariff rates of not less than twenty per cent. 1 This proposed reduction, as the president of the commis- sion afterwards declared, was an unwilling " conces- sion to public sentiment," * and the uncompromising faction did some singular work with it in Congress. The commission bill was either blockaded or radi- cally altered, first in one house and then, on a different basis, in the other. Eventually the House and Senate disagreed, whereupon a conference com- mittee, after a plan which later gained even more ce- lebrity, settled a compromise by raising duties higher than those proposed by either branch of Congress.* In the end, while numerous duties those on cloths especially were reduced, other and equally impor- tant tariffs, such as those on metal manufactures, were materially increased. Since it was doubtful if these conflicting changes in the import duties would reduce the revenue, Congress applied itself to the internal taxes. Under the Revenue Act of 1872, with its later amendments, manufactured cigars had been assessed six dollars per thousand, and had 1 Report of Tariff Commission, 1882, i., p. 6. * John L. Hayes in Bulletin of Wool Manufacturers, quoted in Taussig, p. 254. 1 W. R. Morrison, House of Representatives speech, March 3, 1883 ; J. B. Beck, U. S. Senate speech, March 2, 1883. 94 American Finance [1883 yielded $18,000,000 annually; the tax was now re- duced to three. On tobacco, the impost, which produced in 1882 $25,000,000, was cut down from sixteen cents a pound to eight. There has been a curious fatality in the coincidence of tariff revision, in this country, with trade reaction. The Tariff Acts of 1872, of 1883, of 1890, and of 1894, in every case accompanied or shortly preceded a period of serious commercial distress, and the coinci- dence has been plausibly used by opponents of revenue revision. Now it cannot well be questioned that the American practice of ripping up by whole- sale a complicated import tariff runs two very serious risks. It is pretty sure to derange at least one season's plans in the industries affected, and it is apt to make a bad miscalculation as to future pub- lic revenue. Of this second possibility, we shall find some very forcible examples in our review of 1890 and 1894. How far, if at all, these later meas- ures were a factor in the subsequent trade reactions, we shall then inquire. It has been very commonly asserted that the change of import duties during 1883 had such unfavorable influence. The Tariff Act became a law in March, 1883; public revenue decreased $50,000,000 in the twelve months ending with June, 1884, and something like $25,000,000 in the fiscal year 1885 ; and in 1884 the financial situa- tion reached a crisis. To those who opposed any change in the protective-tariff system, the inference was accordingly drawn, that the tariff changes caused the trade reaction. Yet the argument as applied to 1883 has absolutely 1883] Tariff and Revenue 95 no foundation. The reduction in revenue, to begin with, was no larger than the advocates of an altered tariff, including the Secretary of the Treasury, had originally recommended. 1 Under the Act of 1883, the revenue reached its lowest point in the fiscal year 1885 ; yet there was a surplus revenue, even in that year, of $63,463,771 larger by thirty per cent, than the requirements of the Sinking Fund. The bulk of such reductions as were actually made by Congress came, as the framers of the Law of 1883 intended, in the excise schedules. The Adminis- tration had opposed reduction of these taxes, which were a charge, not on necessities but on luxuries, and the change was nowhere seriously advocated in the electoral campaign of 1882." But Congress, under the influences already noticed, wholly ignored such well-known facts. Nothing can better prove the purpose of the legislators than the original title of the Law of 1883: " a bill to reduce internal taxation." We have seen already that taxes on tobacco manufac- tures were reduced forty to fifty per cent. ; in the preceding fiscal year they had yielded $47,000,000 revenue. Taxes on bank deposits, capital, and checks, and on other miscellaneous objects, had hitherto yielded annually upwards of $10,000,000; these taxes were abolished. Here, then, was $31,- 000,000 struck off deliberately, 1 without considering 1 Secretary Folger, Treas. Rep., 1882, p. xxix. 1 President Arthur, Annual Message, December 4, 1882 ; Secretary Folger, Treas. Rep., 1882, p. xxxi. Commissioner of Internal Revenue, Treat. Jtef., i88f, p. 73; 1884, p. 79. 96 American Finance the movement of the customs revenue. But the conclusive proof that changes in the import duties did not affect the fall in revenue is shown by the average rate imposed and collected before and after the Act of 1883. By the official record, average rate of duty actually collected during the fiscal year 1883 (less than four months of which came under the new tariff) was 42.45 per cent., whereas in 1885 the aver- age rate had risen to 45.86.' The financial troubles of 1884, then, did not in any respect arise from changes in the tariff. What did occasion the misgivings with which that year began is not at all difficult to discover. For the time had now arrived to test the question whether it was possible, with the existing supply of other forms of currency, to circulate twenty-five million new silver dollars annually. Even in 1882, the Treasury authorities .warned Congress that the seem- ing demand for silver in the interior was artificial and temporary, and that, despite this demand, a slow but ominous displacement of the Treasury's gold with silver was already in progress.* Congress had replied only 'by its attempt to break down the prohibitory rule of the New York Clearing- House, and thus force the dollars into Eastern circulation. After the very general reactions in the markets of 1882, Ihe volume of interior trade decreased con- tinuously; a logical outcome, certainly, of the dis- 1 U. S. Bureau of Statistics, Annual Kef., 1892, p. Ixxvii. 'Secretary Folger, Treat. Rep., 1882, pp. xii., xiii ; Treasurer Gilfillan, ibid., pp. 365, 369. 1884] Financial Distress 97 covery that production had far outrun the imme- diate home and foreign demand. Genuine trade demand for money, in any country, is accurately measured by the bank exchanges of a season at the commercial centres. Now in 1881, these exchanges in the leading American cities were larger by nearly sixty per cent, than those of 1 879, and the decrease in 1882 was only slight. But total exchanges at the same points in 1883 decreased fourteen per cent, from 1882; in 1884, they fell off eighteen per cent. further. 1 While, therefore, the silver currency was increasing with unaltered regularity, opportunity for its employment was decreasing even more rapidly. The question as to the movement of silver coin, in default of continuous commercial expansion, was now answered very emphatically. In 1883, as in the spring of 1880, a silver surplus again began to pile up in the Treasury. Foreign exchange moved heavily against us. Europe not only bought from the United States the smallest amount of merchan- dise in five years, but it sold on the American markets as large a supply of f< reign goods as that of 1880, and sold in addition a heavy instalment of its American securities. In March, 1884, $12,200,- ooo gold was shipped to Europe; in April, $21,006,- ooo. Payment of gold in public revenue decreased rapidly; payment in silver as rapidly increased. The crisis foreshadowed in 1880 by Secretary Sher- man seemed to be imminent. The so-called panic of 1884, an immediate conse- quence of these disquieting developments, chiefly 1 New York Financial Chronicle, January 17, 1885. 98 American Finance [1884 affected the security markets. It was provoked, first, by the heavy liquidation of securities, already no- ticed, and by the embarrassment of several over-cap- italized railway companies; second, by uneasiness over the currency situation, which was decidedly em- phasized, in February, by the ill-judged hint of the local Treasury authorities that it might be deemed ad- visable to force out silver through the Treasury pay- ments at New York. 1 This rumor had an influence much like that of a similar Treasury rumor in the financial uneasiness nine years later. But the range of the resultant panic was not much wider than New York City, nor was the financial crisis similar in grav- ity to those of 1 873 and 1 893. Symptoms such as the hoarding of currency, causing a public premium on every form of money; the complete blockade of foreign and domestic exchange, the general run upon the savings-banks, the failure of sound deposi- tory institutions, and the temporary suspension of American industry, were witnessed in both the earlier and the later panic year; but there was nothing of the kind in 1884. Business in all departments of production was indeed seriously depressed, and re- sults unsatisfactory, as regards both volume of trade and prices.' But the manner in which the producing and mercantile communities endured the money- market strain proved pretty conclusively two facts: first, that the liquidating process, during the two preceding years, had been thorough; and second, that underneath the crumbling structure of specula* 1 New York Financial Chronicle, March I, 1884. ' New York Chamber of Commerce, Annual Rep,, 1884. 18841 The New York Panic 99 tion was a firm foundation of genuine and increased wealth. 1 The stock markets, however, passed in May, 1884, through an acute and very alarming convulsion ; led up to by the commercial depression, the flight of foreign capital, and the disordered Treasury finances, and immediately precipitated by the discovery of several vast financial frauds. Looking at 1884 in retrospect, it would seem that the financial com- munity for a day or two lost faith entirely in the honesty and credit of its members. It is no unusual incident for a group of swindlers and defaulters, who have escaped detection while their speculative " mar- gins " could be sustained, to be exposed with mer- ciless publicity when the markets break suddenly away from them, and the falling markets of the season found plenty of such ventures ripe for de- struction. But the 1884 disclosures were of a peculiar order. The theft of $3,185,000 of a New York City bank's securities by its president, without the least misgiving on the part of its officers or directors; the failure of a second-rate Wall Street firm for $16,000,000, with assets of $67,000; the ruin of a strong national bank through its president's connection with this firm, despite his knowledge of its fraudulent representations ' ; the suspension of another well-known institution through the notorious speculations of its president,* these were disquiet- ing developments enough, had they come separately 1 New York Financial Chronicle, January 3, 1885, p. 8. * Comptroller Cannon, Annual Treas. Rep.^ 1884, p. 157. p. 158. loo American Finance tie 84 and singly. But when it is considered that the per- formances of John C. Eno, Grant & Ward, the Marine Bank, and the Metropolitan Bank, all came to public knowledge within a single week and in the same community, the shock to financial confidence is not hard to understand. It resulted on the Stock Exchange, during a day or two, in what can only be described as a delirium of panic ; prices of standard dividend-paying shares collapsing, from a level already very low, fifteen to twenty per cent, in as many hours, while the rate for loans on call ran up as high as three per cent, a day. But the spasm was not continu- ous; the low level of security prices was touched within a very few weeks of the acute collapse. Even the sudden and very serious strain upon the money market was relieved by a contrivance virtu- ally introduced during the panic of 1873, whereby the Clearing-House issued to any bank in its mem- bership loan certificates, secured by the deposit of that bank's securities to a value greater by twenty- five per cent, than the certificates allotted, and receivable in lieu of cash in settlement of balances at the Clearing-House. Through this emergency device, banks whose cash reserves were impaired during the panic avoided actual suspension. Against deposit with the Clearing-House of sound commer- cial paper not at the moment marketable, they took out $24,91 5,000 of such loan certificates, thus tiding over the worst of the money-market crisis. 1 We shall encounter this noteworthy banking makeshift again, 1 Comptroller Cannon, Annual Treas. Rep. t 1884, pp. 139, 153. 1884] Fall in Agricultural Prices IOI under still more interesting circumstances, in our re. view of 1893. This New York panic in the spring was followed by a heavy fall in agricultural prices; partly occa- sioned, perhaps, by the disordered money markets, but chiefly by the immense increase of home and foreign production. The American grain crop of 1884 was larger even than that of 1882; the whole world's wheat production was twelve per cent, larger than the crop of 1878, under which, it will be remem- bered, prices had broken continuously. 1 In 1884, the price of wheat fell lower than in 1878; in other staple products, prices fell nearly to the level of the earlier year of depression. If, as had been argued in the debates of 1878, the fall in prices was caused by an insufficient currency, no such result ought to have been expected in 1884; for notwithstanding the gold shipments of the year, the total money supply in circulation in the United States had in- creased $425,000,000, or fifty per cent., since the resumption of specie payments.* The debaters of 1878 were not familiar, however, with the statistics of foreign grain production. Neces- sities of life can never, strictly speaking, be ' ' over-pro- duced," but they may be produced in such quantity that, in order to sell them all, new customers must be brought in by fixing a lower range of prices. The world's product of wheat, in 1884, was not only the largest in history, but it was not equalled again dur- ing the next half-dozen years.' The average price of 1 Liverpool Corn- Trade News estimates. Treat. ef., 1884. * Liverpool Corn- Trade News estimates. IO2 American Finance 11884 wheat in 1884, accordingly, was not only the lowest ever touched up to that time in American history, but it was also lower than any yearly average there- after until 1892.' Public authorities on agriculture flatly declared that there was no profit in raising wheat at the prices of 1884.* This was undoubtedly an exaggeration; but when a National Bureau of Agriculture published such a statement, it is not difficult to guess what must have been the feeling of the farmer. The Republican party went into the Presidential campaign of 1884 under this double handicap of acute financial depression in the East and unfavor- able agricultural markets in the West. It was bur- dened, in addition, with its failure to modify the tariff in the direction of lower duties a failure which drove into renewed opposition the element which won the election of 1882. The fact that, even against these odds, the Republican party actually came within 25,000 votes of a plurality on the whole country's popular vote of November, 1884, proves how powerful was the prestige gained through the achievement of resumption. As it turned out, how- ever, the party was defeated, the vote of New York State against Mr. Elaine turning the scales. The Democratic party thus obtained control of the National Administration, for the first time in twenty-four years. It inherited from its predecessor a very serious financial situation, the outcome of which, when President Cleveland took office in 1885, 1 U. S. Statistical Abstract, 1896, p. 293. * U. S. Department of Agriculture, Annual Ref., 1885, p. 348. 1884] The Silver Trouble Again 103 was extremely doubtful. The pessimism prevalent even in the Administration which relinquished office was frankly voiced in its final Treasury report. Through a curious irony of fortune, Hugh Mc- Culloch, whose own plan of resumption had been repudiated eighteen years before, was called again to the Treasury, in his old age and in the closing months of the Arthur Administration, to witness what seemed to be the undermining of the Sherman resumption plan. His view of the situation was wholly discouraging. " Silver certificates," he wrote in his report of December, 1884, " are taking the place of gold " ; "a panic or an adverse current of exchange might compel the use in ordinary pay- ments by the Treasury of the gold held for the re- demption of the United States notes, or the use of silver or silver certificates in the payment of its gold obligations." ! On one occcasion, the Treasury be- gan to force out silver through the Clearing-House.' Mr. McCulloch's gloomy forecast was confirmed by the new Executive. " Silver and silver certifi- cates have displaced and are now displacing gold," wrote the President-elect, early in 1885; adding that the part of the Treasury's gold reserve pledged for redemption of the legal tenders, " if not already encroached upon, is perilously near such encroach- ment." ' 1 Treat. Rep., 1884, p. xxxi. 1 Assistant-Treasurer Graves's reply to H. R. resolution, Feb. 10, 1885. * Grover Cleveland, letter to A. J. Warner and others, February 34, 1885. CHAPTER V THE SURPLUS REVENUE ALMOST the first act of the Cleveland Adminis- tration, in its management of the Treasury, suggested that Government finances were in imme- diate and serious straits. Its surplus gold reserve, by midsummer, 1885, was down to $115,000,000 hardly more than was held at the resumption of specie payments; this reserve was falling three or four millions every month, and the July interest- payments drew on it heavily. The Treasury's sur- plus of silver dollars meantime had risen by July to the unprecedented sum of $71,500,000, and was in- creasing two to three million dollars monthly. The recourse first adopted by the Treasury was an appeal to the New York banks for help. These institu- tions responded by turning over to the Treasury in July of 1885 some $5,915,000 gold from their own reserves, taking in place of it fractional silver coin, of which the Treasury happened then to have on hand an exceptionally large supply. ' As a precedent, this action was important ; as a permanent solution 1 New York Financial Chronicle, July 8 and July 25, 1885. 104 18851 Cleveland Administrations Plans 105 of the Treasury's difficulties, it was quite as fruitless then as the similar recourse was in 1893 and 1894. The silver, after being held by the New York Clearing- House for three or four months, as security for certificates issued to its owners and used in bank exchanges, was returned to the Treasury for legal tenders. 1 Fortunately, the new Administration did not base its subsequent operations on makeshifts such as this. What it did undertake was very interesting. It had been observed, in connection with the outflow of legal-tender currency to the interior during and after 1879, that bills in small denominations were most apt to stay in circulation. In the two years 1880 and 1 88 1, for instance, the Treasury paid out some $70,000,000 Government notes in one-, two-, and five-dollar bills. Against this outflow of small notes, only $46,000,000 was paid back to the Treasury, during the period, in notes of the same denomina- tions. On the other hand, the Treasury received in revenue during the same two years, in notes for one hundred dollars and upwards, four times as large a sum as it paid out.* I have already called attention to the automatic law under which a bank keeps on hand for permanent circulation the currency needed by its depositors for daily uses ; passing along, there- fore, in settlements with other banks or with the Treasury, such forms of currency as its depositors do not need. The failure of the small notes to re- turn from circulation had proved, therefore, that 1 New York Financial Chronicle, November 7, 1885. Tretu. Rep., 1881, p. 426. io6 American Finance such denominations could be kept in constant use. Nor is this preference hard to understand. Wages are paid in bills for five dollars or less; retail pur- chases rarely require exchange of anything larger than a ten-dollar bill. Very few people carry about with them currency in bills of one hundred or five hundred dollars, but every citizen is apt to have in his pocket-book a handful of paper money in the smaller denominations. The pocket-books of sixty million citizens, with business active, are capable of absorbing permanently, in this way, enormous sums. Now the framers of the Silver Act of 1878 had an idea that silver dollars would serve exactly such a purpose. In this they were mistaken. The people would not take these heavy coins in any quantities from their depositories ; they insisted on being sup- plied with other forms of currency ; so much so that in 1885 a million more than the whole year's silver- dollar coinage came back to the Treasury. 1 The people had not the same objection to the silver cer- tificates. As we saw in studying the results of the silver shipments south and west after 1880, the recipients of these dollars turned them back to the nearest sub-treasury in exchange for silver certifi- cates, but they took the certificates readily enough. But the provision of the Law of 1878 that silver certificates should not be issued in denominations of less than ten dollars prevented their use for ordinary retail purposes. Such a provision virtually declared that there should be no pocket-money, the per- manent circulating medium, in that form of currency. 1 Treasurer Jordan, Annual Treas. Rep., 1886, p. 78. 1886] Small Silver Certificates 107 The Treasury now undertook to reverse this situa- tion. The people had the legal-tender notes which the Treasury needed to facilitate its own New York exchanges, and they would not take the silver cur- rency which was embarrassing the Treasury. Might it not, then, be possible to issue silver certificates in one-, two-, and five-dollar denominations, and mean- time to hold back in the Treasury reserve such small legal-tender notes as should from time to time be received in revenue ? The project would, of course, involve the establishment of store-houses for the idle silver dollars held against the certificates outstand- ing. Even in 1885, one hundred million of the coins were thus stored away. But the plan would serve at any rate, if successful, to transfer ownership of these dollars from the Treasury to outsiders; it would substitute another form of money in the Treasury's own balances, and, what was more im- portant, it would prevent the silver currency from coming back in the revenue in such quantities as to embarrass the Treasury's operations. If the people were to keep the silver certificates for their daily uses, heavy payments to the Government must be made in gold or legal tenders, and either currency could be freely used again in all Clearing- House ex- changes. The new Administration began by keeping in the Treasury all of the one- and two-dollar legal tenders paid to it, and by using in its own disbursements only notes in large denominations. This policy had prompt results. Within a year, complaint of the scarcity of small notes came in from various sections io8 American Finance of the country; and in 1886 Congress was asked to permit the issue of silver certificates in small denom- inations. Congress consented grudgingly, and in August, 1886, it authorized the issue of such silver currency in one-, two-, and five-dollar bills, and the exchange of large silver certificates for an equal amount in small denominations. With this author- ity, the Treasury tried at once the experiment of dislodging the legal tenders from the people's pocket- books and replacing them with small silver certifi- cates, and the plan succeeded. By 1888, there were $34,000,000 less in legal-tender notes for one, two, and five dollars in the country's circulation than in 1886, and all this void was filled by newly issued silver currency in the same denominations. Meantime another influence was at work, which was much more useful to the Treasury's plans. I have mentioned the Government legal-tender cur- rency as a permanent medium of retail circulation ; I have not yet noticed the circulating national- bank notes. These notes were a very important factor in the operation just described. In 1884, there were more of the bank notes outstanding than there were of the legal tenders, and more than half of such outstanding bank notes were in denom- inations of ten dollars or less. 1 The demand for currency in the rapid trade expansion after 1879 had not only attracted foreign gold, and absorbed into interior circulation legal tenders and even silver, but it had stimulated the national banks to add some thirty millions to their circulating notes. It will be 1 Comptroller Cannon, Treat. Rep., 1884, p. 186. 1886] Retirement of National Bank Notes 109 recalled that the check to trade activity, after the summer of 1882, sent gold back to Europe and silver and Government notes back to the Eastern banks and the Treasury. The same business motive, there- fore, which had inspired the banks, in the three pre- ceding years, to increase their note circulation, now encouraged reduction of such issues. Nor was the state of trade the only motive for such reduction. Under the National Banking Law, a bank wishing to issue notes was required to deposit Government bonds with the Treasury, against which it would receive in its own notes ninety per cent, of the par value of the bonds deposited. This is an admirable contrivance to ensure soundness in a bank- note circulation, but a very doubtful expedient to ensure its permanency. The Bank of England is not allowed to sell the public securities on which its circulation rests; the banks of the United States have a perfect right to do so, provided they retire the circulation issued against such bonds. Not only did the banks possess the right of sale, but in the case of bonds, like the three per cents, redeemable on call, banks were forced to surrender both bonds and circulation when the Government was paying out its surplus. In 1883, upwards of $353,000,000 Government bonds were on deposit as a basis of bank-note circulation. Out of this total, more than $200,000,000 were in the three per cents, 1 and it was naturally these very three per cents which the Treasury selected in its public-debt redemptions. Whenever such bonds were called for redemption, the 1 Treat. Rep., 1883, p. 218. I io , American Finance [1886 bank possessing them was compelled either to replace them with other Government issues bought on the open market, or else to retire its circulating notes. Under the circumstances, it is not surprising that the circulation was surrendered. Fully three fourths of the bank notes thus retired from circulation were in small denominations ; and this, of course, signified growing scarcity in money available for small ex- changes. Secretary Manning and his associates in the Treasury were too sagacious observers of the under- currents of finance to have failed to reckon this bank- note movement into their plans for disposing of the surplus silver. 1 But even the public men who dis- cerned this curious phenomenon, and correctly pointed out its meaning, could hardly have imagined how far the contraction of the currency, thus au- tomatically begun, was destined to be carried. In 1 886, at the very time when the issue of small silver certificates was authorized, began the second enor- mous rise in public revenue since resumption. In 1885, excess of Government income over expendi- ture was $63,463,771 ; it increased thirty millions in the next twelve months; by 1888 it had reached the sum of $119,612,115. The particular causes of this surplus revenue, whose consequences in many different directions were destined to be of the utmost importance, we shall presently examine. Its influence on the cur- rency was immediate. To avoid direct contraction through heaping up a constantly increasing sum of 1 Treasurer Jordan, Treat. Rep.> 1886, p. 100. 1888] Silver Currency Circulated 1 1 1 money in the Treasury, the Government again en- larged its purchases of outstanding bonds. In the fiscal year 1886 it had bought only $50,000,000 ; in 1887 it purchased $125,000,000; in 1888, $130,- 000,000. When, later on, the three per cents, re- deemable at the Government's will, had all been retired through such purchases, the Treasury began to bid in the open market for its unmatured bonds. Banks which had paid 102 in 1879 f r tne f ur P er cents, for instance, and had since employed the bonds as a basis of circulation, were now offered a steady market for them at 125 or higher. The temptation to accept such profit was strong, and the banks accordingly began to retire the circulation based on the four per cents. Between 1886 and 1890, national bank-note circulation decreased $126,- 000,000, nearly one half this decrease being in notes of five or ten dollars each. / Such a reduction in the retail currency, coming along with the Treasury's policy of keeping in its own reserve the smaller legal tenders, opened the gate wide for the silver certificates. Even in 1886, the Treasurer was able to report that the average proportion of silver currency in payments at the New York Custom-House was barely twelve per cent., against thirty-six per cent, in 1885, while the percentage paid in legal tenders, which the Treasury could freely disburse again through the Clearing- House, increased from twenty-seven per cent, to fifty-nine. 1 In the eight years between the passage of the Silver-Coinage Law and the middle of 1886, 1 Treasurer Jordan, Annual Treat, Jiff., 1886, pp. 77, 143. ii2 American Finance [1888 $150,000,000 silver coin and certificates had been put into general circulation ; in the four years after 1886, the country absorbed $200,000,000 more, and this four-year increase happened coincidently, as we have already seen, with a shrinkage of $126,000,000 in the bank-note circulation. The Treasury's silver surplus, meantime, was re- duced with such rapidity that it fell from $97,745, 750 at the opening of August, 1886, to $79,641,424 exactly one year afterwards, and to barely $19,000,- ooo before the close of the Cleveland Administra- tion. Most people will remember how suddenly, in those years, they lost sight of the once familiar bank-notes and small legal-tender pocket-money, and found instead, in their daily exchanges of petty cash, the new silver certificates. Whoever noticed this was unconsciously observing the working-out of one of the most curious economic experiments of the century. For the second time, therefore, the anticipated crisis in the currency was averted, and on this occa- sion, so far as the silver certificates were concerned, it was permanently set at rest. What will occur in relation to this and other forms of United States currency in the future is a matter of simple guess- work. But with the subsequent halt in compulsory silver-coinage, under the law which will be noticed in the next chapter, the silver certificates took the place of the cancelled bank-notes in the retail circu- lation. In 1891 the bank currency Beached its lowest point since 1865, but even at the close of the fiscal year 1896, the country's national bank-note circu- 18881 Rise in Customs Revenue 113 lation was $137,000,000 less than its maximum of 1882, and the silver currency made up one fourth of the total money supply outside the Treasury. But the solution of the silver problem, temporary or otherwise, had not solved the problem of the surplus, which now became more awkward even than in 1882. It will be necessary, before this singu- lar episode can be properly studied, to observe the character of the period which gave rise to it. No phenomenon in our financial history has had more immediate bearing on the strange chapter in Ameri- can finance from 1891 to 1897. The United States is even now affected, in its public finances, by the traditions surrounding the period of the surplus revenue. The legislation of 1890 and the financial phenomena of 1893 were distinct results, in very large measure, of the four-year period after 1886. Neither 1890, nor 1893, nor indeed the succeeding years of American finance, can be understood except in the light of the epoch which we are now to examine. The excessive rise in surplus revenue, after 1886, happened in spite of a further considerable increase in public expenditure. It was partly caused by a general increase in the product of internal taxes, but of the total gain in annual income, sixty per cent, was made at the custom-house. In 1885, the import duties made the lowest yield of any year under the tariff of 1883; in 1890, under the same law, they had risen forty-eight million dollars, reaching the highest record in the history of the Government, before or since. 8 ii4 American Finance No such increase would have been possible with- out an equally remarkable increase in the import of foreign merchandise, and no such expansion could occur in the import trade without some notable changes in the industrial situation. Such a change had in fact occurred. As compared with the re- sumption period, these years did not reach the high range of prosperity. They were, however, a period of great activity in trade. We saw that recovery from the 1884 collapse was rapid. Prices did not move up as in 1879 an< ^ 1880, for the reason that foreign competition, in all branches of production, including agriculture, was continuous. But profits, though irregular, averaged fairly well on a largely increased volume of business. Of 1886 itself, contemporary critics" wrote that it was " the best business year since 1880"'; of 1889, that it " surpassed all predecessors in the volume of trade movements."* In the dry -goods industry, "an unusually large and prosperous trade was done in 1888,'" and in 1889, "distributors were in such good spirits that their operations for the spring were exceptionally liberal. ' ' * The active markets during 1887 and 1888 induced some repetition of the experiments of 1880; wheat and coffee were " cornered " on more than one occasion in the speculative markets. In the first of these two years the experiment broke down 1 New York Financial Chronicle, Review of 1 886. *IKd., Review of 1889. New York Chamber of Commerce, Annual Rtp., p. 86. ., Annual Rep., 1889, p. 83. 18881 Trade Expansion 1 1 5 disastrously, but in September, 1888, wheat was put up to two dollars a bushel. The iron busi- ness was prosperous. Between 1885 and 1889, an- nual consumption of iron in the United States considerably more than doubled. 1 In 1887, came a decided rise in iron prices; a result, as usual, of sudden demand for railway purposes. There were laid down in that year 12,878 new miles of road, four times the total of 1885, an ^ the largest year's construction in the country's history.' This increase in railway mileage, which was located almost wholly in the West and South, partly caused and was partly caused by another symptomatic move- ment the active " town-lot " speculation in the newly developed regions West and South. During September and October, 1887, interior speculation reached to such a height as actually to embarrass Eastern money markets by the heavy drain of capi tal to the centres of excitement. During 1887 and 1888, upwards of forty-nine million acres out of the public lands were sold to settlers, an annual increase of nearly five million acres over the years immedi- ately preceding. 1 Not unconnected with this new extension of the improved interior domain, annual immigration, which in 1886 had fallen to 334,203, increased again by 1888 to 546,889. It cannot readily be doubted, then, if the usual tests are to be trusted, that these were years of pros- perity. There were, on the other hand, several 1 Annual Reports, American Iron and Steel Association. 1 Poor's Manual of Railroads. 1 Returns of the General Land Office, 1888. n6 American Finance ness qualifying features in the period which must be noticed before its character can be fully summed up. Labor troubles were intermittent, and in very for- midable shape. These years witnessed the establish- ment and spread of those remarkable organizations which for half a dozen years held at bay the corpora- tions which employed them. In the spring of 1886, the Knights of Labor strike was declared on the Missouri Pacific Railway, the switchmen's strike at Chicago and Milwaukee, and the strike of street-car employees in New York City. All of these demon- strations failed. They were followed, during May, by the memorable anarchist riot at Chicago, brought about by a concerted effort to demand an " eight- hour day " for laborers throughout the country. Checked for some months as a result of the Chicago episode, trouble began again in 1888. The Phila- delphia and Reading miners' strike of January, and the strike of the Chicago, Burlington, and Quincy's locomotive engineers in March, involving 2500 of the railway's employees, were movements of even larger scope than their predecessors, and they cer- tainly reflected industrial discontent. For a time, signs of equally angry discontent came from the farming districts. The American wheat crop of 1885 was the smallest since 1881, and, unlike the deficient crop four years before, it came at a time when supplies left over from the crop of the preceding year were double the average, 1 and when Europe's wheat yield as a whole nearly equalled 1 1 Bradstreet's tables of U. S. Visible Supply, June, 1885. * Liverpool Corn- Trade Year-Book. 1888] The Trust Question 117 that of 1884. The result in 1885 was that the American wheat-producer had to face, for the first time in a generation, the double misfortune of a short crop and low prices. When farmers are dis- contented, currency agitation is certain to begin, and so it turned out on this occasion. In April, 1886, a free-coinage bill came to a vote in the House of Representatives after warm debate, and was de- feated by a majority of only thirty-seven votes. Better harvests in the two following years, with de- crease in competitive foreign production, somewhat relieved the pressure from this particular source, and as a consequence the currency agitation waned ; but the dissatisfied laborer in the East continued much longer a conspicuous factor in politics. It was in November, 1886, that Henry George, run- ning for Mayor of New York City on a platform of discontented labor, polled 68, 1 10 votes out of a total of 219,679. Hardly less significant was the fact that the third party in the Presidential campaign of 1888 abandoned most of its traditional watchwords, styled itself the " Union Labor party," and in its platform made the question of strikes and arbitration the central plank. These combinations of laborers were not the only reflection of a considerably altered situation. A very singular parallel, at the opposite end of the in- dustrial scale, was provided by combinations of corporations. This phenomenon came to public view with even greater suddenness. Political plat- forms may be counted on, ordinarily, to notice cur- rent events susceptible of use as " issues." But in ii8 American Finance [1889 1884, the so-called " trust question " was not once named in any Presidential platform. The State conventions of 1886 made no reference to it; only one or two platforms of minority organizations men- tioned the movement, even in 1887. In 1888, on the other hand, denunciation of the trusts was made a separate and conspicuous plank in the platform of every political party submitting nominations. As a matter of fact, the majority of the sugar refineries in the United States, and a large part of its lead, rope, oil, and spirits manufactories, had before 1889 been combined into associations under single manage- ments. The magnitude of these undertakings may be judged from the fact that in 1890, four trusts, organized within three years, reported aggregate capital stock of $188,000,000. This enormous capi- tal was used not only to extend the actual plant and trade of the allied manufacturers, but at times to buy off aggressive competitors simply for the pur- pose of shutting down competing mills. The limits of this book will not permit me to go at any length into this question of the trusts. It may, however, be noticed that in one respect the movement was an instructive symptom of the period. The trusts were organized to restrict a competition which their organizers declared to be ruinous if left unchecked. That there was some basis for this allegation may be judged from the course of many other markets, which pretty uniformly told a story of keen, close, and sometimes destructive competi- tion. The over-capitalized and in some quarters unwisely projected railway systems naturally felt 1889] Europe's Sales of Merchandise 119 the full force of this movement. A series of " rate wars" so far cut down profits that, although, with the heavy annual increase in the mileage, total gross earnings rose with great rapidity after 1887, net earnings and dividends actually decreased. 1 With the opening of 1889, was introduced that extraor- dinary plan known as a " gentlemen's agreement," whereby the presidents of the important railway systems, not at all with a sense of humor, met and pledged their personal word of honor to see that rates were conscientiously maintained.' Undoubt- edly as a consequence of the same ruling conditions, the record of commercial failures, which stood in 1 886 at 9834 individual suspensions, with total lia- bilities of $i 14,644, 1 19, rose by 1889 to 10,882, with liabilities of $148,784,357.' With home competition thus aggressive, the enor- mous merchandise import movement becomes a matter of curious historical interest. It might have been supposed that home competition would have shut out these imports. But the period which we are noticing was as peculiar in Europe as in the United States. Production by foreign manufacturers, during this period, reached a volume quite unprecedented ; in Great Britain especially, the search for outside mar- kets was urgent and aggressive. Merchandise exports from that country reached in 1890 by far the highest total in its history, having increased, since 1886, some $287,000,000, or very nearly twenty-five per 1 Poor's Manual of Railroads. 9 January 10, 1889. * Dun's Review, Annual Tables. I2O American Finance [1399 cent. 1 In England, this was not a symptom of dis- tress, although competition was aggressive; for 1889 was declared by English commercial authorities to be a year when labor was abundantly employed, and when trade compared very favorably, even in the matter of profits, with previous years. 1 But the un- precedented stimulation of production drove manu- facturers to an urgent quest after new fields of export trade. In return for these heavy foreign sales of the English surplus product, securities issued by the countries to which the goods were sold were taken by English capital in enormous quantities. 1 The investment phase of this operation led to some extraordinary phenomena in London during 1890, and had much to do with our own investment markets during that and the three ensuring years. For although there was not a nation in the commer- cial world to which Great Britain's exports, during the four years ending with 1889, had not been heavily increased, its exports to no other nation increased as did its shipments to the United States.' The con- suming power of this country had grown enormously with the extension of its wealth and population. I have already noticed the increase of one hundred per cent, in annual use of iron; in 1889, consumption of cotton was reckoned larger by 2,600,000 bales than in any previous year of the nation's history,* and these markets were typical. Nor were the Increased 1 Annual Trade Statement of the United Kingdom, 1891. * London Economist, Commercial Review of 1889. 3 Ibid, 4 Annual Trade Statement of the United Kingdom, 1891. ' New York Financial Chronicle, September 14, 1889. 1888] Foreign Competition in Grain 121 importations limited to any particular branch of foreign products. They embraced necessities and luxuries, finished manufactures and raw material of manufacture. In the four years prior to 1890, an- nual imports of iron increased $4,00x3,000 and im- ports of precious stones $4,000,000. There was a gain of $17,000,000 in foreign cordage-ware received, and of $10,000,000 in foreign silks. Along with a $15,000,000 increase in annual importations of wool- len goods came increase of $9,000,000 in tobacco imports, nearly $2,000,000 in import of foreign wines, and no less than $1,800,000 in so small an item as foreign-made gloves. These growing imports were doubtless evidence of increasing wealth. But nations as well as individu- als will sometimes buy in excess of their means of ready payment ; this being usually true of a specu- lative period, when hopes are high and money- lenders ready to make loans on easy terms and on all sorts of security. It is conspicuously true of such a period as that which we are reviewing, when foreign merchandise is taken and consumed in exchange for mere evidences of debt. Imports were equally heavy in the trade revival after 1879, but they were then for the most part Europe's method of settling its debt for our enormous grain exports. In none of the five years following 1885, on the contrary, did the annual breadstuffs-exports of the United States come within one hundred million dollars of the trade of 1880.' Out of the 498,000,000 bushels American wheat crop of 1880, 186,000,000 bushels l (7. S, Bureau of Statistics, Annual Report. 1893, p. t. 122 American Finance were exported; out of the 491,000,000 bushels crop of 1889, foreign consumers took only 109,000,000. There had, in fact, been another immense expansion in the grain-fields of foreign competitors. Not only did Europe enjoy fair harvests on an extraordinary acreage, but India and the Argentine Republic, which had hardly been noticed in the grain export markets of ten years before, were now in 1888 ex- porting fifty million bushels of wheat per annum. This was an immediate fruit of the British capi- tal invested in the railways of those countries. The net result of this foreign competition was that the total outward trade of the United States decreased or held stationary at the moment when imports were increasing at the rate of twenty to forty millions annually. In 1888, for the first time since the specie-resumption law was passed, imports of merchandise exceeded exports; in 1889, the same phenomenon was repeated. Like other customers of England at the time, we settled our adverse balance by selling our own securities; but the sequel to this operation, with trade relations what they were, was in the main disastrous. For, let it be observed, although these heavy foreign pur- chases of American stocks and bonds contributed immense amounts of capital to our markets, the capital thus acquired was almost wholly based on debt. If these foreign investors were for any reason to take alarm over the outlook in this country, with- drawal of such capital, through sale of the railway securities on our markets, was an immediate possi- bility. Even a shock to confidence and credit in 1888] Rapid Increase in the Siirplus 123 the home of this invested European capital would be reasonably sure to cause its abrupt withdrawal. This had happened once before, in the London panic of 1866, with consequent serious embarrassment to the United States. But the foreign capital invested here in 1866 was a trifle compared with the amount poured into American enterprises between 1886 and 1890. This was, however, a problem of the future; ex- isting conditions served very notably to strengthen the Treasury's position. Acting directly, the heavy home consumption added to the internal revenue; indirectly, it caused the increase in the customs. There seemed to be no check to the rise in reve- nue. In 1887, as I have already noticed, the pub- lic debt redeemable at par was extinguished, and the Government was forced to ask authority from Congress to enter the open market as a buyer of its own unmatured bonds at a premium. This, as the Secretary of the Treasury declared to Congress, was " a responsibility which ought not to be put upon any officer of the Government." ' But there was absolutely no alternative. The few months during which the Treasury, while awaiting some authorita- tive action on the part of Congress, suspended bond redemptions, sent up the surplus money holdings of the Government nearly thirty millions. In August, 1888, it was literally true that the Treasury's cash surplus, wholly removed from the use of trade, was one fourth as large as the entire estimated sum in the country's outside circulation. 1 Secretary Fairchild, Annual Trtas. Rep., 1887, p. xzviii. 1 24 American Finance [1888 It would have been larger even than this but for the use made, under pressure of necessity, of the depository banks. At the close of 1885, $12,901,- 432 of the Government's funds were thus deposited. On the last day of March, 1888, these deposits had increased to $61,231,647, and thejr had risen nearly twenty millions within four months. Now it is true enough that this method of putting a public surplus on deposit with the banks, where it may still con- tinue to serve the purposes of trade, is legitimate, and in ordinary cases beneficial. No other tempo- rary disposition of an excess revenue is ever thought of, for example, by the British Exchequer, whose funds go, as a matter of ordinary course, into the Bank of England. It is true, also, that these bank deposits of United States Government funds were abundantly secured, under the law, by pledge with the Treasury of Government bonds to a face value ten per cent, greater than the money thus entrusted. ' A careful effort was moreover made to distribute such deposits equitably; in 1888, they were shared by no less than two hundred and ninety separate institutions.* Nevertheless, this recourse was as un- popular with the community at large as it was in 1878, and it was, moreover, even more limited in scope and permanency. The Government's deposits were liable to immediate recall, and they were looked upon as temporary in any case. Yet to qualify for such deposits, a bank was obliged to obtain Govern- 1 Annual Treat. Rep., 1888, p. 453. -Ibid., p. 19. 1888] Enormous Bond Redemptions 125 ment bonds at prices forced to a maximum by the Treasury's own purchases. 1 From any point of view, therefore, the bank deposits were inexpedient. There was one very obvious recourse reduction in the revenue, and this the Administration urged on Congress. But Congress refused to act. The House of Representatives contained an Administra- tion majority, and it had already, in 1887, passed the Tariff-Reduction Bill of Mr. Mills. But the Re- publicans then controlled the Senate, and all such legislation was accordingly blocked. As a last re- sort, therefore, in April, 1888, formal authority was wrung from Congress to devote the surplus to bond redemptions at a premium. A very extraordinary chapter in American finance now opened. During 1888, the Government four per cents, ranged on the open market from 123 to 129'; yet at these high prices the Treasury bought, within seven months, upwards of $50,000,000.' The 4^'s, ruling, because of their near maturity, between 106 and 109, were redeemed, meantime, in the amount of $33,000,000. During 1888 and the two ensuing years, $45,000,000 was actually paid out in premiums; within four years, the enormous sum of $235,000,000 was expended for bond redemptions in excess of the annual sinking-fund requirement. 4 To the world at large, this spectacle of public debt redemption, to the extent of nearly half a billion 1 Annual Treat. Rep., 1887, p. xxviii ; 1888, p. 453. Annual Treas. Rep., 1888, p. 457. / iJ., p. xxlxvi. U. S. Mint Report, 1893, pp. 22 and 57. 1890] Senate Declares for Free Coinage 147 it. From its unlimited possibilities of currency in- flation, every prudent statesman shrank. But all that conservative Congressmen accomplished was to bind in advance, so far as possible, this Frankenstein which the Administration had constructed. The House of Representatives began by limiting the issue of notes to $4,500,000 monthly; it made them legal tender and, like the older obligations of the Govern- ment, " redeemable, on demand, in coin." Thus modified, the measure passed the House on the day of its first consideration, June 5, 1890, by a majority of sixteen, the entire vote in its favor being Repub- lican. It went next to the Senate, and that body promptly showed its opinion of Mr. Windom's com- promise by substituting a flat free-silver coinage bill, which passed by a majority of seventeen votes, the majority vote including every Republican senator, with two exceptions, from the very trans-Missouri States which the Secretary was laboring to conciliate. The situation was sufficiently awkward, because the tariff bill was laid before the Senate on the very day when the Senate returned its free-coinage substitute measure to the House. With calm assurance in the strength of its position, the Senate turned down the tariff bill on its calendar and awaited develop- ments. It has sometimes been alleged that the preparation and enactment of the Silver-Purchase Bill 'of 1890 were made necessary, not by senatorial obstruction to the tariff bill, but by fear that in default of a com- 1 John Sherman, letter to J. H, Walker, July 8, 1893 ; Reeolkt* Hens, ii., 1070 and 1188. 148 American Finance [1996 promise, a free-coinage measure would be passed. Such an inference assumes that President Harrison would have signed a free-silver bill, which he could hardly have done, in spite of Mr. Sherman's insinu- ation to that effect, after declaring officially that the results of such a law " would be discreditable to our financial management and disastrous to all business interests." But the theory also assumes the exist- ence during 1890 of a free-coinage majority in the House of Representatives. If such a majority ex- isted, the time for it to show itself was when the Senate's free-coinage substitute bill came back to the House for action. Mr. Bland at once proposed that the Senate substitute be adopted by the House, and his motion was promptly defeated by a vote of 152 to 135. The President's declaration and the vote of the House of Representatives prove, if they have any meaning, that the fear of a free-coinage bill was imaginary. Nor need such a conclusion be based only on general principles ; there has been positive and authoritative testimony to the same effect. " On the day when the Sherman Bill passed," Sena- tor Teller has since declared from the floor of Con- gress, " there was no more show of a free-coinage bill becoming a law than there was of the heavens falling. " a There could certainly be no safer witness than this Colorado statesman, the leader of the sil- ver Republicans in the Senate of 1890. But the jeopardy, indeed, into which the tariff bill had fallen through the deadlock on the Silver-Pur- 1 Annual Message, Dec. 3, 1889. * Senate speech, April 29, 1896. 1890] The Compromise Silver Bill 149 chase Act, was real, and an anxious week for its pro- moters followed. The silver bill, as usual in case of a disagreement between House and Senate, went to a conference committee. When it emerged, it was so altered than an entire new set of financial problems was called forth. The conference bill required the Treasury to purchase monthly, not $4,500,000 worth of silver bullion, but 4,500,000 ounces, or as much thereof as should be offered. Like the House bill, it directed the Treasury to pay for this silver in legal-tender notes. These notes were not to be redeemable in silver bullion, for a final quietus was now put on Mr. Windom's fantastic redemption plan. The Secretary of the Treasury, " under such regulations as he may prescribe," was directed to " redeem such notes in gold or silver coin, at his discretion." But as a limitation to this discretion- ary power, the following remarkable clause was added: " It being the established policy of the United States to maintain the two metals on a parity with each other upon the present legal ratio, or such ratio as may be provided by law." This conference measure, with its famous " parity clause," was chiefly the work of Mr. Sherman, for which reason the law became subsequently known, somewhat unjustly, as the " Sherman Act." Those who have studied Mr. Sherman's handiwork in legis- lative compromise, notably in the Resumption Act of 1875, will recognize something familiar in this compromise of 1890. Like the Resumption Law, it conceded a thoroughly bad principle in order to avoid the enactment of that principle in a still more 150 American Finance U890 vicious form. Both laws were extremely obscure in their description of the duties imposed on the Treas- ury; each was susceptible of two diametrically op- posite interpretations, according to the personal convictions of the Secretary who should administer it. Neither ventured to say in plain English what its author meant, and both were therefore destined to bring on their future administrators a storm of legislative protest and abuse. There is, however, little doubt of the purpose of the Compromise Bill of 1890. The senator who, in the ensuing debate on the measure, described it as " a beckoning hand for an interpreter," 1 expressed fairly the general bewilderment. But other senators showed plainly enough the meaning attached to the measure by the silver faction. ' This compromise," said one of the most determined silver advocates, " is an abandonment, a total abandonment of the double standard."* "In all these provisions," another silver senator declared, " the gold redemp- tion is asserted and is made the essential and the unqualified and the operative and the valuable con- dition of the bill. " * No one, during the whole debate, combatted this interpretation. The Eastern senators confined themselves to pointing out that, while the time would probably never come when the Treasury would be forced to make its choice of metals in redemption, the " parfty clause " required, in case of such emergency, that the note-holder should re- 1 John W. Daniel, Senate speech, July 9. * Francis M. Cockrell, Senate speech, July 9. * Wilkinson Call, Senate speech, July 10. 18901 Meaning of the Parity Clause 151 ceive whichever kind of coin he desired. 1 We shall find this contemporary evidence highly important in the discussion of a later episode. The conference measure promptly passed both House and Senate. It passed the Senate partly be- cause senators from the silver-producing States, con- vinced that the Treasury purchases would raise the price of silver to the coinage parity, now took the floor in favor of it.' But the true reason for its prompt enactment was the heavy party pressure now applied to recalcitrant Republicans. The final vote of July 14, 1890, is remarkable from the fact that in neither House of Congress did a single Re- publican member vote against the bill, or a single Democrat in favor of it. Thus did this extraordinary measure pass into Jaw. It was presently followed by the passage of the revenue law for which, as we have now seen, the silver-purchase legislation was the price. The situa- tion at the close of 1890 was remarkable in many ways. The Treasury's accumulated surplus was about to be wholly dissipated. Prospect of making both ends meet in Government finances was to be subjected altogether to the chances of outside trade. In the face of these impaired resources, outstanding demand liabilities of the Treasury were to be in- creased by upwards of fifty million dollars annually, and this forced addition to the country's paper cir- culation was to be made at the very moment when the Treasury's hoards were thrown on the open 1 John R. McPherson, Senate speech, July 9. * John P. Jones, Senate speech, July 8. 152 American Finance [1990 money market and when contraction of bank-note circulation had ceased. When Secretary Sherman was defending, in 1879 and 1880, his own plan of Government legal-tender issues, he was reminded of the possibility that a heavy revenue deficit might some time leave the Treasury with nothing but its gold reserve from which to meet expenses. To this he answered that it was not " to be presumed that Congress will omit to provide ample revenues." ' He cited further the objection that the amount of notes " may be en- larged by Congress, and that this power is liable to abuse," but his reply was that under resumption of specie payments " there is no temptation for over- issue." * Fourteen years had passed, and Congress now had suddenly enacted one law destined to force a deficit on the Treasury, and another to increase without assignable limit the issues of legal-tender notes. That Mr. Sherman himself should have voted for both these measures and constructed one of them is another notable instance of the irony of history. 1 Treat. ef., 1879, p. x. IKd. t 1880, p xv. CHAPTER VII THE EXPULSION OF GOLD SO far as the Silver-Purchase Act was designed to help the silver market and this we have seen to be its almost single purpose it was an early and complete failure. Mr. Windom's report and the subsequent Congressional moves were immediately reflected, it is true, by a violent advance in silver. The speculators promptly put their machinery in order, and by way of affording every possible facil- ity to a speculative craze, the New York Stock Ex- change arranged for the deposit of silver bullion and the issue, against such deposits, of negotiable certifi- cates which could be bought, sold, and delivered on the Exchange like any other security. In 1889, the average price of silver in New York was 93^ cents per ounce.' By July, 1890, it had risen to $1.04, and the enactment of the Silver-Purchase Law carried the price with a wild rush to $1.21 on Sep- tember 3d. But the speculative movement ended, as such movements usually do, as soon as the earlier and shrewder speculators began to take their profits, and the reaction was even more rapid than the ad- 1 Treat. Rep., 1889, p. Ixxxvi. 153 1 54 American Finance [1390 vance had been. Silver fell below 98 cents an ounce before Congress assembled again in December, 1890, and the President regretfully confessed the failure of the effort " to give to the market for silver bul- lion such support as the law contemplated." ' Mr. Windom's annual report, issued at the same time, insisted that in spite of the failure of the law to help the silver market, ' ' its beneficial results will event- ually commend it to general approval," since it had already been " the means of providing a healthy and much-needed addition to the circulating medium of the United States."* This, it will be observed, was a somewhat altered theory of the purpose of the law, but it was also adopted by the President, who declared that " the increased circulation secured by the act has exerted and is continuing to exert a most beneficial influence on business and on general values." Now it should be remarked, first, that this is precisely such an argument as might have been employed in 1872, for instance, in behalf of the increase and perpetuation of the older legal tenders. It is the familiar inflation argument. But, further- more, it will not be difficult to show that Mr. Harri- son's view of cause and effect in the trade movement of 1890 was quite unwarranted. The volume of American trade in 1890 was doubtless larger than in 1889,' but profits were no greater,* and the average 'Annual Message, Dec. i, 1890. ' Treas. Kef., 1890, p. xlix. * New York Financial Chronicle, January 10, 1891, p. 64. 4 New York Chamber of Commerce, Annual Rep., 1890, pp. 81, 89, 98. 1890] President Harrison 's Argument 155 of commercial prices not so high ' which sufficiently refutes the argument that the new legal-tender issues under the Act of 1890 were the cause. It is true that the rampant speculation which broke out for a time in the American market, especially in that for securities, was ascribed by many good authorities to the paper-money issues. 1 This would have been no illogical result, judged by the precedent of the infla- tion period. But even in this regard, the influence of the Silver-Purchase Act could have been only slight. About five million dollars monthly in the new currency were coming upon the market. But in the one month of September, 1890, the circulat- ing medium outside the Treasury was expanded by no less a sum than sixty -two million dollars * the most rapid increase in the country's history, not ex- cepting the period of legal-tender issues during the war. Clearly, this unparalleled expansion did not result from the Silver- Purchase Act. Its true cause is easy to discover. The appropriation laws of the Fifty-First Congress were then doing their most effective work, and in that single month fifty-five million dollars, or nearly one fourth of the Treasury's total surplus, were emptied into the money market.* It is probable enough that this unexpected and violent enlargement of the bank reserves, though it had slight connection with the law to whose opera- tion Mr. Harrison assigned it, did its part in fanning the flame of speculation. But the fundamental 1 U. S. Senate, Report of i8qa on Prices and Wages, vol. i., p. 9. * London Economist, December 20, 1890. ' Treas. Rep., 1891, pp. 15 and 95. 4 Ibid., p. 84. 156 American Finance 11990 reasons for the summer advances of 1890 were quite independent of the American currency supplies. There were two such reasons. I have already de- scribed the feverish eagerness with which Great Britain had been engaged, since 1886, in developing the resources of young foreign communities, taking securities in payment. This movement reached its culmination in 1890. During the five months from February to August of that year, 100,000,000 in new securities were brought out on the London market. " Business," in the words of a contempo- rary London review, " was enormous, and the rise in all descriptions of prices was astonishing." ' Along with the powerful reflex influence on our markets of this foreign speculation had come visible evidence that the world's supplies of grain were running into one of their intermittent periods of shortage. In 1889, every important foreign wheat- producing state, with two exceptions, yielded a deficient supply ; the United States, meantime, producing the largest crop since 1884." These short foreign supplies of 1889, followed next season by another harvest only slightly larger for the entire producing world, gave an additional fillip to the up- ward rush of prices in the early autumn of 1890. The Administration, then, was mistaken in as- cribing the trade movement of 1890 to the Silver- Purchase Act. The truth was soon made manifest 1 London Economist, February 21, 1891 ; Commercial Review of 1890. 'Liverpool Corn-Trade Newt, 1889 ; Annual Rep., U.S. Depart- ment of Agriculture, 1889. 1890] The ' ' Baring Panic " 157 when the chief sustaining influence under the fabric of speculation was suddenly removed. Into no foreign state had English capital rushed with such reckless eagerness as into the Argentine Republic. The resources of that state were overestimated ; its climate was precarious for production, its currency depreciated, and its government untrustworthy. Nevertheless, English investors had taken its securi- ties in constantly increasing quantities, and the powerful London house of Baring Brothers had underwritten loan after loan in Buenos Ayres, even as late as the spring of 1890. In 1889 the wheat crop of Argentina, whose increasing annual volume had chiefly inspired this investment movement, turned out a failure. This industrial disaster was followed, first by a bloody political revolution, and then, in September, 1889, by a financial panic in Buenos Ayres. Demand for Argentine securities in London slackened im- mediately, and a certain timidity over all foreign investments became perceptible. This caution seemed to disappear in the final upward movement of prices early in 1890 a curious but perfectly familiar phenomenon on the eve of every specula- tive collapse. But the reviving speculation failed to disentangle the bankers from their imprudent South American engagements. Rumors of trouble began to circulate in the autumn. At length, on November 2oth, Baring Brothers, unable either to sell or borrow with their Argentine securities, de- faulted on 2 1, 000,000 home liabilities. Only through the united efforts of the Bank of England 158 American Finance [1890 and the London financial institutions generally, who guaranteed the doubtful Baring assets, did Great Britain escape a repetition of the Overend-Gurney panic of 1866. So serious did the strain become, during one critical week of November, 1890, that the Bank of England adopted the extreme precau- tion of borrowing 4, 500,000 gold from the Bank of France and the Imperial Bank of Russia. This London episode was of serious significance to the United States. In a previous chapter we found that our abnormal import of European mer- chandise, from 1886 to 1890, represented largely capital invested by Great Britain in negotiable American securities. It followed that in 1890, when London's foreign investment bubble had been pricked, recall of British capital thus invested must en- sue. The " Baring panic " was reflected promptly, not only by collapse at Buenos Ayres, but by a disturb- ance in the American money market so severe as to force the New York banks to repeat their emergency operation of 1884 and 1873, and issue $15,00x5,000 Clearing-House loan certificates. 1 At one time, loan- ing rates on call in New York City rose as high as 1 86 per cent., and there were numerous banking failures. Recovery, however, was rather unusually prompt, because the season's heavy export of Amer- ican agricultural products, and our active interior trade, offset for the time the movement of English liquidation. In December, notwithstanding the condition of Europe's money markets, the United States imported gold. But with the ending of the 1 Treat. J?tf., 1891, p. 337, 1890] Money Supply Excessive 159 harvest movement came a swift and ominous change in the situation. Between July I, 1890, and January I, 1891, the money circulating in the United States outside the Treasury was increased, in all, one hundred million dollars. 1 The revenue and appropriation laws of 1890 prevented the recall of any portion of this sum into the Treasury. The Silver-Purchase Law guar- anteed an increase in the circulation of something like fifty millions annually. Even contraction in the bank-note issues had been suddenly arrested; for, as early as April, 1891, the impending deficit in revenue had forced the Treasury to abandon all Government-bond redemptions at a premium,* and with the abandonment of this policy the retirement of the bank notes ceased.' During the active harv- est trade of 1890, employment had been found for these enormous additions to the money supply. But with the close of the year the harvest trade was ended ; the dull interior season began, and it is in- variably such a season which tests, as it did even in 1880, the character of a currency. By January, 1891 to quote the words of the United States Treasurer "the people who had demanded this hundred million of ready cash had made their use of it, and were willing to part with it. But the Treasury, which had found the means of paying it out, was not in a position to call it back. Money began to find its way into the great commercial centres, foreign exchange began to rise, and gold bars began to be taken from the Treasury for shipment abroad. . . . 1 Treas. Rep., 1891, p. 15. f Ibid., p. xxvi. ' Ibid., pp. 27 and 358. 160 American Finance [1891 By the end of June the exports of gold had reached the unexampled figures of $70,000,000 for the six months." * Unexampled such an outflow of gold might Very properly be called; for in six months of 1891 the shipments had exceeded the total gold exports of any twelve months since the currency inflation of the war.* But in 1891, as usually happens when an inflated currency begins its work of mischief, any explanation of the gold expulsion was received ex- cept the most plain and obvious. The Government reports explained that the national banks of Eng- land, France, Germany, and Russia had reasons for wishing to increase their gold reserves; that these institutions were encouraging gold imports by pay- ment of commissions; that American tourists had been spending more gold abroad than usual because of the Paris Exposition.* When these particulai influences disappeared, and still the heavy outflow of gold continued, it was further pointed out that the Austrian Government, then laying its plans for resumption of specie payments, had been making strenuous exertions to obtain gold for the purpose. 4 Particular stress was laid on the fact that many ex- port gold consignments, during 1891 and 1892, went out with sterling exchange a small fraction below the usual gold-shipping point. Now the facts alleged were all correct ; but they did not in the least explain the enormous shipments. 1 Treasurer-Nebeker, Treat. Rtp.. t 1891, p. 16. * U. S. Bureau of Statistics, Annual Rep., 1891, p. XIX. ' Director of the Mint, Trtas. Jiff., 1891, p. 146. 4 /# 1894, p. Ixviii. 1 Ibid., pp. 10, 119. >4 210 American Finance [1894 " Congress alone," Mr. Carlisle said in his report, " has the power to adopt such measures as will re- lieve the present situation and enable the Treasury to continue the punctual payment of all legitimate demands upon it." 1 Had this statement been strictly accurate, the outlook would have been dark indeed. For so indifferent was this extraordinary Congress to the Treasury's situation that the bills drawn up in accordance with the Secretary's views were repudiated by the very Congressmen who in- troduced them, 1 were not even granted the courtesy of a preliminary discussion, but were referred with out debate to hostile committees, where they were buried. Nothing was ever heard of them again.* When it was evident that the Congressional major- ity would not even discuss the needs of the situation, the Secretary's hand was forced. In the middle of January, Mr. Carlisle formally notified the chairman of the Senate Finance Committee that in default of action by the legislative body, the Administration would be compelled, in order to avert public in- solvency, to assume the right asserted by its prede- cessors, and issue bonds to restore the gold reserve. 4 Congress again did nothing ; on January i/th, therefore, bids were invited for an issue of fifty million five per cent, bonds, redeemable ten years after date. Subscriptions, the circular continued, 1 Treas. Rep., 1893, p. Ixxi. 1 Remarks of D. W. Voorhees in U. S. Senate ; Congressional Record, January 16, 1894, 1 Index to Congressional Record, 53d Congress, ad Session, p. 118. 4 Letter to Senator Voorhees, January 13, 1894. 18941 Congress Attacks Administration 211 " must be paid in United States gold coin," and " no proposal will be considered at a lower price than 117.223, which is the equivalent of a three per cent, bond at par." Several interesting incidents at once developed. The action of Congress, to begin with, showed again how completely Mr. Carlisle had misjudged that body in his appeal to it a month before. Bill after bill, and resolution after resolution, was introduced and angrily debated, denying the Secretary's right to issue bonds, declaring the proposed bond issue illegal, prohibiting interest payment on the bonds, and otherwise endeavoring to obstruct or cripple the whole operation. 1 It was now, indeed, that the Secretary's impolitic discussion of his powers, in his report of the previous December, had its logical re- sult ; the opposition rested its argument against the bond issue on Mr. Carlisle's own official language." During the progress of this debate, the obstruc- tionists received some characteristic aid from an un- expected quarter. The leaders of the workingmen's Kniglits of Labor organization, which at that time was controlled by an unusually blatant group of agitators, applied to the courts for an injunction against the bond issue. But the result of this performance proved that the agitators had made a blunder. The injunction suit was promptly thrown out by the Federal District Court, first on the ground that the complainants had no standing in the case, but second, and of much more import- 1 Index to Congressional Record, 53d Congress, 3d Session, p. II& * W. V. Allen, Senate speech, January 25, 1894. 212 American Finance ttB94 ance as a precedent, on the ground that the Sec- retary had an undoubted right to issue bonds for redemption purposes, and to elect in his discretion that the bonds should be payable in gold. 1 The Knights of Labor had unintentionally done the Ad- ministration a considerable service; the courts of law had now publicly taken their stand beside the Treasury. Meantime, also, the Congressional oppo- sition proved to be more vociferous than dangerous ; the silent legislators took care that none of its measures reached a vote. Beyond this mild and equivocal support of the public credit, however, the conservative element in Congress did nothing. With the bond issue formally announced, the Sec- retary's next concern was with the markets. The outlook in that quarter was hardly more encouraging than in Congress. Not the slightest eagerness was anywhere displayed by investors or institutions to subscribe for the new five per cents; nor is this reluctance difficult to understand. Along with all other domestic markets, the investment market had relapsed into stagnation and despondency. Prices for all securities were very low and capital very timid. There had been for weeks no demand for Government bonds on the open market ; the out- standing four per cents, which had longer to run than the proposed new issue, were selling at 112^, against the price of 117^ asked for the new fives. So far as concerned the prospect of European bids, it should be noticed that the minimum price stipu- 1 Decision of U. S. Judge Cox, District of Columbia, January 30, 1894. The First Bond Issue 213 lated for this ten-year bond was the equivalent of a three per-cent. bond at par, 1 whereas the French three per cents, a perpetual issue, were then selling at 97 in Paris, while the 2| per cent. British consols brought only 98! . It is true the recent redemption of its own debt at a premium had greatly enhanced the credit of the United States. But against this advantage must be set the fact that Congress, at the very time when Europe was invited to bid for the bonds of 1894, was publicly discussing measures to repudiate the entire issue. Judged by Executive precedent and tradition, there was need, in the face of this dubious situation, of prompt negotiation with the larger financial in- terests. That such solicitation is not only prudent business policy, but the legitimate office of a national finance minister, has been attested in nearly all issues of public loans, here and abroad, during the century. Mr. Carlisle was, however, very reluctant to give in any way the appearance of affiliation with the bank- ers. This reluctance would perhaps have been excusable, if anything was still to be gained or lost according as Congressional prejudice should be suited. But the time was past when Congress needed to be reckoned in with the Secretary's judg- ment of his duties; all that could possibly result now from neglect to meet the large investment in- terests face to face, was danger of losing the advan- tage in a bargain. Only two weeks had been allowed between the issue of the circular and the closing of subscrip- 1 Circular of January 17, 1894. 214 American Finance U894 tions, and during three fourths of this period the Secretary did nothing whatever. Four or five days before the final date, it became evident, from the slow receipt of bids, that as matters stood, the loan would not be taken. This was too grave a possibility to be lightly contemplated ; the Secretary, therefore, laying aside his scruples by virtue of ne- cessity, came on in person to New York. He found the situation really critical in this eleventh hour. Most of the banks honestly did not wish to buy the bonds ; all of them looked on the investment as a questionable business move. But the arguments employed in 1893, when the banks were urged to give up gold for legal-tender notes, were again in- voked; the press again spurred on the reluctant banking interests ; above all, the plea that another panic must at all hazards be averted was forced into consideration. It might have been imagined, from the extraordinary nature of the episode, that it was Turkey or China which was standing hat in hand in the money market. The outcome of this humiliating incident was, however, that the fifty million bonds were taken, eighty per cent, of them going to the New York banks at the upset price. 1 If the " syndi- cate bid " from the New York banks were to be elim- inated from the reckoning, the actual bids received for the bond issue of February I, 1894, would cover less than ten millions out of the fifty millions offered.* The lack of any thorough understanding with sub- 1 Muhleman, Monetary Systems of the World, historical appendix, p. 221. * Muhleman, appendix. 1894] Banks Draw Out Treasury Gold 2 1 5 scribers hacf another very embarrassing result. The bonds, under the terms of the Resumption Act, were to be sold for " not less than par, in coin," and the circular to subscribers required payment in gold. Subscriptions were made in the form required, and $58,660,000 gold coin was duly delivered by sub- scribers to the Treasury. But before making these payments, subscribers first withdrew $24,000,000 gold from the Treasury through redemption of legal tenders, and then turned in this same gold again to pay for bonds. In effect, therefore, nearly half of the subscriptions were paid, not in gold, but merely in legal tenders. 1 That this was a proper move I do not believe. It was not, of course, illegal, because any holder of the notes had a statutory right to present them for redemption, and technically, the bond subscribers were as much entitled to such use of legal tenders as were the gold exporters. But there was this decided difference between the two operations : .the gold-exporters had been forced by the Government to take the notes instead of stand- ard money, and were therefore fully justified, in a trade emergency, in demanding gold redemption. The bond-subscribers, on the other hand, had con- sented to a contract under which they received a full consideration, while they knew the tacit con- sideration in the Government's behalf to be the adding of fifty-eight million dollars to its actual gold reserve. The use of coin obtained on note redemp- tion was therefore an undoubted subterfuge. Its justification, if it can be justified at all, lies in the 1 Muhleman. appendix, 216 American Finance [1894 fact that the New York banks were reluctant and unwilling subscribers, and that they chose this course as a means of saving the loan from failure, while protecting their own gold holdings which they were not willing to surrender. Whether this un- fortunate result could have been avoided by early and definite negotiation with the banks is, of course, an open question. The fact remains, however, that no effort had been made by the Treasury in that direction. If the bond subscriptions had all been paid in gold obtained from outside sources, the Treasury's gold reserve would have risen by the second week of February to something like $130,000,000. As it was, the highest point touched by the fund was $107,000,000, on the 6th of March, 1894. In other words, the margin over the traditional hundred- million limit, after the February bonds had been sold and paid for, was as narrow as it had been a year before, and it soon appeared that such a reserve was as inadequate as it had been in 1893. It is true, the presentation of legal tenders for redemption by subscribers to the bonds had increased considerably the Treasury's surplus in that form of money, 1 so that after January, 1894, the gold reserve was no longer drawn upon to meet the monthly deficit." But we have seen that foreign exchange was by this time moving steadily against the United States, and we have also seen why the movement was com- mercially inevitable. The Treasury had indeed taken from outside domestic circulation, through its 1 Treat. Rep,, 1894, p. 55. */&' Treas. Rep., 1896, p. 5. 228 American Finance [1894 be included within this Union, according to their respective numbers," ' and it further and still more explicitly declares that " no capitation or other direct tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken." * The question then presented was, Is the income tax a direct tax within the meaning of the Constitution ? If so, the fact that it was not ap- portioned by the Act of 1894 to the several States according to population, but was levied solely on citizens enjoying more than the stipulated $4000, and was levied, moreover, in proportion to their in- come, must be fatal to the law. On April 8, 1895, the Court ruled that taxes on real estate, or on rents derived from real estate, were direct faxes, and it therefore annulled the law so far as in- comes of this nature were affected.* At the same time, it pronounced unconstitutional the levy of Fed- eral taxation on incomes derived from municipal securities, the Court's theory being that such a tax was a tax upon the borrowing power of a State or its instrumentality, and hence repugnant to the Consti- tution. 4 On the broader question whether the whole Act imposing an income tax was void for want of uniformity, the Court divided equally in April. It heard argument on the case again in May, 1895, and on the 2Oth of that month at length decided that a tax upon a citizen's whole income was a tax upon the property whence such income was derived ; that, as a tax on property, it was a direct tax within 1 Article i, section 2. * Article i, section 9. 1 39 U. S. Supreme Court Reports, p. 759. *IHd. 18941 Tariff Law and Revenue 229 the meaning of the Constitution, and was therefore void because of its unequal distribution. 1 This im- portant ruling was sustained by five Supreme Court judges in a bench of nine, the majority vote includ- ing not only the Chief Justice, but the oldest and most experienced members of the Court among them Justices Field and Gray. A change by one of the younger members, Justice Shiras, from a vote in favor of the law in April to an adverse vote in May was, however, the deciding influence in deter- mining the Court's opinion. The annulment of this income-tax provision, it was asserted then and afterwards, prevented the Act of 1894 from yielding a surplus revenue. The truth, however, is, that so incorrect were the forecasts of the legislators that a deficit would equally have oc- curred, even had the income tax remained in force. Congressional estimates of its yield were based on the supposition, unwarranted by all experience in taxation, that an income tax could be collected exactly as imposed. The delusive character of such expectations had been shown to the legislators long before they passed the Wilson Bill. The chief of the Government's statistical bureau had reported in April, as a result of careful investigation, that " the possible revenue under that income tax would range from $12,000,000 at the lowest rate to $39,000,000 at the highest," and the lower average was predicted for the early operation of the law." Such a result 1 39 U. S. Supreme Court Reports, p. 1108. 8 W. C. Ford, Chief of U.S. Bureau of Statistics ; letter to Sen- ator Hill, April 3, 1894. 230 American Finance 11394 would have ensured a deficit only slightly less than those of 1895 and 1896. In short, the Treasury had obtained little more real relief from its appeal for revenue legislation than from its appeal for authority to issue bonds. For a single month there was a surplus revenue, wholly due to .payment of whiskey taxes in advance of the imposition of the increased internal schedules ' ; but by October, 1894, the monthly deficit had risen to thirteen million dollars, the largest of the year. Even when it had become evident that the new revenue act would not remove the deficit, Congress did nothing to help the Treasury. Its single proffer of relief, during the entire session, was a bill direct- ing the Treasury to coin and use the fifty-five millions " seigniorage" theoretically acquired by the Gov- ernment in buying silver at the market price and paying it out in over-valued silver dollars a strange expedient in the face of a drain of gold forced by an already redundant circulation, and properly vetoed on that ground by the President.* This bill was urged on the usual ground that the country was suffering for lack of circulating medium, whereas the money supply, as we saw in the preceding chap- ter, had been increasing more rapidly than in any previous period of our history. Never had the American money supply approached the volume shown in the Treasury estimates of February, 1894. The absurdity of the complaint of an insufficient 1 Classified Treasury statement of receipts and expenditures fox August, 1894. * President Cleveland, veto message of March 29, 1894. 1894] The Endless Chain 231 currency was forcibly displayed in the autumn of 1894, when the Treasury deficit once more threw into the money markets twenty-five millions of the public surplus, 1 and when, as a consequence, the outward movement of gold again grew heavy. On August /th redemption of legal-tender notes for ex- port gold had reduced the Treasury's gold reserve to $52,189,500,* or less even than its minimum before the February loan. Another appeal was made to the New York banks to exchange their gold for the legal tenders in the Treasury, and again the banks thus surrendered some fifteen millions gold.' But this was little help ; it could not affect the gold-expulsion move- ment. Having borrowed on its surplus notes all of the gold obtainable, the Treasury again undertook in November to borrow on its bonds. The experi- ence of January was repeated; a banking" syndi- cate " was hurriedly forced together. Half the subscription gold was again obtained from the Treasury through redemption of legal tenders not immediately, for the large subscribers had tacitly agreed to obtain their gold from other sources, but afterwards, when subscribers who had quietly bor- rowed the necessary gold from other banks on thirty- day gold notes repaid such obligations at maturity through Treasury redemptions. In its original pur- pose, then, the loan was again a failure ; the more immediately so in that the sight of a suddenly crumbling gold reserve, at a time when the Treasury 1 Trtas. Rep., 1896, pp. 55, 125. Ibid., 1894, p. Ixix, 232 American Finance 11994 was believed to be at last protected, awoke the wildest dismay in the home and foreign investment community. " We have," the President remarked to Congress on the completion of the loan, " an endless chain in operation, constantly depleting the Treasury's gold, and never near a final rest." ' The home and foreign markets were in fact forced to the belief, at the close of 1894, that pres- ervation of the gold standard and of the public credit was no longer possible. It certainly had be- come impossible through the whipping into line of reluctant city banks. The first loan of 1894 had failed of its purpose within ten months ; the second had failed within ten weeks, and, outside the loan market, no recourse was left to the Government. Such was the panicky rush of home and foreign capital to escape before the anticipated crash, that sterling rates advanced even above the normal specie-export point. In January, 1895, $25,900,000 gold went out on export, and the enormous sum of $45,000,000 was withdrawn from the Treasury in redemption of legal tenders.' The gold reserve had risen to $111,000,000 after the payments on the December loan of 1894; by February, 1895, it had fallen to $41,340,181, and it was falling at the rate of nearly two million dollars daily. In the first week of February, a telegram came to the Secretary from the Assistant Treasurer at New York, warning him that the New York office could hardly continue redemption of legal tenders more than one day 1 Annual Message, December 3, 1894. 1 Treas. Rep., 1896, p. 131. 18051 Collapse of the Gold Reserve 233 longer. 1 The crisis predicted in 1880 by Secretary Sherman and in 1884 by Secretary McCulloch, and foreshadowed with increasing distinctness ever since the enactment of the Law of 1890, was 'now so plainly imminent that the business community anticipated nothing else than suspension of gold payments. Such was the situation in the closing week of January, 1895. Merchants and bankers now busied themselves putting their houses in order against the expected surrender of the Treasury. The falling markets during the first three days of that week, Jhe half-suppressed excitement in business circles, and the discussion which began over the probable nature and immediate results of a lapse into de- preciated currency, reflected the common feeling that a few days, and possibly a few hours, would settle the question finally. On Thursday, January 3 1st, a sudden change occurred. The markets rose rapidly, foreign exchange declined, gold-ex- port engagements were cancelled, and the rumor ran through all business centres that the President had met the emergency. . 1 Assistant-Secretary Curtis, Associated Press interview of Feb- ruary 25, 1895. CHAPTER X THE BOND-SYNDICATE OPERATION THE action taken by the Administration, in the Treasury crisis of 1895, involved one of the most remarkable experiments in the history of finance. It was the Treasury's double problem now to restore the gold reserve and to prevent the im- mediate withdrawal of the specie thus obtained, and this could not be done through another bond sale similar to that of December, 1894. It could not be done directly through the banks at all. There re- mained the large international banking houses which are commonly employed as agents for important Government operations in the money market, and which had been employed by Mr. Sherman in the resumption operations of 1878 and 1879. What terms could have been made with these in- ternational interests, had they been approached in 1893 or 1894, is a matter of conjecture. Their terms as now submitted, in the crisis of January, 1895, were extremely harsh; they measured with little mercy the emergency of the Treasury. They unfolded what they believed to be a practicable plan 234 1895] The Belmont-Morgan Contract 235 for both restoring and maintaining the Treasury reserve, but they made the consideration for their services the allotment of a thirty-year four per cent, bond at a price equivalent to 104^, when the existing United States four per cents, with less than half as long to run, were bringing 1 1 1 on the market. 1 This was asking a heavy concession; no such demand has been made by any Government-bond syndicate during the present generation. On the other hand, the foreign bankers offered to bind themselves, under conditions which we shall presently examine, to guarantee the maintenance of the Treasury gold reserve, and they submitted one rather important counter-proposition. The four per cents, sold at the stipulated price of 104^, were equivalent to a 3f per cent, bond at par, 1 whereas the loans of 1894 had sold on a par basis of three per cent. ; but the alternative proposition of the syndicate was that they would pay par for a three per cent, bond, provided pay- ment should be expressly stipulated in gold. This was, on the whole, a safe proposition for the bankers to make, because express provision for gold payment could not be inserted without an act of Congress, and there was not the slightest likelihood that any such act could pass. A bill with that provision was in fact introduced in the House of Representatives in February, and was immediately defeated by a vote of 167 to 1 20. This vote was taken February 7th ; on February 8th the Secretary of the Treasury 1 Muhleman, Monetary Systems, appendix, pp. 224, 225 ; New York Financial Chronicle, February 9, 1895, p. 236. 236 American Finance 11895 signed a contract on the syndicate's own terms with Messrs. J. P. Morgan & Co. and Messrs. August Belmont & Co., the second of these firms represent- ing the powerful foreign house of Rothschild. The bonds thus sold amounted to $62,315,400, and they brought $65,116,244. The wild clamor which instantly broke out at Washington seemed actually for the time to stun the Administration party. It was echoed in the oppo- sition press; nor, indeed, did the Administration's supporters throughout the country show, as a rule, anything but bewilderment. In the storm of angry denunciation, perhaps the only unmoved figure was the President ; who, having chosen his position, held to it with characteristic resolution. In his special message to Congress, February 8th, Mr. Cleveland wrote that in his judgment the transaction " promises better results than the efforts previously made in the direction of effectively adding to our gold reserve." Ten months later, in his Annual Message of Decem- ber 2d, he declared that he had " never had the slightest misgiving concerning the wisdom or pro- priety of this arrangement," and that, individually, he was " quite willing to answer for his full share of its promotion." Let us now see what happened between the dates of these two declarations. The two considerations in the contract with the syndicate, which had not appeared in any previous bond sale, were contained in the following provisions : " At least one half of all coin deliverable hereunder shall be obtained in and shipped from Europe," and " the parties of the second part, and their associates 1895] The Syndicate s Problem 237 hereunder, ... as far as lies in their power, will exert all financial influence and will make all legitimate efforts to protect the Treasury of the United States against the withdrawal of gold pend- ing the complete performance of this contract." Since it was also stipulated that deliveries of gold from Europe " shall not be required to exceed 300,- ooo ounces per month," and since 1,750,000 ounces in all were to be imported in order to fulfil the con- tract, it followed that this engagement in the Treas- ury's behalf would hold good during about six months. Now there had been only two important sources of gold withdrawal from the Treasury : gold-export- ers who were unable in any other way to meet their obligations on an advancing foreign exchange market, and subscribers to the bond-issues who converted their notes into coin to make their pay- ments. There had been practically no withdrawal for simple hoarding purposes ; in his intimation to this effect, in his report of 1894, Secretary Carlisle was mistaken. 1 The syndicate's engagement, then, was first a pledge to obtain all gold for their sub- scription elsewhere than at the Treasury, and second, it was a promise to stop, if humanly possible, the redemption of notes for export gold. The first of these pledges was simple enough ; the second in- volved extraordinary difficulties. We have seen in another chapter that withdrawal of Treasury gold for export purposes had become a measure of necessity, because the sterling bankers 1 Treas. Rep., 1894, pp. Ixix., IO. 238 American Finance [1895 had in the ordinary course of business contracted foreign obligations which they were forced to meet through gold remittances, while they could get no gold for the*, purpose except at the Treasury's re- demption office. If, then, the syndicate was to " protect the Treasury against the withdrawal of gold " for export purposes, it must do one of two things provide in this country, at its own expense, the necessary gold for export, or provide a credit fund in Europe which should make gold remittances unnecessary. The first it certainly could not do ; the comptroller's compilation of the previous De- cember had shown that all the national banks in the country held only $146,000,000 gold, while the New York banks in February held only $82,000,000. No banker or combination of bankers had the power, in case of repetition of 1894*5 exchange- market conditions, to procure the $100,000,000 gold which had gone out that year on export. 1 The second expedient was possible. A banker's draft on London, forwarded to a London creditor, must be redeemed in current English funds at a Lon- don institution. If the New York maker of the draft has shipped the necessary sum in gold, the draft will be honored on the arrival of the specie. But if the maker of the draft has borrowed the requisite sum in London on his individual credit, he possesses equally the means of foreign settlement. This was the principle on which the syndicate of 1895 under- took to act. They proposed to sell in New York whatever drafts on London should be needed by the 1 U. S. Bureau of Statistics ; foreign-trade statement for Decem- ber, 1894. 1895] Foreign-Exchange Houses Combine 239 banking and mercantile community, and to meet the drafts in London through the use of their own credit on the London money market. The magnitude of this undertaking will readily be perceived. If the demand for such remittances, which had forced the hundred million dollars gold exports of 1894, were to be repeated, the failure of the experiment was inevitable. No banker or com- bination of bankers could borrow any such amount on its joint or individual credit. This well-known fact explains the reservation in the contract, whereby the syndicate pledged results only " so far as lies in their power." Both they and the Government, however, took the chance. With the double pur- pose of ensuring themselves against competitive sales of exchange and of ensuring the Treasury against export - gold withdrawals by competing bankers, the syndicate next took the unprecedented step of binding together in the undertaking every banking house and every bank in New York City with important European connections. All of these firms and institutions were admitted to the syndi- cate, part of the new four per cent, loan being dis- tributed among them at profitable rates. In return for this allotment, they bound themselves, as the Belmont-Morgan syndicate had already bound itself, to draw no gold from the Treasury pending the exe- cution of the contract. It was hoped by this means to set the Treasury on its feet. The London critics instantly pronounced the undertaking impossible. 1 They pointed out, cor- ' London Economist, 1895, February 23, June 15, July 6, August 10. 240 American Finance rectly enough, that the syndicate proposed to dam up a natural commercial movement ; from this they reasoned that eventually the dam must overflow, and that when this happened, the artificial obstruc- tions erected by the New York bankers would be instantly swept away. We shall presently see how far this London judgment had a solid basis. The syndicate, however, was working on a different theory. Its members were aware, of course, that a withdrawal of foreign capital equal to that of 1894 or 1893, with the consequent excessive demand for drafts on London, would break down the whole experiment. But suppose this demand for remit- tances to Europe were not to be repeated. Thft mere fact that the Treasury and the currency were protected would remove one very important cause of the recent flight of European capital. If, in ad- dition, such an agricultural year as 1879 or l %9 1 were again to be witnessed, it would be found that the syndicate operation had merely equalized the whole year's movement of exchange. In the spring they would sell their drafts on London, depositing at New York in current funds the proceeds of the sale. In the autumn the possession of this accumulated New York fund would enable them, when London needed remittances to New York, to draw on their New York deposits, sell the drafts to the European remitter, and with the proceeds pay off their London debt. It was, perhaps, a doubtful chance, but it was worth the trying. On the basis of such contingent calculations, this remarkable experiment began. During many weeks, 1895] Trade Recovery Begins 241 the moves of the syndicate were watched with seep- ticism in both London and New York. But the operation went on smoothly. Except for some in. significant West Indian consignments, there were no gold exports, and gold withdrawals from the Treasury fell to an unimportant minimum. 1 The foreign-exchange market continued very strong; in fact, the ruling rate was higher even than the aver- age of 1894 ; but at these rates the syndicate supplied remitters with all necessary drafts on London, and the gold contracted for delivery from Europe duly arrived at the rate of five million dollars monthly. From the New York banks associated with the syndicate had been obtained, within a few weeks after the signing of the contract, most of the $37, 500,000 domestic gold pledged for delivery to the Treasury. On February Qth, these banks reported specie holdings of $82,263,900; on April 6th, they held $64,471,200. They made no effort to recoup themselves through note redemption at the Treas- ury ; a fact which at least suggests the possibility that skilful negotiation might have achieved the same result in 1894. On June 25th, the hundred- million Treasury reserve was again intact ; on July 8th, it reached $107,571,230. Long before July, the syndicate's expectations had apparently been fulfilled by a decidedly favor- able turn in all the markets, and by a complete re- versal of attitude by European investors. In these regards, the events of 1895 were among the most remarkable in our history. It must be remembered 1 Treat. Jf.ep., 1895, p. 7. 242 American Finance 11993 that the industrial paralysis of 1894 had alike affected import trade and home production ; both had fallen to the lowest level in many years. It resulted that surplus stocks of merchandise were abnormally small. A sudden demand would exhaust them very quickly, and such a demand began almost within a month of the February bond negotiation. The buying power doubtless came in some degree from actual con- sumers; but it was chiefly speculative, originating in the growing belief that with the Government's finances out of danger, healthy industrial conditions would return. During this season, the commercial markets presented for a time a spectacle almost equal to that of 1879. Hardly an article of domes- tic produce or manufacture failed to rise in response to this increased demand. The iron market led the movement. From a weekly record of 157,000 tons in February, the country's iron production rose by November to 217,- OOO tons per week, the largest in the country's history, and in spite of this heavy increase in the output, the stock of iron on hand for sale had been decreased through urgent purchases nearly half a million tons. 1 The price of iron, meantime, had risen two to three dollars per ton. Along with this advance in iron came rapid recoveries in the grain markets; in cotton, provisions, oil; and notably in print cloths, the staple of the dry-goods market, whose price rose twenty-five per cent, between Feb- ruary and November. While these advances in commercial prices were in their beginning, during 1 New York Iron Agt, November 14, 1895. 1895] Return of European Capital 243 the early spring, the market for securities moved up slowly and suspiciously, foreign scepticism over the bond operation still finding voice in speculative sales which offset the timid investment purchases at home. In May, however, came a sudden change. The month began with large purchases of new American securities by London banking houses. Bonds issued by several important railways, for im- provement purposes, found a ready sale abroad, and brought unexpectedly good prices. This was ap- parently the only stimulus needed for real recovery of confidence. Almost simultaneously, a buying movement in " Americans" began on all the im- portant European markets. This sudden and enormously heavy foreign buying was in part explainable by the condition of the /oreign investment markets. Since the Baring col- lapse of 1890, English capital had been timid and its investment and speculative ventures few. Against 189,436,000 new security issues taken by London investors during 1889, only 49, 141,000 had been floated in 1893.' But now an important change was taking place. In 1885, gold had been discovered in the Kaffir country of South Africa; two years later, the gold production of that country had be- come considerable, and London capital began to seek investment in the Transvaal; by .1892, the annual output of the mines on the Witwatersrandt alone exceeded twenty million dollars. 1 Towards the middle of 1894, the incorporation of joint-stock * London Economist, January 5, 1895. 8 U. S. Mint Rtpert, 1892, pp. 63, 65. 244 American Finance U893 mining companies in London, enormously capital- ized, was undertaken with unusual activity. The Rhodeses and Barnatos of the African domain began to cut an important figure on the London and Continental markets; with the opening of 1895, an old-fashioned popular craze of speculation broke forth throughout England. It chanced, by one of those odd coincidences of which financial history is full, that this fever of speculation reached its height at the very moment when the United States Government-bond syndicate had apparently solved the problem of the Treasury. The sudden reversal in the American situation, and in particular the rise in prices on the commercial markets, offered at once a fresh field of activity for the excited London adventurers, and they started in suddenly to buy American securities. During two weeks of May, 1895, this foreign buying was so heavy on our own exchanges that every outbound European steamer carried a mass of American stocks and bonds consigned to European houses. Sterling exchange broke from the high level of $4.89, a figure which it had maintained ever since the Febru- ary contract, and which would ordinarily compel gold exports, to $4.86$, or par, touched in the second week of May. The syndicate bankers were already selling in London drafts on their New York deposit fund, and paying off their London money- market obligations. So far the experiment appeared to be assured of complete success. Whether, in the event of a par- ticularly large and profitable merchandise-export 1895] Outbreak of American Speculation 245 market in the autumn, the syndicate could have achieved all of its purposes, is a matter of some uncertainty. But to those who looked below the surface, there were signs of danger in the very phenomena which were now inspiring the business community with new hopes. For one thing, the time was extremely unfortunate for hasty and ex- tensive domestic speculation. The speculators ran far beyond the limit both of genuine trade demand and of available domestic capital. We have seen in previous chapters the bad results of such operations, even in the best days of the resumption year; we have also seen how far a similar movement paved the way in 1892 for the collapse of 1893. The com- mercial consequences of the speculation of 1895 were similar to those of preceding years. Prices were carried so high as to serve the purpose, doubly mis- chievous under existing conditions, of increasing merchandise imports and checking exports. During the first half of 1895, imports increased ten million dollars a month over the corresponding periods of the year before. Nor were results any more fortunate in the export trade. The syndicate's hopes in this direction were utterly disappointed partly, no doubt, because the corn-crop failure of the previous season had left little of that commodity to sell, but chiefly because of the wild domestic speculation for the rise in wheat. The early American wheat crop was dam- aged by frost; the later crop was very large; but the speculators, acting on the basis of the first re- ports, actually ran up the price, between February 246 American Finance 11895 and June, thirty-three cents a bushel. As in the fall of 1879, this excessive movement brought the export trade to a halt. While speculation raged in Chicago, Russia was quietly supplying the needs of European consumers. In half a dozen staple markets, the course of events was similar. As against the heavy excess of merchandise exports during 1894, imports during the first nine months of 1895 actually exceeded exports by forty-three million dollars decidedly the largest balance of merchandise trade against us since the climax of speculation in 1890. What happened with wheat happened also with securities. Prices of stocks and bonds rose rapidly in May, in response to the foreign buying; but in the next two months American speculators for the rise carried prices so much higher that Europe, still more or less sceptical over the syndicate experiment, seized on the tempting opportunity to secure a profit, and sold back in quantity its holdings of American securities. Even the new four per cents, one half of which the syndicate had placed in Lon- don, taking all possible precautions to prevent their early return, were unloaded on the New York market almost as soon as they were released; the home speculators had forced up the price, within two months, from 119 to 124. These various results followed the inexorable rule of commercial logic; but they doubled the strain upon the syndicate. Foreign exchange returned quickly to the normal gold-shipping point, after its sudden fall, and once more the bankers had to bor- 1895] Syndicate Loses the Market 247 row heavily in London. Now, moreover, two radi- cal defects in the syndicate's plan of operation began to betray themselves. The bankers had contracted to obtain one half the gold for the Treasury in Europe. Economically speaking, this was a mis- take. It added precisely the sum of the gold im- portations to the syndicate's London debt, and it increased a domestic money supply already notori- ously excessive. The second defect in the syndicate plan was in- evitable from the nature of the operation. By the coalition of all the international houses at New York, the bankers had in a certain sense cornered the foreign exchange market. They could not, to be sure, exact any very exorbitant price for drafts, because such a policy would have forced mercantile remitters to combine for mutual protection and ship gold on their own account. But the minimum selling price fixed for their drafts by the syndicate in midsummer was $4.90 to the pound sterling. A few months before, when drafts were " covered " in export gold, bankers had sold these sterling drafts freely at $4.88^ or less. That is to say, a New York merchandise importer with a foreign-trade debt of ; 10,000 to settle, had to pay $49,000 for his draft in the middle of 1895, whereas the highest rates of 1894 had cost him only $48,850. The motive of the syndicate bankers in exacting this high rate was ob- vious enough. The success of the experiment was growing doubtful; their London borrowings had become very large. They might be forced to export gold, and they fixed their price for sterling drafts so 248 American Finance [1995 high as to protect themselves from loss in such emergency. But in so doing, they opened a wide inducement for competitive sales of exchange. Apparently the syndicate alliance of February had swept the market clear of competition. But the syndicate was destined to pass through the experience which awaits every manipulator of a market corner, whatever his pur- poses or motive. All commercial experience teaches that the most skilful possible preparation for a corner will, in nine cases out of ten, overlook some source of supply, able to fill current demand at lower prices, or that in the final strain upon the market some new yource, hitherto unheard of, will be discovered. Ex- actly this happened in 1895. With a demand for millions of exchange drafts in the market, with no exchange house in New York selling below $4.90, And with a trade profit in selling exchange at $4.88^- and shipping gold to " cover," a New York coffee- importing house with powerful European connec- tions entered the sterling market. It offered drafts one cent per pound below the minimum of the syndicate ; the syndicate houses made no change in rates, and their new competitor therefore instantly had the market in its hands. On July 2Oth, this house presented $1,000,000 legal tenders at the Treasury for redemption and shipped the gold to London against its sales of sterling in New York. During the next five months, $65,000,000 gold was shipped, all of the specie being obtained from the Treasury. From its summer maximum of $107,000,000, the gold reserve 1895] Better Outlook for the Treasury 249 declined again to $63,000,000 on December 31st. 1 Recognizing that its undertaking to protect the Treasury had broken down, the syndicate did what it could to help out the Government through volun- tary exchange of gold for notes. In August and September, it thus paid over some twenty millions gold, which was immediately engulfed in the specie exports ; this being only the old and futile expedient of 1885, of 1893, and of 1894. In October the syndi- cate contract expired by limitation, and even the voluntary " reimbursement " ended. Apparently, the syndicate experiment had failed, and nothing was left for the United States but a repetition of the financial strain of 1894. But the situation was not by any means as hope- less now as it had seemed to be a year before. The syndicate's partial mistakes of judgment and the plunge of domestic industry into speculation had done mischief, but they could not wholly offset the real recovery of trade during the interval of reassur- ance. There were other reasons why the outlook was less discouraging. The Fifty-third Congress, whose action or inaction on the question of the cur- rency had alternately menaced the public credit, had gone to the people in November, 1894, and had been repudiated by an overwhelming vote. The Democratic House plurality of ninety-one under the elections of 1892 was turned by the vote of two years later into a Republican plurality of one hun- dred and forty. Little was expected in the way of constructive legislation, even with this radical change 1 Treas. Rep., 1895, p. 51. 250 American Finance [1395 of membership, and nothing was obtained. But it was at least anticipated, and correctly, that the Fifty-fourth Congress would take warning from the fate of its predecessor, and put a stop to the policy of financial agitation. But more important than either of these two in- fluences were two facts which bore directly on the currency dilemma in the closing months of 1895; first, that the country's actual commercial use of money was nearly eighteen per cent, greater than in 1894 and larger by twenty per cent, than in 1893 ' ; and second, that the very process through which the Treasury's gold, accumulated through its suc- cessive loans, had been drawn out, had added to the Government's surplus of legal tenders no less a sum than $101,000,000.' This was one fifth of the entire amount of legal-tender currency in existence. Ex- cept through a revenue deficit, this Treasury legal- tender surplus was removed from the outside cur- rency supply, and the revenue deficit, as a result of the merchandise import movement, had fallen to comparatively small proportions. At the close of December, 1895, even the New York banks held twenty-four millions less in legal tenders than they had held a year before, and twenty-seven millions less than at that date in 1893.' These were important changes ; but they had not 1 New York Financial Chronicle ', January II, 1896, p. 62. ' Statements of January 31, 1894, and December 31, 1895 ; Treat. Rep., 1896, p. 55. ' New York weekly bank statements, December 28, 1895 ; Decent* ber 29, 1894 ; December 30, 1893. 1896) The Fourth Bond Issue 251 yet undone the mischief. Trade at the close of 1895 was certainly no more active than at the close of 1891, and the outstanding supply of paper currency was as large or larger. 1 That the situation was still sufficiently precarious was shown not only by the gold withdrawals on the breaking of the deadlock in exchange, but by a sudden and violent outpour of gold in December, 1895, when the extraordinary Venezuela episode stirred the London investment community to its depths, and threw on the Ameri- can market a load of liquidating foreign sales. But the nature of the problem was now much more plainly understood by both Government and people. The Administration acted promptly, and in a differ- ent way from any of its previous experiments. On January 6, 1896, the Treasury announced a new four per cent, loan for the very large sum of one hundred million dollars. Subscriptions for this loan were again required in gold, and the use of gold obtained from the Treasury through note redemption was again as generally practised as in 1894. But we have seen that the floating supply of Government notes available for such purposes was now materially reduced. Gold or legal tenders subscribers must obtain to cover their subscriptions, and the demand for both these forms of money was increased by the fact that the loan was offered at popular subscription to the highest bidders, and that the number of intending subscribers was known to be extremely large. The result was curious. Some of these subscribers made 1 Treat. Rep., 1896, pp. xax, 122. 252 American Finance tie** an open market bid for gold coin ' ; some adopted the much more unusual expedient of bidding a frac- tional premium for legal tenders which might be used to get gold from the Treasury.* One or two bankers paid a premium for gold abroad, as the syndicate had done in 1895, and imported it for subscription purposes ; and this incoming gold actually passed on the ocean outbound gold con- signed from the United States to Europe.* All this situation was abnormal enough, but it arose from two really encouraging conditions the existence of many competing bidders, which occasioned a de- mand for currency several times larger than the actual face value of the loan, and the fact that the dangerous over-supply of Government de-, mand obligations on the market was already ma- terially reduced and was about to be reduced much further. In effect, the Cleveland Administration was at last doing, by virtue of necessity, exactly what Hugh McCulloch had undertaken to do, thirty years before ; it was converting its floating debt into a funded loan. That it was not retiring perma- nently the notes thus redeemed from a redundant circulation, and replacing them by a conservatively constructed bank-note circulation, was not the Ad- ministration's fault. From his first report to his last, Secretary Carlisle had discussed and urged this 1 New York Financial Chronicle, January 18, 1896. * New York Evening Post, January 25, 1896 ; New York Tribune, January 26, 1896. 1 New York Financial Chronicle, January 18 and February 8, 1896 1896] Beginning of Real Recovery 253 solution of the problem ; but Congress would not listen. The loan of 1896 succeeded. It was, in fact much more than merely the successful rehabilitation of the gold reserve against United States notes. The Government loans of 1894 were placed, it will be recalled, only through urgent personal solicitation with the banks, and the loan of 1895 amounted to the purchase, at a very high price, of the services of an international syndicate to protect the gold reserves. But the $100,000,000 four per cent, loan of February, 1896, offered unreservedly to the highest bidders among the investing public, elicited no fewer than 4640 individual bids, applying in all for no less than $568,000,000 one of the most gratifying responses in the Government's fiscal history. 1 The accepted bids ranged all the way from nof to 120, whereas the four per cents, of 1895 had been taken by the syndicate at 104 , had sold no higher than 124 at the height of that year's midsummer speculation for the rise, and had been quoted at only 113 when the loan of 1896 was on the market. The resolution, unanimously adopted by the New York Chamber of Commerce on February 6th, the day following the opening of bids, to the effect that " the success of this loan should dispel every doubt as to the ability and intention of the United States Government to redeem all its obligations in the best money in the world," correctly enough reflected the inference of financial markets. So far as concerned the results in the Treasury's own finances, it remains 1 New York Financial Chronicle, February 8, 1896. 254 American Finance L1896 only to say that on the day before the instalment payments against the loan subscriptions began, the Government gold reserve had fallen to $44,563,493, and that, within seven weeks, it had risen to $128,- 7 1 3.709.' Gold exports, in connection with uneasiness over the Presidential campaign which followed, did, to be sure, again bring the reserve on July 23d, as low as $89,669,975, and another proffer by the banks of $25,000,000 gold in exchange for legal tenders in the Treasury was considered necessary." But the swift movement of events proved that even this recourse was superfluous. Long before 1896 was over, the foreign exchanges had turned in favor of New York ; the gold reserve never, after July, 1896, fell back below $100,000,000; a new era in American finance, which we shall have next to review, had opened, and in March, 1900, when the statute was finally passed, declaring gold to be the standard of value in the United States, this proviso was inserted : " It shall he the duty of the Secretary of the Treasury to set apart in the Treasury a reserve fund of $150,000,000 in gold coin and bullion, which fund shall be used for such redemption purposes only." To this was added the definite instruction to future Secretaries of the Treasury, that this $150,000,000 fund shall be maintained " by exchanging the notes so redeemed for any gold coin in the general fund of the Treasury " and " by accepting deposits of gold coin ... in exchange for the United States notes so redeemed " ; and that if, in spite of these pre- 1 Daily Treasury statements, February 10 and March 31, 1896. * New York Financial Chronicle, July 25 and August I, 1896. 1900] The Gold Standard Act 255 cautions, "the gold coin and bullion in said fund shall at any time fall below $100,000,000, then it shall be his duty to restore the same to the maximum sum of $150,000,000 by borrowing money on the credit of the United States." As for reissue of Government notes redeemed from the gold reserve, the Act of 1900 established the further highly im- portant rule that such notes " shall be held in the reserve fund until exchanged for gold." It will be observed that this statute operated to reform, in five important particulars, the evils of the old system whose effect on the public credit and on private finance we have seen in our previous chapters to have been altogether disastrous. First, the gold reserve against United States notes is absolutely set apart as a distinct fund for a specific purpose, and not left to contradictory interpretation of the language of a compromise statute by legislators and courts. 1 Second, the $100,000,000 minimum is increased to $i 50,000,000, in line with Secretary Carlisle's opinion.* Third, the use of this gold reserve to meet a deficit in revenue is forbidden a use which was a funda- mental cause of its depletion in 1893.' Fourth, the raising of public loans to make good a serious inroad on the gold reserve, through redemption of United States notes to procure gold for export purposes, is not only authorized but required a power over the public credit which had up to that time been strenu- 1 See pp. 24, 167, 185, 186, 209, 210, 211 ; also minority report H. R. Judiciary Committee ; Congressional Record, July 6. 1892. 9 Treas. Rep., 1893, p. bud. ' See pp. 103 and 204. 256 American Finance 11900 ously contested. 1 Fifth, through the holding back of notes once redeemed, until the gold reserve is made good again, provision is made for normal con- traction of the outstanding supply of notes at such a juncture the lack of which provision had repeatedly, in the preceding decade, aggravated the strain upon the Treasury, and deprived it of the self-protective power enjoyed by all great banks of issue.* In other words, the time was very near, even in the troubled year 1896, when the loose and unscientific fiscal statutes, on which had converged the doubts and around which had raged the political conflicts of a generation past, were to be replaced by a sound and unmistakable declaration of policy for the future. I have anticipated the progress of our narrative by this glance ahead at the legislation of 1900, because it was in many ways the logical sequel to the events narrated in this chapter. It now remains to tell con- secutively the very extraordinary story of American finance after 1896 a story which has no parallel for dramatic contrasts in the history of the United States, and few, if any, in the financial history of the world. 1 See p. 211. 9 See pp. 49 and 50. CHAPTER XI THE "INDUSTRIAL BOOM" OUR narrative is now about to enter upon a very remarkable chapter in American finance. It is a chapter which, so far as regards its general ten- dencies, may possibly be said merely to have repeated history; but which, when judged by the dramatic change in the country's financial condition, and by the portentous character of the phenomena of the day, stands quite by itself. What we have to consider, in our review of the five or six years which followed 1896, is such reversal of its position by the United States that, instead of the crippled industrial and financial state of 1894, with the country's principal industries declining, its great corporations drifting into bank- ruptcy, and its Government forced to borrow on usurious terms from Europe to maintain the public credit, there was presented, in the short space of half a dozen years, a community whose prosperity had become the wonder of the outside world; whose productive industries had developed such strength that the "Amer- ican invasion" was discussed abroad as threatening 17 257 258 American Finance [1896 ruin to our European competitors; whose corporations, when properly capitalized and managed, had grown so profitable that the strongest financial interests of the world were struggling to buy possession of them; whose banking-houses subscribed in important sums to new English and German Government loans, not to mention the public bond issues $100,000,000 in all, within seven months of Cuba, Japan, and Mexico. The startling ups and downs of fortune which have occurred in other communities are familiar. The story of alternating "booms" and panics is largely the story of modern industrial progress. It is, however, the fact of a complete revolution in this country's position, not only as regards its own enterprises, but in its re- lation to other industrial States, which challenges atten- tion, and it is this which we shall now examine. Two underlying phenomena of the day, of the first importance to finance, require notice before resuming the narrative of consecutive events. Their scope of influence was world-wide; they should, on the face of things, have operated as effectively in shaping Euro- pean finance as in shaping our own. Yet the salient fact of the period is the expansion of American indus- trial activity out of all proportion to that in other coun- tries, and it will be a part of our program to discover why. These two phenomena were the immense in- crease in the world's gold production, and the world- wide rise in prices of commodities. A moderately rapid increase in annual gold output had been in progress during the half-dozen years before 1896. The 1896] The World's Gold Output 259 gold product of 1896 itself was greater by 50 per cent, than that of 1892, and was very nearly double that of 1884. But the annual increase after 1896 was far more rapid. In 1893, the world's total output was $157,494,800; in 1896, $202,251,600; in 1899, $306,724,100. * In 1898 alone, the increase in annual product over 1897 (whose own output broke all preced- ing records) was more than $50,000,000 2 ; this marked an increase greater than had been scored in any previous year but one of the world's history that exception being the $67,000,000 increase of 1852, when the miner's pick was dislodging the richest surface deposits of Australia and California. 3 . Now there can be no doubt that this increase had its effect on the financial movement of the period; how much effect, is a controverted question. Professor Cairnes showed fifty years ago, when the new gold was pouring in from Australia and California, that prices of commodities, the world over, were affected because, primarily, the new mining communities gave large orders for goods to the older manufacturing States, thus creating a new demand, which paid its price not in other merchandise, but in gold. 4 It is difficult to trace this process in the gold production of to-day; for the world's great gold-fields are now owned, as a rule, 1 U. S. Mint, annual estimates. * Ibid. 3 Report, Parliamentary Commission of 1876, on Depreci- ation of Silver, based on figures of Tooke, Newmarch, and the London Economist. * Essays in Political Economy, ]. E. Cairnes. 260 American Finance [1897 not by scattered individuals, but by joint-stock cor- porations with large capital. One thing is certain, that the banking and credit institutions of the world were able, through the increased gold production, to accumulate larger reserves of gold. Since those re- serves limit the credits granted by the banks to the financial market, it follows that greater and more con- fident activity of credit should have been possible. M. Paul Leroy-Beaulieu pointed out in 1904 that more than one-half of the gold then held in the reserves of the world's great banks and of the United States Treasury had been accumulated since 1890. 1 But, even if we were to concede the whole claim of the quantitative money school, we should still have to confront the question why the United States should have been the main beneficiary. Increase in gold production since 1890 has been largest of all at the Transvaal mines, which England owns; yet it is England, of all important industrial States, which has shown least signs of an industrial "boom." All statisticians agree that low-water mark was reached in commodity prices in midsummer, 1897. There had been a pretty continuous decline since 1891 ; the figures of Dun's Review, adopted by our Govern- ment's Bureau of Statistics, give a unit of 72.455 for July, 1897, as against 96.092 in the middle of 1891 and 74.317 in the middle of 1896. The London Econ- omist, using another unit, gives 2259 for the middle of 1890, 1947 for 1896, and 1885 for July, 1897, which 1 Economists Franfais, 1897] Rise in Commodity Prices 261 is the low figure of the record. By the year 1900, the Dun's Review unit had risen from 72.445 to 95.295, and the Economist index number from 1885 to 2211. These figures are the embodiment, in the form of dry statistics, of a good deal that happened during the interval. Summed up, they show a recovery in staple prices, between the low level of 1897 and the high level of 1900, ranging, according to method of striking averages, from 17 to 31 per cent. When specific prices are examined, it will be found that this general advance, especially in the period which we are reviewing, was most notable in products of the earth. Breadstuffs as a whole, for instance, rose in this country 40 per cent, between the middle of 1897 and the middle of I9OO 1 ; the average price of cotton in 1900 was 32 per cent, above the average in i897 2 ; in iron, the average was higher by 65 per cent. 3 Iri agriculture particularly, the world's normal consump- tion was apparently increasing faster than production. Our yearly cotton exports increased scarcely half as rapidly in the decade after 1896 as in the decade before it. At one time, the permanent disappearance of the United States as a wheat exporter was seriously dis- cussed. 4 Whatever is to be assigned as the dominant cause for the persistent rise in prices, the result must clearly have been beneficial, most of all to agricultural 1 Dun's Review estimates. 2 Shepperson's annual compilations. Reports of the American Iron and Steel Association. Liverpool Corn Trade Year Book, 1905. 262 American Finance na96 countries, such as the United States still is, and least of all to countries which import and consume the pro- ducts of other States. We shall presently see exactly how these phenomena operated in this country. Keeping in mind that the real turn in the movement of prices came in the middle of 1897, it will first be well to observe what were the finan- cial, social, and political conditions which existed just before it. Industrial markets were in a state of pro- found discouragement; the collapse of the premature "trade boom" of 1895 had left the country's business, at the opening of 1896, seemingly worse off than at the end of 1894. In particular, agricultural markets were in the grip of renewed depression. Wheat was in the fifties; cotton in 1895, at 5^- cents a pound on the New York market, sold at the lowest price in nearly half a century. The South and West were calling for free-silver coinage, and, as they reasoned, their demand had been balked by President Cleveland's maintenance of the gold standard through the Treasury's contract with a Wall Street banking syndicate. Under these conditions, the Presidential campaign of 1896 ap- proached. The Democratic party was obviously split in two, and the Populist party now made its bid for alliance on the coinage issue with the Democrats. The outcome was an excited and tumultuous Demo- cratic convention at Chicago, where a young Nebraskan Congressman, thirty-six years old and previously un- known in national politics, delivered a speech of florid and impassioned eloquence which so exactly voiced 1896] The Free-Coinage Campaign 263 the high-pitched resentments and aspirations of the delegates that he was chosen for their candidate, almost by acclamation. As a matter of course, the platform demanded " free and unlimited coinage of both silver and gold at the present legal ratio of 16 to i, without waiting for the aid or consent of any other nation," and it opposed "the policy and practice of surrendering to the holders of the obligations of the United States the option, reserved by law to the Government, of redeeming such obligations in either silver coin or gold coin. " 1 A month before the selection of Mr. Bryan as the Democratic candidate, the Republican party nominated Mr. McKinley; and here the logic of events moved more potently than the purposes of men. McKinley's legislative record was that of a silver advocate. On November 5, 1877, his vote was cast in Congress for the Bland Bill "to authorize the free coinage of the standard silver dollar, " and in the following February he voted to pass the amended free-coinage bill over the veto of a Republican President. He had voted with his party for the Silver-Purchase Act of 1890. But he had also been in 1890 the head of the Congressional committee which drafted the bill imposing the highest protective duties in our history, and he was avowedly made the party's candidate in 1896 on the theory that return to high protection, after the lower tariff of 1894, would be the campaign issue. The tariff, however, was not destined to cut any appreciable figure in the 1 National Democratic Convention, Chicago, July 9, 1896. 264 American Finance [1896 contest. Mr. McKinley's campaign began with speeches on protection; but it soon appeared that, on the tariff issue alone, the Republican party could not win. A great body of Democratic voters stood aloof from either party. They would not indorse the Bryan free-coinage candidacy, but were halting between the alternatives of supporting an independent Gold Demo- cratic ticket, nominated by bolting Democrats, or voting for McKinley in the face of his tariff record, which was to most of them thoroughly objectionable. Ordinary common sense dictated the policy to be pur- sued under such circumstances. Mr. McKinley, in his successive speeches to visiting delegations at Canton, said less and less about the tariff, and more and more about the currency, until on July 3oth he took ground flatly for the gold standard. But the election was not won, and it probably could not have been won, by any speech of the candidate. A vigorous and effective "campaign of education," with unprecedented quantities of campaign literature on economic questions, distributed and eagerly read by the voting constituency, had perhaps most to do with the result; the naturally larger resources of the sound- money party for organizing and conducting the can- vass played their part. But Nature herself eventually took a hand. A few months before the November vote was to be cast, the attention both of voters and of markets converged on something new. In August, wheat touched the extraordinarily low price of 53 cents a bushel on the Chicago market, a figure nearly 1896] Wheat Crop and Election 265 unremunerative to all but the most favorably situated farmers. Two months later came news of partial failure of the crop in India, whose harvest turned out smaller by nearly 20 per cent, than in the preceding year. That country, which had sent 56,000,000 bushels to the outside world in the crop year 1891, was actu- ally forced to import wheat in 1896. A This hap- pened when the consuming world had been using wheat, at the low prevailing prices, with the greatest freedom, and when, accordingly, supplies of wheat on the world's great markets had fallen to the lowest level since the famine year 1891. In September, 1896; the so-called "world's visible supply" was 126,000,000 bushels, against 152,000,000 a year before, and 190,- 000,000 two years back. 2 The news of the crop failure in India, coming on such a situation, forced Liverpool to advance its bid for American wheat. As against the August price of 53 cents per bushel, wheat rose at Chicago to 70 cents in September, to 74^ in October, and to 94! in election week. The moral effect of this movement was very great. What it meant, politically, was shown by the quick assertion of Mr. Bryan's party managers, that the " money power" was putting up wheat, over election day, to delude the agricultural voter. This explana- tion of the rise, in view of the facts which I have cited, was at least superfluous. The point which it 1 Liverpool Corn Trade Year Book for 1896, pp. 57, 58, and 60. * Ibid., p. no. 266 American Finance 11996 tacitly recognized, however, was that the Western voter had been told that, under the gold standard and with the silver-coinage laws repealed, wheat could not rise again; and here, with the gold standard still in operation, was wheat at the highest price in nearly half a dozen years. The political result of this rise in wheat, nota- bly in the doubtful Western States, was undoubtedly important. It largely accounted for McKinley's heavy majorities in farming States of the Middle West, such as Ohio, Michigan, and Minnesota, which in 1892 gave to the Democrats and Populists, combined, a plurality of 21,000, whereas in 1896 the Republican party's vote in the same three States ran 148,000 votes ahead of its two antagonists. The election of 1896 settled the question of a gold standard. McKinley's large majority of 95 in the Electoral College, and his popular plurality of 602,555 in the country as a whole, where even the "landslide" of 1892 gave Cleveland only 380,961 plurality, set the seal of the voters effectively on the verdict. The Stock Exchange had witnessed a demoralizing mid- summer break in prices, and had recovered only cau- tiously on the eve of election when, indeed, gold went actually to a premium of if per cent., when New York bankers invested their surplus resources largely in drafts on London, when call money touched 125 per cent, in Wall Street, when a $10,000,000 syndicate of bankers was organized for co-operation in a possible crisis, and when a long line of private individuals stood outside the United States Sub-treasury's redemption 1896] Victory of the Gold Party 267 window to exchange their legal tenders for gold coin. * This state of affairs ended abruptly November 4th, when election results were known. Money rates fell in a week to 4 per cent.; within a day, gold coin was presented at the same Sub-treasury windows for con- version into legal tenders. 2 This was the first re- sponse of the financial markets. It is a popular impression, with perhaps the ma- jority of people, that industrial revival was immediate and continuous after the election of November, 1896, and to this belief have been partly traceable some singular Stock Exchange phenomena at subsequent elections. The belief is erroneous. That the defeat of the free-coinage demonstration, at what was ap- parently the psychological moment promising best for its success, was an event of great importance in the country's economic history, there can to-day be little doubt. The outcome of the election certainly con- tributed to the later return of full financial confidence and industrial activity. But confidence and industrial activity were by no means an immediate sequel. The rise in stocks, which had begun before election, lasted barely forty-eight hours after November 4th; then heavy realizing sales began, and in the sequel, financial depression prevailed again until far into 1897.3 During November, fully 700 manufacturing New York Financial Chronicle, Oct. 31, 1896, pp. 768, 770, 782; Nov. 7, 1896, p. 814. 'Ibid. Ibid.. Jan. 2, 1897, p. 16. 268 American Finance ti897 establishments resumed work or added to their working force. This was taken as reflecting reassurance in the business community over the election verdict on the currency. But the rush of activity ceased, in a month or two, as suddenly as it had begun. 1 Instead of immediate and continuous revival, the first half of 1897 was a period of financial uncertainty and de- pression. The first half of 1896 had been regarded as hard times; yet the checks drawn on all the coun- try's banks in the similar period of 1897 showed de- crease of $570,000,000, or 2^ per cent. 2 In the second quarter of 1897, liabilities involved in commercial failures throughout the country were $3,000,000 greater than in 1896.3 In July, 1896, there had been in blast in this country 191 iron foundries, with a weekly output of 180,500 tons, and with 815,000 tons piled up in their yards. This was then called a very unfavorable showing; yet in July, 1897, the number of furnaces in blast had further decreased 46, to 145, weekly output had fallen 16,000 tons, to 164,000, and the idle stock of iron had risen nearly 200,000 tons, to 1,004,000.* The victorious party in the election of 1896 had won, as we have seen, on the issue of the currency, and it was destined in due time to embody the people's verdict in the statutes. But the Republican platform 1 New York Financial Chronicle, Jan. a, 1897, p. 1 6, also Jan. i, 1898, pp. 7, 8, and 9. 2 Ibid., July 3, 1897. Bradstreet's reports. Iron Age figures. 1897] The Dingley Tariff 269 of June, 1896, had also declared for raising the import duties, and denounced the Wilson Tariff as " injurious to the public credit and destructive to business enter- prise." That the campaign issue had been changed in the course of the contest did not change the purposes of party leaders. Revision of the tariff was at all events the first work of the newly-elected Congress. The Dingley Tariff Law, enacted on July 23, 1897, not only restored the scale of duties lowered by the Wilson Bill of 1894, but in many important industries fixed higher import tariffs even than the McKinley Law of 1890. The average rate of duties collected in the fiscal year 1893, under the McKinley Act, was 49^ per cent. In the two fiscal years 1895 and 1896, when the Wilson Bill's schedules had full scope, the average rate was, respectively, 41 f and 40. In 1898, under the Dingley Act, the percentage rose to 49^, and it averaged 52 in 1899 * a height not paralleled, even in Civil War times. 2 In so far as the Dingley Tariff was designed to correct the deficit in the Government's finances a matter of importance it was not an effective measure. When imports are Shut out by a higher tax rate, the tax is less productive. The deficit continued; cus- toms revenue itself, during the twelve months after the law's enactment, was smaller than in either year under the Wilson Tariff. 3 But it has long since ceased to i U. S. Statistical Abstract for 1907, p. 505. 1 Taussig, Tariff History of U. S., pp. 167 and 259. t y. S. Statistical Abstract for 1900, p. 29. 270 American Finance [1897 be the fashion to ascribe the subsequent "boom" in American prosperity to the Dingley Tariff. One reason is that the similar increase in duties by the Mc- Kinley Tariff of 1890 was followed, not by prosperity, but by disaster. The other is that our later industrial recovery found expression chiefly in an enormous export trade. If higher import duties had any influence on that, they must have checked it, because raw materials used in exported manufactures were now taxed more heavily, and because, all other things being equal, restriction of imports through such taxes normally curtails the movement of exports sent in exchange for them. All such considerations were soon dismissed from the public mind of 1897, by a turn of events which repeated, on a larger scale and in an equally extraor- dinary way, the story of 1879. We have seen that, although the Indian wheat crop failure of 1896 made a great hole in the world's sup- plies and caused an immediate rise in the price of wheat, nevertheless Europe itself raised in that year a crop of good proportions. What happened in 1897 was, first, that a scorching drought in France cut down the season's wheat yield in that country 93,000,000 bushels from 1896; next, that a wet harvest reduced the Russian crop nearly 80,000,000 bushels; and, finally, that a season of storms flooded so disastrously the Danube Valley that Austria and the Balkan States gathered less wheat by 127,000,000 bushels than in the preceding year. The whole European crop fell short of 1896 by 350,000,000 bushels, a loss of no less than 1897] Another Great Wheat Year 271 30 per cent. 1 Had the American harvest of 1897 re- mained at the figures of the year before, a great dis- aster would have befallen Europe. This country's fortune had, however, stood it in good stead. The high price of wheat in the autumn of 1896 had encouraged farmers, the country over, to plant more wheat in the ensuing spring. This increase amounted to nearly five million acres. Weather conditions in the United States were favorable throughout the season. The resultant crop ran 103,000,000 bushels ahead of 1896, and was, with one exception, larger than any pre- viously harvested. Under the circumstances, it was sold at extraordi- narily good prices. By August "dollar wheat" was touched again on the Chicago Board of Trade, for the first time since 1891; and the price was maintained throughout the ensuing season. At this price, con- suming Europe, with its supplies already depleted by the Indian failure of the year before, bought our wheat in quantities quite unprecedented. During the twelve months after the harvest of 1896 the United States exported, in grain and flour, 83,000,000 bushels of wheat. In the same period, after the 1897 harvest, the export was 150,000,000. The value of the season's exported grain increased no less than $122,000,000. One result of this notable trade incident was the im- port, during the same twelve months, of $120,000,000 gold, the first natural movement of the kind in this ' Year-book for i8p8, U. S. Department of Agriculture, p. 686. 272 American Finance [1997 direction since the autumn of 1891. Directly, this inflow of gold, which was lodged with the Treasury in exchange for notes, caused a rise in the Government's gold reserve from the $44,500,00x3 of February, 1896, and the $137,000,000 at the end of 1897, to the hand- some figure of $245,000,000 in the middle of 1898. It need hardly be pointed out that this position made possible the success of the Gold-Standard Act in 1900, as it certainly would not have been possible in 1896. The Act of 1900 not only required establishment of a fund of $150,000,000 gold to insure redemption of the notes of the Government, but, by the facilities which it opened for the establishment of new national banks, it created a new demand for cash, to be held in their reserves. Since increase of Government paper money, other than certificates against deposited gold or silver, had been stopped by repeal of the Silver- Purchase Law in 1893, it followed that this new demand for reserve money must be met from imported gold. In short, nature helped out the later statute of currency reform, as it did the Specie Resumption of 1879. In both cases it was a European famine and a bumper crop at home which lifted us happily over the rough places of the road. We have seen how the export of our wheat to famine- stricken Europe piled up our export trade and reversed our situation on the international market. The wheat was the primary influence; but scarcely less important was the revival in general trade, shown by the increase in bank exchanges, which amounted during the first 1898] The "American Invasion" 273 half of 1898 to 30 per cent, over 1897. It was natural that this increase should have been greatest in the grain- growing West, to which accrued the first benefits of the successful harvest; and it was natural that, as domestic trade expanded, and with it the demand for money, capital should be drawn from abroad to keep the busy wheels in motion. Now, however, a more novel and dramatic episode of the American trade revival came in sight. It was not until the close of 1897 that people began to hear, by way of Europe, of " the American invasion." This matter came to the front, as a topic of discussion, in a remarkable speech delivered at Vienna, that Decem- ber, by the Austrian Minister of Foreign Affairs, Count Goluchowski. It was asserted in this speech that "the destructive competition with trans-oceanic countries re- quires prompt and thorough counteracting measures, if the vital interests of the European people are not to be gravely compromised." "European nations," the Austrian statesman concluded, "must close their ranks and fight, shoulder to shoulder, in order suc- cessfully to defend their existence. " 1 Directed as it obviously was at the United States, what did this singular diatribe mean? Certainly, neither Austria nor Europe at large could have been protesting against the "American invasion" of Europe's grain market; for that, in 1897, was Europe's only alternative to famine. It did not require long to dis- 1 New York Financial Chronicle, Dec. 18, 1897, p, 1147. tl 274 American Finance H897 cover that Count Goluchowski had his eye on our ex. port of manufactures. The volume of these exports was practically stationary in the eight years between 1882 and 1890, and it increased very slowly after that. In the hard times after 1894, however, when there seemed little hope in a domestic market, our manu- facturers began to look abroad. As we have seen in noticing the iron trade figures, even as late as 1897, great stocks of unsold goods had piled up after every effort to stimulate home production. But we have learned also that, while our own markets were pass- ing through that period of despondency, Europe's were reviving rapidly 1 ; by 1897, their recovery had assumed the dimensions of a " boom. " I have shown what was our own manufacturers' position. Prices were low, wages were low, material was abundant, the struggle for profits had sharpened the eye for improvements and economies. The one thing needed was an expanding market. At home there was none as yet; but here, in foreign States, had suddenly arisen a demand for manufactured goods so urgent that at the moment English and German manufacturers could hardly fill it. Our people would scarcely have shown themselves possessed of Yankee shrewdness, had they neglected the opportunity; and they did not neglect it. They were, in fact, in a pe- culiarly favorable situation to take advantage of it. The raw material lay almost at the doors of the factories. See page 243. 1898] Beginning of Trade Revival 275 Skilled laborers, chafing after their four-year period of partial idleness, could be had at once and in quite sufficient number, and orders from home consumers were so light that scarcely half the producing capacity of well-equipped mills was being used for the domestic trade. Our manufacturers took foreign orders for prompt delivery which the English and German mills were simply unable to accept. We sold our goods, not only in the so-called neutral markets, but in the markets of Continental Europe. 1 The result was that, between 1893 an d 1899, our export of manufactures actually doubled. They were $158,000,000 in the one year, and $339,000,000 in the other; and they increased a hundred millions more in the fiscal year 1900. It is plain enough, from the facts which I have re- called, that there was nothing mysterious about this American invasion, and certainly nothing harmful. If we had so flooded Europe with cheap iron and steel that its own manufacturers lost their market, their case might have been different. But nothing of that sort happened. During the five years between 1894 and the stopping of Europe's industrial boom in 1899, by the Boer War and the German bank panic, years in which we were enlarging our output and export of manufactured steel, Great Britain's annual steel production rose from 3,210,000 tons to 5,000,000, Germany's from 3,641,000 to 6,300,000. 2 Under all American Iron and Steel Association, Report for 1898. J Annual statistical reports, American Iron and Steel Asso- ciation; especially Report for 1899, p. 77. 276 American Finance [1898 the circumstances, not only did the volume of our grain and cotton and manufactured exports increase, but their average value rose. It is easy to see why, under such conditions, our total export trade, crossing the billion-dollar mark in the fiscal year 1897, should have risen to $1,200,000,000 in 1898, to nearly $1,400,000,- ooo in 1900, and to not quite $1,500,000,000 in 1901. Stimulated by this great outside demand, our trade activity and our industrial profits rose to extraordinary figures. The first task of this era of returning prosperity was the task of financial reconstruction. We saw, in reviewing the events of 1894, in what state of wreck the panic of 1893 had left the country's railway finances. Not only was 61 per cent, of the outstanding shares of American railways receiving no dividend whatever, but one-fourth of that stock represented roads in the hands of bankruptcy courts. l As late as the middle of 1895, receivers were operating 169 railways, with 37,855 miles of track more than one-fifth of the country's total railway mileage, and represented on the markets by no less than $2,400,000,000 stocks and bonds. 2 In the hard times of 1894, no rehabilitation of these wrecked corporations was possible; the achievement called for abundant confidence and abundant capital; and it was only with the returning signs of promise 1 See p. 218. 2 Interstate Commerce Commission, Report on Statistics of Railways for 1895, pp. 10, 12, and 107. 1897] Railway Reorganization 277 in the next three years that substantial progress was made. In December, 1895, the Erie was taken out of receivers' hands; in the same month, the Atchison, Topeka & Santa F emerged from bankruptcy; in September, 1896, the Philadelphia & Reading was placed on its feet. Foreclosure was in each case fol- lowed by purchase of the properties in behalf of former shareholders, who, as a condition to their participation in the new company, were assessed -pro rata to raise the needed cash resources, the bondholders submitting to lower interest rates, usually receiving stock in the new corporation as a solace. That this was by no means as simple an achievement as might be imagined, may be shown by two sample reorganizations, highly interesting in retrospect because of the longer financial sequel. The Union Pacific was sold in foreclosure during November, 1897. It was bought in by a new Union Pacific Company, for whose stock old share- holders had exchanged their $60,868,000 former holdings share for share, paying also a $15 per share cash assessment. There was no way of compelling a former shareholder to pay this sum; he might throw away his stock, which had sold on the Exchange, the preceding summer, at 4 cents on the dollar. Therefore a banking syndicate was organized to guarantee the cash assess- ment; they committed themselves for $15,000,000. What happened to the bondholders may be judged from the fact that the company's old first mortgage 6 per cent, bonds were exchanged for 100 per cent, in new first mortgage 4*5, plus 50 per cent, in new preferred 278 American Finance U897 stock. 1 This was the company whose officers, ten years later, were using its accumulated resources, to the extent of $131,000,000, to buy control of half a dozen other railways. Northern Pacific was similarly sold in July, 1896; the $49,000,000 old common stock paid a 15 per cent, cash assessment and the $35,000,000 old preferred, 10 per cent. The underwriting syndicate guaranteed $5,000,000; through scaling down interest or exchang- ing old bonds for new stock, annual fixed charges were reduced $4,853,000. 2 The old stock sold on the New York Stock Exchange in May, 1896, at 25 cents per $100 share; it was the stock delivered in exchange for this, plus the $15 cash assessment, which sold for $1000 per share in the famous "corner" of May, 1901. Natu- rally, this process of rehabilitation grew more general as return of prosperity became assured. In 1893, rail- ways with $1,781,000,000 stock and bonds were placed in receivers' hands; in 1896, railways with $1,150,377,000 were sold under foreclosure 3 ; for each process, these were totals exceeding by nearly a billion dollars those of any other year on record. 4 But as against the 169 insolvent railroads of 1895, w ^^ 37*^5^ miles of track and $2,439,000,000 capital liabilities, existing receiver- 1 Reorganization plan of October 15, 1895; see Financial Chronicle, Oct. 19, 1895, p. 705. 3 Reorganization plan of March 16, 1896; Financial Chronicle, March ai, 1896, p. 550. 3 Railway Age annual compilations; see U. 8. Statistical Abstract for 1906, p. 590. Ibid. 1898] The Spanish War 279 ships in the middle of 1898 covered only 94 roads, with a mileage of 12,745 and a capital of $661,500,000, and in 1900 only 52 roads, with mileage of 4178 and capi- tal of $351,000,000. * By 1900, net earnings of all American railways had increased fifty per cent, over 1895, an d actual dividends paid out were nearly doubled. 2 This expansion of financial and industrial activity had presently to endure some rather crucial tests. The United States declared war against Spain in April, 1898, and this for a month upset all financial markets. Our situation on international exchange, however, was so strong that the very first thing the country did, even before war had been declared, was to draw $60,000,000 gold from Europe to protect its bank position. The war was quickly over. Admiral Dewey destroyed the Spanish fleet at Manila on the first of May; Cervera's fleet was annihilated July 3d, outside Santiago harbor; on July 26th, Spain asked for terms, and on August i2th, the protocol to the treaty of peace was signed. In several ways, the war served to demon- strate the new financial resources of the country. A $200,000,000 3 per cent, war loan, offered at par to in- vestors in July, elicited subscriptions for $1,500,000,000; it was taken by home subscribers, the separate allot- ments numbering 3 20,000, 3 and it went to a premium i Interstate Commerce Commission, Reports on Statistics of Railways, 1898, p. n; 1900, p. n. 1 Poor's Manual, annual tables. Secretary Gage, Annual Treasury Report for 1898. 280 American Finance [1898 of 6 per cent, within three months. In April, 1899, our Government paid Spain a $20,000,000 indemnity for the Philippines, and the $20,000,000 export of gold, caused by the operation in exchange, did not prevent a con- tinuous increase in the Treasury's own gold reserve. * Partly in connection with the war, wheat went to a price $1.85 per bushel at Chicago, on May loth never but once exceeded in the thirty preceding years. This was a corner, which broke down as corners usually do; but it was unlike many corners, in that it occurred when the American farmer still had plenty of wheat to sell, and when he received the benefit of the corner prices. Our wheat crop of 1897 was the second largest ever harvested in this country. The crop of 1898 exceeded all precedent, and that of 1901 was 10 per cent, larger still. In the fiscal year 1893 our imports exceeded exports by $18,700,000. In 1897 the excess of exports was $286,000,000. The next year it was $615,000,000. This abnormal accumulation of foreign credits had some strange results. First, the pressure of domestic capital on our home investment markets raised prices to unexpected heights. As a result, foreign holders of our securities sold them back; and Europe was practically drained of American stocks and bonds. Then, for the first time in our history, we began to lend to Europe. President Kriiger of the Transvaal Re- public declared war on England in October, 1899. 1 U. S. Treasurer's Report, 1899, p. 45. Transvaal mines had in 1898 produced $75,000,000 gold 1 more than one-fourth of the whole world's out- put of the year and exactly that amount was received in London, from South Africa, during iSpp. 2 But with hostilities begun and the Transvaal frontier blockaded, production sank at once to insignificant proportions; then, when the Boer authorities placed an embargo on the mines, it ceased entirely. From April, 1900, to April, 1901, inclusive, scarcely an ounce of gold was mined in the Transvaal, 3 and in the whole year 1900, England received only $1,800,000 gold from South Africa; less by $7,000,000 than the sum which it had to export to the banks of Cape Colony. * As a consequence of this sudden curtailment of sup- plies, coming with trade and speculation abnormally active throughout Europe, the great State banks began to bid for gold. The Bank of England's official dis- count rate went in December, 1899, to 6 per cent., a height not reached since the panic of 1890; the Imperial Bank of Germany fixed 7 per cent., the highest rate in its history, s In the face of this confusion of the markets, and of several defeats which foreshadowed a long campaign, England placed its war loans. Before the war was Monthly and annual reports, Johannesburg Chamber of Mines. ^Annual report of British Board of Trade, 1899. J Monthly reports, Johannesburg Chamber of Mines; see London Economist, June 14, 1902, p. 931. * British Board of Trade Statement for 1900. * London Economist, Berlin letter, Dec. 33, 1899, p. 1815. 282 American Finance [1899 ended and that was not until May 31, 1902 England had issued $795,000,000 in new Government securities; the whole cost to England of this little conflict was no less than $1,085,000,000 1 or, since the fighting lasted two years and nine months, almost exactly one million dollars per day. Inevitably, the collapse in foreign markets, at the end of 1899, disconcerted our own financial markets also; London's panicky recall of capital from New York sent the Wall Street call-money rate up to 186 per cent, on December i8th. Yet it was in this very situation that the American market came to Europe's relief. New York took $28,000,000 of the British Exchequer loan of August, 1900 2 ; ap- plied for $150,000,000 of the loan of May, 1901, and secured $ 100,000,000 3 ; it subscribed for $80,000,000, Or one-half of the loan of April, I9O2. 4 In two of these loans, American banking houses dealt directly with the British Exchequer, something wholly new in finan- cial history. These were not all our foreign investments of the period. The German Government sold us $20,000,000 of its new bonds in 1900, and we lent some $10,000,000 more to Continental cities. Yet the "foreign balance" continued to accumulate. At the close of 1900 it was estimated by international bankers that this country still had a credit fund of at Budget speech, Charles T. Ritchie, Chancellor of the Exchequer, April 23, 1903; London Economist, May 9, 1903, P- 832. * New York Financial Chronicle, Aug. n, 1900, p. 258. Ibid., May 4, 1901, p. 844. Ibid., April 19, 1902, p. 8oa. 1900] A Remarkable Situation 283 least $200,000,000 outstanding on Europe's money markets. It was a very common query at that time, in financial circles, what was to be the outcome of this unprece- dented situation. Some people predicted that it would mean investment of our overflowing capital, on a rapidly increasing scale, in foreign enterprises. It was then that the prophecy was heard that New York was des- tined to displace London, if it had not already dis- placed it, as the financial centre of the world. On the other hand, the Wall Street community, which took the speculator's view, predicted that the price of outstanding American securities, under this pressure for investment, would rise to unheard-of heights. Neither of these things happened exactly as was predicted, but what did happen was, as we shall presently see. quite as startling as either of them. CHAPTER XII THE SPECULATIVE MANIA OF 1901 THE situation in which the American community found itself, in 1901, was one which arises at intervals in all prosperous modern states; but its char- acteristics were emphasized, on this occasion, by the unusual incidents of the period. Such a situation has invariably, on all previous occasions, resulted, first in readiness of people at large to embark in all sorts of enterprises the wealth whose extent they have suddenly come to realize, and next in a rush into speculation. This is a very old story, familiar to every business man and student of economics. It describes the financial movement between 1899 and 1901, but it describes it no more accurately than it does Germany's "industrial boom" of 1897 or England's "Kaffir craze" of 1894 or the "railway mania" of 1844 or the great American land speculation of 1836, or, for that matter, a score of incidents in the financial history of every modern state. The tracing of this chapter of causes and consequences is, however, specially in- 1901] The Investment Situation 285 teresting in the case of our recent financial history, because the magnitude of the forces behind the great speculation of 1901 was quite unparalleled. I showed, in the preceding chapter, to what extent the prosperity of the United States, and its rapid accu- mulation of new capital, had progressed. We saw how this capital, gathering confidence and pressing on all investment markets, had not only raised prices of our own securities to unexpected heights, and bought back from Europe the bulk of American investments in foreigners' hands, but had overflowed into such quarters as British consols and German Treasury bonds. But after all this, a huge credit fund was still left unin- vested on home and foreign markets. At such times, people always wonder what is to be the outcome, and the outcome is always the same. The public has the money, and is eager to invest it; the banking com- munity provides new securities as a field for such investment. These new securities may be good or bad, sound or fraudulent. They may be new enterprises or old enterprises recapitalized. They range in char- acter all the way from worthless zinc and copper mines, or "syndicates" promising 25 per cent, on money left in their hands to use as they see fit, to issues of refunding bonds by a Government in high credit. All of these applicants appeared on the scene in 1899 and 1900. But the great banking houses, with their hand on the public pulse, concluded that this was mere trifling with the resources at command. The reservoir of American capital seemed inexhaustible; it filled up on 286 American Finance 11901 one side faster than it could be drained into these various enterprises on the other. It was then that the scheme of recapitalizing American industry was conceived. Industrial trusts were not new in American financial history; we have seen, in a preceding chapter, how far the movement of consolidation had progressed between 1887 and 1890.* But the movement had languished after the second of those years; hard times, low profits, and distrustfulness on the part of invest- ment capital prevented further progress between 1893 and 1897; financial embarrassment of some of the trusts already in existence threw doubt on other propo- sitions of the sort. 2 But the prosperous trade, abundant capital, and overflowing confidence which prevailed in 1899 had created a new situation. The promoter a name which now grew suddenly familiar on all American markets asked the owners of a dozen or more competing plants, in a given industry, to name a selling price. Naturally, as their own retirement from business was involved, the price the owners fixed was high. A banking syndicate would be formed, however, to provide the money requisite for the pur- chase, and for a handsome payment to the middleman. Thus acquired, the manufacturing plants would be combined and incorporated under the name American Milling Company or United States Spinning Company or International Weaving Company, and the stock would be offered to the public. Seep. 118. Seep. 188. 1901] Company Amalgamations 287 As it turned out and as the bankers had expected, the public was in exactly the mood to respond to the invitation. The shares were readily absorbed; other combinations, followed. Still, the investment fund showed no symptom of exhaustion. Presently the more venturesome spirits among promoters began to combine these already large industrial combinations into a single company, and to sell the stock of that, at inflated valuations, to the public. This would have been a step too far, but for the fact that profits of manufacture, notably in the steel and iron trade, went on increasing faster than promoters could turn their expectations into stock. One conspicuous expert in this business, who rose from the sphere of travelling salesman pf a wire-making firm to the leadership of a great combina- tion in the steel trade, was asked on the witness-stand, in March, 1902, to describe the history of his amalga- mations. They began, he said, by the combination of seven wire factories in Illinois into one corporation, which was called the Consolidated Steel and Wire Company. Two months later this company was bought up, along with seven more mills, by the American Steel and Wire Company of Illinois, which issued $24,000,000 stock. This was in 1898. Early in 1899 he organized the American Steel and Wire Company of New Jersey, which paid $33,600,000 for the Illinois Company's $24,000,000 stock, added eleven other wire plants, and issued its own stock in the comfortable sum of $90,000,000. The witness was asked what had become of $26,000,000 stock whose destination was 288 American Finance 11900 not accounted for, and said he did not know. l One might possibly imagine that this wholesale "watering" of capital would at least have led the investing public to bid a low price for the inflated stock; but it did not. Of the $90,000,000 stock thus issued in the above- described "watering" process, $40,000,000 was pre- ferred as to dividend. It started out on the Stock Exchange at $94 per share, rose in two months to $106, and sold at $112 a year or two afterwards. The $50,000,000 common stock, all of which was virtually given away as a bonus in the "deal," started at $45 per share, and in two months actually rose to $92.2 This was a fairly typical case. How far this move- ment of incorporation went may be judged from the following figures. In the first three months of 1899 new industrial companies, with a total capitalization of no less than $1,586,000,000, were incorporated in this country. 3 During the full year 1899 the total rose to $3,593,000,000, of which respectable sum $2,354,000,000 was the common stock, which, by frank confession of promoters then and afterward, was simply "water." 4 We have already seen, however, how seriously the investing public took even these 1 Testimony of John W. Gates, in Parks vs. Gates, New York Supreme Court, March 18, 1902; New York Tribune, March igth; New York Evening Post editorial, March ipth. J New York Financial Chronicle, Railway and Industrial Supplements, 1899, 1900, and 1901; Ibid., Annual Reviews of 1899 and 1900. Ibid., April 8, 1899, pp. 645-647. *Ibid. t March a4, 1900, pp. 560-563. 1899] The New Industrial Stocks 289 common shares. They did, in fact, show particular favor to them, for the reason that the relatively lower price of common shares roused the bargain-counter instinct. Furthermore, in the immense industrial expansion of the period, these very common stocks, representing the inflated capitalization of concerns which in not a few cases had been bankrupt four or five years before, were very generally receiving dividends. * For it was not only true that individuals, in the flush of material prosperity, were buying necessities and luxuries with increased freedom. Even in this direc- tion there was a general tendency which approached extravagance. But a still more powerful demand came from the industries themselves. Iron, for instance, which had sold for $15.45 per ton in the autumn of 1894, brought $29.50 at the close of 1899; that is to say, its price had nearly doubled, and such a market necessarily brought about construction of new plants and enlargement of those already in the field. Iron, for such construction, was bought from existing mills. The same stimulus ran through every other trade. An extremely large demand for new material came from railways, which had to carry the produce of the farmers to the coast. Naturally, after four years of rigid cutting of expenses under receivers in bankruptcy, the companies were in no condition to handle easily this enormous trade in 1897, and, as their profits and credit 1 New York Financial Chronicle, Railway and Industrial Supplements, 1899 and 1900. if 290 American Finance [189* went on rising, after the readjustment of their financial status, their task was physical reconstruction of the properties. What they spent on this, as compared with three or four years before, may be judged from the new railway securities which were sold in the investment markets to procure the money. In 1898 they put out $67,000,000 worth of stock and bonds, mostly for such purposes; in 1899, $107,000,000; in 1900, $199,000,000; in 1901, $434,000,000; and, in 1902, $527,000,000. 1 It must not be supposed that this series of amazing capital flotations to use a barbarism of the English market was placed without occasional friction, inter- ruption, or inconvenience. The Spanish War arrested the movement in 1898. It was checked again, in the autumn of 1899, by the Transvaal War and the down- fall of Germany's industrial speculation. I have shown how important a part was played in the rise of our manufacture and export of steel and copper by this European boom. Now the demand from that quarter was suddenly cut off. Instead of inquiring urgently for our manufactured goods, to fill a demand which its own mills could not meet, Europe experienced so sudden a collapse in its home demand that its own manufacturing plants began to compete with one another for what was left of the business, and to cut prices in the competition. Our markets naturally felt the shock. Early in 1900 export orders decreased, and there began a great decline in the price of iron. " Poor's Manual figures; see U. S. Statistical Abstract for J93 P- 399- 19001 Bryaris Second Campaign 291 This last phenomenon, a familiar sign of trade reaction, came into view on the eve of another Presi- dential contest, when Mr. Bryan forced a reluctant Democratic convention to declare for the second time for free-silver coinage: We reiterate the demand [the platform announced] for an American financial system made by the American people for themselves, which shall restore and maintain a bimetallic price level, and as part of such a system the immediate restoration of the free and unlimited coinage of silver and gold at the present legal ratio. Hardly was this demand submitted, however, when it was seen how futile a political expedient it was. The gold standard was already embodied in law, as it had not been in 1896, and the victory of 1896, by the party proposing such enactment, had been followed by unprecedented prosperity most conspicuous in the agricultural communities where, four years before, the demand for free-silver coinage had been intensified by the pressure of adversity. Among Mr. Bryan's campaign supporters, the argument began to be heard that "the silver question is settled." Bryan himself, as he set forth on his personal canvass of the country in the autumn of 1900, was constrained by visible demonstrations of opinion to abandon, after his first few speeches, the discussion of bimetallism, and to revert to denunciation of " imperialism, " as exemplified in the 1 Democratic National Convention, Kansas City, July 5, 1900. 2 92 American Finance [1900 purchase and occupation of the Philippine Islands by the United States. This new issue had the effect of drawing to his sup- port some eminent public men who had no sympathy with his currency theories, but who felt very deeply the perils to which our Government was committing itself in the colonial experiment. 1 A convention of the Anti-Imperialist League, meeting at Indianapolis on August i6th, declared that, "without regard to their views on minor questions of domestic politics," they proposed to "withhold their votes from Mr. McKinley in order to stamp with their disapproval what he has done," and they advised "direct support of Mr. Bryan as the means of crushing imperialism. " The Populist Party, in a convention held May loth at Sioux Falls, South Dakota, had already nominated Bryan on the basis of a demand "for the reopening of the mints of the United States for the free and unlimited coinage of silver," and the Silver Republican party, convening in Kansas City, July 6th, gave the same endorsement on the same grounds. All this was futile. The Populists themselves could not hold their party in line. On the day when the fusion wing of their organization nominated Bryan at Sioux Falls, the Anti-Fusionists or "middle-of-the- road Populists" met at Cincinnati, declared for "a scientific and absolute paper money, based upon the 1 E. M. Shepard, statement of Aug. 15, 1900. Carl Schurz, letter to L. J. Gage, Sept. 3. Charles R. Codman, speech at Indianapolis Convention, Aug. 16. 1900] Political Confusion 293 entire wealth and population of the nation, not re- deemable in any specific commodity, but made a full legal tender for all debts," and selected independent candidates. A faction of the Anti-Imperialist party broke away from the Indianapolis nominations, and made at New York, on September 5th, an attempt to name another candidate than either Bryan or Mc- Kinley. The Gold Democracy, which had fought an independent battle in 1896, adopted at Indianapolis, July 25, 1900, a series of resolutions urging voters " not to be deceived by the plea that the money question has been finally settled," declaring it "dangerous to elevate to executive power any one hostile to the main- tenance" of the gold standard act, and advising against a vote for Mr. Bryan. From this singular clashing of political ideas, stood forth the one salient fact that the voters were satisfied with the existing status and with the new gold standard law, and wanted no more experi- ments. The vote of November left no further doubt upon the subject. McKinley's majority in the electoral college rose from the 95 votes of 1896 to 137 in 1900; his plurality on the popular poll increased from 602,555 to 864,688. Bryan, who had carried 22 states in 1896, carried only 17 in 1900. That industry and finance should have halted, under the double influence of the collapse of the foreign market for our exports and the vicissitudes of the presidential campaign, was entirely natural. But the country's real prosperity, its accumulation of fresh cap- ital, had not been arrested even momentarily. News 294 American Finance [1901 of the Waterloo of the free-silver coinage party found its immediate reflection on the Stock Exchange; it was the political side of things which served to fire the imagination, already brought to a pitch of no little excitement by the spectacle of the country's enormous economic power. From this mixture of causes followed very rapidly what may be described as the explosion of speculation at the beginning of 1901, a period which will possibly have as conspicuous a place in the curious reminiscences of finance as the South Sea Bubble of 1720 and the railway craze of 1844. Its underlying causes were, indeed, identical with the causes of those older episodes; the principal phenomena of each were the immense amount of new stock issued, the eagerness of the public to buy it, and the rapidity with which people who bought found the value of their holdings rising. The situation of 1901 was one which turned men's heads. The country seemed to have reached a pinnacle of prosperity from which nothing could dislodge it. The profits of our incorporated enterprises seemed to have no assignable limit. Amer- ican capital pressed upon every avenue of investment. The most reckless and foolish speculation was apt to achieve success. Looking at the matter philosoph- ically, there need be no wonder that the word went forth, in financial circles previously noted for con- servatism, that old precedents of finance were obsolete, that it was no longer necessary to judge the present and future by the past. The climax of this great speculation came from a 19011 Stock Exchange Excitement 295 peculiar cause, which, I think, we shall understand in the light of what we have already considered, but which the investing public of that day did not understand at all. It became evident, at the close of 1900, that something more than buying by investors was at work in the Stock Exchanges. On one stock after another, a buying movement would converge which seemed to be utterly indifferent to prices, and which was accom- panied by trading of quite unexampled volume. It was presently evident that what was going on was the purchase, at extravagant prices, of a controlling interest in the shares of railway and industrial companies. The public inferred, from what it saw, that these purchases were being made on their own account by men of boundless wealth, who were merely investing their private capital. Such a supposition naturally drew the investing public into the whirl of speculation: first, in order to make its own investments before prices should go beyond its reach; second, in the hope of selling out at the much higher prices which the rich men's purchases were expected to bring about. But the public was wholly mistaken as to the nature of the movement. What actually was happening was this. People connected with one corporation would borrow large sums of money, and use that money to buy up shares of another subsidiary or competing corporation. They were buying, however, not for themselves, but for the company with which they were identified; and their purpose was, as soon as the property had been obtained, to hand it over, issue new stock 296 American Finance or bonds of their own corporation, sell such securities to the public, and use the proceeds to reimburse them- selves, with a handsome bonus. There was the famous case, for instance, of the Chicago, Burlington & Quincy Railway. This company's stock, amounting to $110,000,000, sold at the end of 1900 for $144 per share, which was considered by most people rather high. People identified with the Northern Pacific Railway bought up the stock at a seemingly reckless rate, pushed up its price above $180, and then an- nounced that a bond would be issued by the Northern Pacific and Great Northern Companies to pay $200 a share for the whole of the Burlington stock. These bonds were later sold on the open market, the result, of course, being that the supply of securities on the market was increased by some $50,000,000. The same process occurred in half a dozen other railways, the usual expedient being the issue of what was now called a "collateral trust bond." Stock of another company sometimes all of it, sometimes a bare majority was bought for a corporation. That corporation thereupon issued bonds for the cost of purchase; but those bonds, instead of being, like other mortgage issues, a lien on the franchise and road-bed of the issuing company, were merely secured by pledge of the stock which had been bought. When it was found that the public readily bought these bonds, the device was followed by another, not altogether new, but never before applied on such a scale. A company would be chartered for no definite purpose except to 190U The Billion-dollar Steel Trust 297 hold the shares of other companies. Having bought up these shares or acquired them through exchange, it issued its own stock to foot the bill. The public bought this stock, as it had bought the collateral trust bonds, and there seemed no limit to the scope of the operation. It was then that Mr. Morgan, during March, 1901, formed his "billion-dollar steel trust." The idea of such a combination had been thrown out, in a tentative way, by the promoters of 1899, and had been discussed as the dream of excited brains. During 1900, however, as we have seen, the price of iron and steel had fallen, and the status of the numerous over- capitalized steel-making corporations which had come \nto the field began to be tested. Some of them had to cut their dividends, and on top of this, the most powerful steel-manufacturer in the field, Mr. Andrew Carnegie, announced his purpose of building new competitive mills and starting production of kinds of material which the new trusts of 1899 had thus far mainly monopolized. Consternation followed among the financial magnates who had been building up the enormously capitalized steel trade combinations, and who had other plans in view, whose success was bound up with resumption of the "boom" on the Stock Exchange. Mr. J. P. Morgan, the acknowledged leader of the Wall Street consolidation movement, then opened negotiations with Carnegie. Andrew Carnegie was a different proposition from the small manufacturers who had been bought out in the consolidations of 1899. He had, it is true, himself 298 American Finance proposed, as early as 1889, to sell out to an English syndicate, and as late as 1899 had considered a pro- position of American promoters to pay $250,000,000 for the steel property of himself and his associates; but the negotiations came to nothing. l Between 1889 and 1897, moreover, the net annual profits of the Car- negie properties rose from $3,540,000 to $7,000,000, and from the latter figure they had risen by 1900 to no less than $40,000,000. 2 Of the 160,000 shares of stock in the company, Carnegie himself owned 86,382; of the $160,000,000 bonds, he personally held $88,- 147,000. 3 He was the key to the steel trade problem and he knew it. Mr. Morgan obtained conditional assent from the eight other most powerful steel trade combinations to be merged into one huge "holding company," through exchange of stock; Mr. Carnegie laid down, as his individual terms, the purchase of Carnegie Company stock at $1500 per share, paid in 5 per cent, bonds secured by the stocks of all the amal- gamated corporations, and the exchange of Carnegie Company bonds at par for the same security. 4 This meant the payment of $217,720,000 to Carnegie him- self. The extraordinary price was granted; his part- ners were bought out on somewhat less favorable terms s ; and to buy up his company and its competitors, the Bridge, Inside History of the Carnegie Steel Company, pp. 93 and 305. 1 Ibid., p. 995. Ibid., p. 356. Ibid., p. 364. *Ibid., pp. 363, 364. 1901] " Steel Stock " on the Market 299 United States Steel Corporation was organized in February, 1901, with a capital stock of $1,018,000,000 and bonds of $301,000,000. The other combinations in the trade, whose individual capitalizations ranged from the $33,000,000 of the Steel Hoop company to the $99,000,000 of the Federal Steel, received the new shares on a basis running from equal exchange to 125 per cent, of their old outstanding capital, * and the "deal" was closed. It remained to see how the new stock could be floated; for although in form the operation was nothing but sub- stitution of new securities for old, in fact it was some- thing very different. Displacement of capital on an enormous scale was certain to result The beneficiaries of this remarkable operation could be counted on to turn a part of their new stock into cash, and a very substantial portion of the Steel Corporation's stock was to be used for procuring working capital. 2 The promoters took no chances which they could avoid. A bankers' syndicate was formed to guarantee, up to $200,000,000, the successful floating of the stock; it actually put up $25,000,000 cash. 3 Brokers, large and small, were engaged to urge the new stock upon in- vestors throughout the United States. On the Stock Exchange, a celebrated manipulator of speculative values was employed, when the shares were listed, Official Circular of J. P.Morgan & Co., March 2, 1901; New York Financial Chronicle, March a, 1901, p. 441. 'Ibid. * Ibid., March 2, 1901, p. 441; March 9, p. 483. 300 American Finance [1901 to create a semblance of great investment activity, and to sustain the price. The project met with remarkable success. Starting on the curb at a price of 38 for " Steel common" and 82$- for the 7 per cent. "Steel preferred," the Stock Exchange price advanced in a month to 55 and loif respectively. Half a million of the shares were dealt in during the first two days of their appear- ance on the Stock Exchange; the next week's record was a million. The greater part of this was doubt- less merely "matching of orders" by the syndicate's agent, through the medium of other brokers; but the public did not know this. It caught the specu- lative fever; even in thrifty Western towns and New England country villages, the gossip of an evening was apt to concern itself with "Steel." So success- ful was the operation that, a year or two later, the $25,000,000 "underwriting syndicate" received back in cash its whole subscription, plus 200 per cent, in dividends. 1 The outburst of speculation during April, 1901, was something rarely paralleled in the history of specu- lative manias. Not only did the younger men who had sold out to the Steel Corporation, now made into many times millionaires almost overnight and bewildered by their extraordinary fortune, toss into stock market ventures the money which they saw no other way of using, but old and experienced capitalists lost their heads, asserted publicly that the old traditions of * Financial Chronicle, May 2, 1903, p. 977. 19011 Wild Speculation by the Public 301 finance no longer held and that a new order of things must now be reckoned with, and joined the dance. The "outside public," meantime, seemed, to lose all restraint. A stream of excited customers, of every description, brought their money down to Wall Street, and spent their days in offices near the Stock Exchange. Two or three years before, it was called a good day's business when 400,000 shares of stock changed hands on the Exchange. In April, 1901, the daily record rose to a million shares, to two million, and finally, on April 3Oth, to three million and a quarter. Estimating the average price of stocks at that period at $60 per share, an inside figure, it will be seen that the 3,200,000 shares of April 3oth meant that from some quarter $192,000,000 worth of stocks were bought. The mere posting of this enormous business compelled commis- sion houses to keep their office forces working into the small hours of the night. Execution of the orders on the floor of the Stock Exchange, under the prevalent conditions of excitement, so manifestly threatened physical break-down of the brokers that the governing committee took the quite unprecedented step of declar- ing an extra Stock Exchange holiday to give the mem- bership a rest. * The newspapers were full of stories of hotel waiters, clerks in business offices, even door- keepers and dressmakers, who had won considerable fortunes in their speculations. The effect on the public mind may be imagined. 'New York Evening Post editorial, May 3, 1901; Finan~ cial Chronicle, May n, p. 903. 3 London financial correspondence, New York Evening Post, May, 1901. 1901] Wall Streets Reckoning 307 day's low prices for collateral pledged against stock exchange loans, a good part of Wall Street was for a couple of hours technically insolvent. The crisis itself passed over when the two rival bidders, their hands forced by the disastrous results which their quarrel had invoked, came together and agreed on conditions which would relieve the victims of the corner; but the spell was broken. The specu- lating public had learned a lesson, and it was destined to learn still more as to the real nature of the "boom of 1901" before the episode was ended. Much of the public's infatuation had been based on the enormous and accumulating "foreign credit balance" of the country which had been estimated, a year before, at not less than $200,000,000. By the middle of 1901 it was figured out by competent experts that not only had this great credit been entirely wiped out by the drafts of our banking houses, but that a floating debt to Europe, footing up nearly as much, had been created. Our bankers had, in fact, borrowed heavily in London, Paris, Berlin, Amsterdam, and even in the poorer European markets, like Vienna. * These loans, as they matured, were called in by the lenders, and in the harvest months of 1901, when gold ought to have been flowing towards this country, the United States shipped $25,000,000 gold to Europe. One of the largest of the new trade combinations, the $155,000,000 Amalga- mated Copper Company, had been holding the market A. Raffalovich, Marcht Financier, Paris, 1903. 308 American Finance 11903 for that metal at an artificial price; in the autumn of 1901, it lost its market, copper fell from 16 cents a pound to n, and the "holding company" had to cut its annual dividend from 8 per cent, to 2. At the height of the April speculation, Wall Street had dis- missed warnings of possible agricultural disaster with the reply that the country no longer depended on agricul- ture. Nature's response was a summer of scorching drought in the corn-belt, similar to that of 1894, as a re- sult of which, the corn crop of 1901 was cut down 28 per cent, from the year before, its yield being, except for 1894, very much the smallest in eleven years. Only the good fortune of a " bumper " wheat crop, in a year of par- tial European shortage, saved our export trade of 1901. The reaction from the excesses of 1901 continued during the two ensuing years; for although speculation again grew rampant in 1902, with resumption of pro- moters' activities and stock-jobbing exploits, the signs of public abstention and over-strained credit were visible throughout the year. With the autumn, a severe money squeeze was the sequel to the activities of the speculators, and the year 1903 began with evi- dence that the "underwriting syndicates," which had guaranteed the numerous Wall Street promotions of the two preceding years, were caught in a trap. Banks which had loaned them money began to force a settle- ment. The stocks which they held had for some time been popularly known as "undigested securities," 1 > Interview with J. P. Morgan, New York Times, March 31, 1903. 1903] The "Rick Men's Panic" 309 showing that the public understood the situation. A little later on it was James J. Hill, the author of the "Burlington deal," who suggested the term "indi- gestible securities." l The syndicates began by selling their reserve investments of older high-grade stocks and bonds, and the market broke under their sales. Some of these syndicates, fairly forced to the wall, next threw on the market the underwritten securities, to get what they could get for them. They got very little, for along with this heavy selling came news most disquieting to investors. The hastily capitalized industrial corporations themselves began to raise signals of distress. For one thing, their or- ganizers had calculated, in the careless and easy op- timism of the day, that the amalgamated concerns could themselves, when they needed working capital, procure it from the banks, as the individual manu- facturers had done before. They were, however, wholly mistaken, having quite overlooked the fact that discount of one manufacturer's paper by a neigh- boring bank, familiar with his character, history, and business methods, is a very different matter from dis- counting the paper of a company formed through buying out ten such manufacturers. This new concern must ask for ten times as much on its individual note, and it must do so when its character remains to be determined, when its history has just begun, and when its methods are either unknown, or actually (as was the case with Interview at St. Paul, Minn., July 19, 1903. 310 American Finance 11903 more than one new "industrial" in 1903) open to grave suspicion. But, even had these new concerns been most unexceptionable borrowers, the banks, with the European repayments and the syndicate loans upon their hands, were in no condition to oblige them. Some of the combinations, like the New England Cotton Yarn, which had been paying 7 per cent, divi- dends, called a cash assessment from their shareholders. The great steel corporation stopped dividends on its common stock, which had been paid since the company was organized, and with the subsequent fall in prices of its shares, the market valuation of the stock, which had been $785,000,000 in 1901, went actually in 1903 to $350,000,000. Other smaller combinations followed its example. The Consolidated Lake Superior, a $100,000,000 iron trade combination, which had paid 7 per cent, divi- dends on its stock, up to the preceding December, went suddenly into bankruptcy. The United States Shipbuilding Company, which sold its bonds on the assurance that foreign investors were buying both them and its $50,000,000 stock, was placed in the hands of receivers, with an exposure of humbug which was little less than farcical. Its promoters had never even approached great foreign bankers, but had been dealing with needy adventurers around the Bourse who had not the money to equip a mill. In the unsettlement of public confidence, there was even a run on financial institutions, and serious bank failures in two or three smaller cities. 1903] Roosevelt's Sweeping Plurality 311 Yet, with all this, two facts were manifest in the financial situation. First, the worst sufferers were not the general public they had taken their medicine quickly in 1901 but the infatuated millionaires; and second, the real elements of American prosperity con- tinued. The episode of 1903 was rightly described in Wall Street as a "rich men's panic." Perhaps the surest test of the people's actual condition came in the presidential election of 1904, when signs of industrial recuperation were general. The party in power, with Mr. Roosevelt as its nominee, won the most sweeping victory in the history of American politics, its plurality on the popular vote being the extraordinary figure of 2,541,000, where McKinley's plurality of 860,000 in 1900, had itself broken all preceding records. There were other reasons for this unprecedented vote, which we shall have occasion to examine later on; but it was none the less a testimony to the average citizen's con- tentment with financial and industrial conditions. CHAPTER Xin WORLD-WIDE RISE IN PRICES IT is not always easy to classify a year such as 1903, and to assign its proper place in economic history. That it was merely an interlude in the cycle of prosperity, was proved by subsequent events. Wall Street including both the every-day speculator and what is known as "High Finance" undoubtedly drew the inference that 1903 was a "panic year," similar to such a period as 1893, and that the easy recovery from the set-back, and the quick return of prosperity and confidence, provided conclusive testimony to the fact that, after all, economic law had changed and that the real economic penalty for financial blunders and excesses need be feared no longer. It was in fact a very noticeable phenomenon, in the discussions even of experienced bankers at that period, that the oc- currence of another panic like that of 1893, with its runs of depositors, its general suspension of bank payments, its recourse to clearing-house loan cer- tificates, and its premium on currency, was ac- cepted as impossible. Economists who did not take 312 19051 Increasing Prosperity 313 that view had two explanations to offer for the relapse of 1903 and the country's quick recovery from it. One was, that this was an after-effect of the European "Boer War crisis," to be ended when financial Europe got on its feet again, as it did in 1905. Another was, that a so-called "little panic" always comes midway between two- serious economic crises as it did in 1884 and 1866 terminating definitely the period of easy money, but not so completely exhausting the community's economic power that it has to begin to build anew. Whichever may be the more plausible theory, the fact is that, as in the sequel of 1884, the doubts and misgivings of this minor crisis were dismissed within a year and a half. By 1905, not only the United States, but Europe also, had resumed the "industrial boom" on a scale of substantial magnitude. To at least some extent, it is reasonable to suppose that resumption of full gold production in South Africa had an influence. Having reached, in English values, a high record of ^15,500,000 in 1899, on the eve of the Transvaal War, this output sank, during the whole of the two-year period 1900 and 1901, to ^1,014,000. It then recovered gradually; in May, 1905, it passed the high- water mark of previous monthly production; in the twelvemonth 1906, it had reached the sum of 24,500,000. * Partly because of the facilities for banking credits ' Monthly Reports, Johannesburg Chamber of Mines. 314 American Finance [1905 thus provided, partly because of a new impulse to enterprise, more keen because of the halt that had been enforced by the three or four years of financial reaction, the exploits of 1901 now began to be repeated, not in America alone, but throughout the world. This last fact is important to keep in mind. It was European over-expansion which came to grief in 1899, and American over-expansion which met its reckoning in 1903. America, which had not yet overdone things, was in a position to help out financial Europe on the first occasion; Europe had plenty of idle capital to put at America's disposal on the second. To find a period when both Europe and America, and with them the rest of the financial world, were simultaneously engaged, as they were during 1905 and 1906, in the intensely eager task of exploitation, the student of history would possibly have to go back to the early seventies. Circumstances conspired to stimulate this world- wide movement Two years of exceptional agricul- tural prosperity occurred; of wheat in particular, the world produced in 1905 a crop larger by nearly 100,- 000,000 bushels than any ever before harvested, and in 1906, the yield was 100,000,000 bushels larger still. Prior to 1902, the world's largest wheat yield had been 2,900,000,000 bushels; the crop of 1906 was 3,400,000,000; yet such was the magnitude of consumption that English experts estimated the second of these figures to have been only 1,440,000 bushels beyond the world's actual requirements for the 1905] The Trusts and the Rise in Prices 315 season. 1 In the United States, despite the signs of di- minishing productive capacity in 1904, the wheat crops of 1905 and 1906 surpassed all precedent except the great "wheat year" 1901; the corn crop established anew maximum yield in each of these two years; the cotton yield of 1905 was the third largest in our agricultural history and that of 1906 was only a trifle below the largest. Notwithstanding this bounty of nature, prices and cost of living rose with greater rapidity than at any time in a generation past. Taking the London Econ- omists "index number" as a measure, we shall find that between the middle of 1897, when low level of the period was reached, and the end of 1904, the average of commodity prices had risen from 1885 to 2136. Between the middle of 1904 and the middle of 1907, it had advanced to 2601. Comparing the index number for the end of 1904 with that for the middle of 1897, we shall find an advance of 13! per cent. Comparing the number for the middle of 1907 with that for the end of 1904, we shall find the nse for that second period was no less than 2 if per cent. Putting the matter in another way, on the basis of units, the increase in the index number, from 1897 to 1904 inclusive, was 251 points; from 1904 to 1907 inclusive, it was 465 points. That is to say, the average prices of commodities advanced nearly twice as far during the second period, > Estimate, Liverpool Corn Trade News. July, 1907. 316 American Finance 11905 which was less than half as long as the period from 1897 to 1904. To come down to specific articles, such as play an important part in cost of living, the average price of iron during 1904 was $15.57 per ton; in 1906, it was $20.98. Steel prices averaged, in the respective years, $22.18 and $27.45 *; leather, 18.9 cents a pound and 20.2; butter, 16.5 and 18; planed boards, $20.05 P er thousand feet and $21.342; lead, 4.42 cents and 5.78^; tin, 27.90 and 39. 67$. 3 A glance at these figures will show the advance to have been greatest in commodities, like steel and lead, whose production in this country is in the main controlled by a single great corporation. This process was most visibly at work in the copper industry; in which, since 1899, the $153,000,000 Amalgamated Copper Company, a concern organized solely to buy and hold the shares of copper mines, exercised so controlling a voice in fixing prices that even foreign metal markets admitted its arbitrary power. 4 In 1901, when this company held the price at 16 cents a pound, it was declared by the trade to be abnormally and artificially high. In 1904 the price averaged only 13^; it was taken in hand again and marked up continuously to i8| cents in 1905, to 24 in 1906, and to 25! early in 1907.' No price approaching this had been touched since 1873; 1 Annual Reports, American Iron and Steel Association. '> U. S. Statistical Abstract, 1906, p. 576. 3 Annual Report, New York Metal Exchange, for 1906. London Economist, April 18, 1908, p. 830. Annual Report, New York Metal Exchange, for 1907. 1905] Cost of Living Advances 317 yet the rise occurred in the face of an increase in copper production, between 1904 and 1906, of lof per cent, in the world at large, and of 13 per cent, in the United States alone. l Nor was it only the great industrial trusts which pur- sued this policy. In 1901, cotton was considered dear at 10 cents a pound; a short crop and a New York cor- ner raised the price in March, 1904, to i6f , from which, on the harvesting of a crop, the ensuing season, 20 per cent, larger than the previous maximum yield, it fell to 8 cents or thereabouts. The cotton growers thereupon organized; conventions were held, an asso- ciation formed with branches throughout the cotton belt; resolutions were adopted fixing the minimum price at 15 cents a pound, and arrangements made for advancing money to the planter, whereby he might hold his cotton off the market until his price was reached. 2 The "official price" was not achieved; but a good part of the crop of 1906, which was only slightly smaller than the largest yield on record, was sold at prices ranging from 12 to 13 cents. Meantime, hand in hand with the rise in price of merchandise, land and rents advanced. The rise in land values, which began in earnest during 1904, reached the next year, in a good part of this country, the proportions of a mania. Farm lands naturally led in the move- ment; with the great harvests and the high prices, 1 Annual Report, New York Metal Exchange, for 1907, p. 10. a Charleston correspondence, New York Evening Post, Jan. 30, 1906; Financial Section, p. 3. . 318 American Finance [1905 their actual earning power was enormously enhanced', they doubled, trebled, and quadrupled in value. But town and city lots, throughout the country, followed suit. Speculation grew violent in a hundred widely separated localities, and one would see, fifty or sixty miles away from populous cities, unimproved meadow- land staked out with street signs of avenues and boule- vards, and in some cases dealt in through paper "options," the speculators not taking the trouble even to pass title. Sums wholly without precedent were invested in the erection of town and city dwellings. In New York City, capital expended on construction of new buildings had never, even in the excited years of 1899 and 1901, exceeded $150,000,000; it was only $139,000,000 in 1904. But in 1905, it rose to the extraordinary figure of $230,000,000, * and this was typical of dozens of cities throughout the United States. Such was the story throughout the whole domain of industry, and one inevitable outcome was that, along with the speculative enthusiasm and the accla- mations over the period's immense prosperity, bitter complaint arose from other quarters over the increased cost of living. There is, indeed, no doubt whatever that one large section of the community including small-salaried employees and people with moderate fixed incomes was being steadily forced back to a lower scale of living than had been its habit, and that another section, unwilling to economize and infected 1 New York Real Estate Record and Guide, Jan. 6, 1906, p. a, 1904] Growing Strain on Capital 319 by the extravagance of the day, indulged without hesitation in living beyond its means. 1 Against these consequences, organized labor was able to protect itself; the urgent demand for skilled workers in every branch of industry made easy the frequent exaction of advance in wages. Extensive strikes were rare, because employers, their books full of pressing contracts, could not risk losing workmen whom they might possibly not be able to replace. What the rise in wages was, we may learn from the Government's reports. Taking as a basis the average wages paid to American laborers in the decade 1890- 1899, and assuming, for purposes of comparison, 100 as the index-figure of wages paid per hour of labor in that period, the statements show that the average rate in 1904 was 117, that it was 118.9 m T 95> * 2 4-2 in 1906, and 128.8 in 1907. 2 It is open to argument, and indeed is largely proved by the calculations of this same Government report, that these higher wages did not much more than compensate for the increased cost of living. But a quite inevitable outcome of this extraordinary rise in cost of materials and labor was the demand for increased amounts of capital for use in trade, and a rise in the price of money. Even among merchants, it was common complaint that nearly twice as much money had to be used to conduct the same volume M. E. Ingalls, Chairman "Big Four" Railway, speech to American Bankers' Convention, September 27, 1907. U. S. Bureau of Labor, Bulletin for July, 1908, pp. 4 and 5. 320 American Finance [1904 of business as had been necessary two or three years before. Manufacturers had the higher cost of labor and materials to absorb increased capital on the same amount of output, and this happened at a time when the bank-deposit fund, the surplus capital of the com- munity, was being narrowed by the increasing cost of living. That necessarily meant low bank reserves and dear money. Yet evidence of a growing strain on capital resources was no more conspicuous than evidence of the financial community's readiness to draw still more largely on the credit market. This readiness was tested in a very conclusive way. On the night of February 8, 1904, the Japanese fleet at* tacked the Russian squadron at Port Arthur, and one of- the three most costly wars since the Napoleonic era began. It continued, on sea and land, until August 29, 1905, and it involved an expenditure, by the two belligerents, of a sum not far below two thousand million dollars. From the outbreak of the Manchurian war, it was plain that political affiliation would throw on France the burden of equipping Russia, and on England that of equipping Japan. The prospect was viewed with great uneasiness; for Russian bonds, in a sum total estimated between $1,400,000,000 and $1,700,000,000, were already in the hands of French investors, l who might be frightened into panicky liquidation, and a very prevalent belief existed that Japan's 1 New York Evening Post, Feb. 27, 1904, Financial Section, 1904J The Manchurian War 321 economic resources were not strong enough to endure the prodigious strain ahead of them. * On Europe's stock exchanges, a collapse at once occurred in the general investment market, especially on the Paris Bourse and in Russian bonds 2 ; but it was promptly checked, and such was the confidence of the French rentier, that Russia raised in the Paris market, during 1904 and 1905, the great part of its $500,000,000 loans of the period, and in 1906 easily raised $400,000,000 more to settle the post-bellum expenses. Japan, applying first to its treaty ally, Great Britain, now tried a highly interesting experiment it asked the co-operation of American bankers and investors. Russia had made, some years before, a similar tenta- tive application, and had failed. The American public showed no interest; no banker could be enlisted in an " underwriting " ; and although one Russian bond issue was "listed" on the New York Stock Exchange, and a silver vase presented by the Czar to that in- stitution as acknowledgment of the favor, not one of the bonds was ever dealt in. Japan now made, in May, 1904, its initial offer of $50,000,000 bonds, allotted equally to England and the United States. The terms were inviting; Japan pledged its customs revenue to se- cure the bonds, offered them at 93^ cents on the dollar, and fixed an interest rate of 6 per cent. The loan was Interview with Sergius Witte, Russian Finance Minister, November, 1904. 2 Paris correspondence, New York Evening Post, March 5, 1904, Financial Section, p. i; Paris correspondence, London Economist, Feb. 27, 1904, p. 353. American Finance [1905 moderately over-subscribed. In November, Japan again applied to the London and New York markets for a loan of $60,000,000. It bore the same interest and security as the loan of May, but sold at 88. Be- tween that time and Japan's next application to the markets, events in Manchuria moved swiftly. On January 2, 1905, the Russians surrendered Port Arthur; in March, after continuous fighting of a week or more, the main Russian army met disastrous defeat at Muk- den; in the same month, Japan asked for $150,000,000 more from the English and American money markets. With the prestige of victory on their side, and with the bonds of 1904 selling on the market 10 per cent, above their issue price, the Japanese financiers fixed an interest rate of only 4^ per cent., pledged only the Government's tobacco monopoly against the loan, and asked the price of 87 f, or nearly as much as was brought by the second 6 per cent, loan of 1904. Yet such was the enthusiasm of capitalists, that the American half of the loan was applied for six times over. 1 First and last, Japan expended, in conducting the Eastern War, the sum of 1,982,190,000 yen, or, roughly, $991,000,000,2 making the rate of outlay, of the two contestants in the Eastern conflict, in the year and a half of war, more than $3,000,000 daily. Something less than half of Japan's war expenditure, and a similar part of Russia's, were defrayed through in creased home taxation and domestic loans. But taking the two 1 New York Financial Chronicle, April i, 1905, p. 1202. 3 Financial and Economic Annual of Japan, 1906, p. 12. 1906] World-wide Speculation Begins 323 belligerents together, it is safe to say that the Eastern War brought a requisition on the neutral markets, dur- ing 1904 and 1905, of not much less than one billion dollars. Now money thus expended is pure waste; it does not return to the channels of industry, and it diminishes the world's reserve of capital. Yet this prodigious drain did not in the least restrict demands for capital in finance and industry; on the contrary, it seemed to stimulate them. Although 1904 had been the year of heavy Japanese loans in London, requisitions on that market's capital, through new security issues, ran in 1905 $220,000,000 above the preceding year, reach- ing a height never exceeded save in the twelvemonth before the "Baring panic year." 2 Exchange of checks at the London Bankers' Clearing-house, in 1905, rose 16 per cent, above the highest previous yearly total, and 30 per cent, above so active a year as 1899. 2 All this reflected immense activity at the central money market of the world. In the United States, bank clearings in 1905 rose 27 per cent, over 1904 and greatly exceeded all previous records; yet those of 1906 were n per cent, larger still. 3 On the European continent, Germany's issue of new securities in 1905 was 70 per cent, larger than in 1904; the esti- mated total, $770,000,000, comparing with $615,000,- ooo in 1898, itself the maximum of that decade's 1 London Economist, Dec. 30, 1905, p. 2110. 3 Ibid., Dec. 30, 1905, p. 2128; Jan. 6, 1900, p. 16. * New York Financial Chronicle, Jan. 12, 1907, p. 74. 324 American Finance [1906 excited "boom" and the previous high record in the country's history. * That it was not alone financial activity, moreover, which was pulling at the market's purse-strings, may be shown by the fact that iron production, a fair measure of industrial conditions, increased in England from 8,503,000 tons in 1904 to 9,500,000 in 1905 and 10,000,000 in 1906 a 30 per cent, increase over 1901, in Germany from 10,000,000 tons in 1904 to 12,200,000 in 1906, and in the United States from 16,400,000 tons in 1904 to 25,300,000 in 1906; the figures of the last-named year being in all three instances unprecedented. 2 "Everything is in motion," wrote a trained observer regarding 1906; "railways, steamers, factories, harbors, docks; it is evident that so gigantic a development of trade and industry could not fail to have a marked influence upon the position of the international money market. " 3 That influence would have been less formidable, even with the engulfing of capital in the Eastern War loans, had not speculation, with its enhancement of values and its peremptory demand on bank resources, thrown its weight into the scale. Let it again be ob- served that, unlike our "boom" of 1901, the industrial expansion of 1905 and 1906, and the speculation which 1 Frankfurter Zeitung estimates; see London Economist, Berlin correspondence, Jan. 13, 1906, p. 53, and Jan. n, 1902, p. 49. 2 Annual Reports, American Iron and Steel Association, for 1905, pp. 85 and 88; for 1906, pp. 51, 84, and 85. 3 C. Rozenraad, Address to the London Institute of Bankers, March 6, 1907. 1906] Very High Money Rates 325 accompanied it, were limited only by the bounds of the civilized world. In October, 1905, when the Imperial Bank of Germany put up its discount rate successively to 5, to 5^, and to 6 per cent. the last- named figure being the highest ever reached, except in time of actual financial panic, the authorities of the bank declared publicly that the volume of un- covered note circulation, a pure emergency device, was the largest in the history of the institution, and that the high discount rate was expressly designed to apply a curb to the German speculative mania. 1 In Egypt, land and stock speculation reached, between 1905 and 1907, a pitch of excitement which, later on, a responsi- ble financier described as meaning that the "people were apparently mad; I do not know what other word to use; they seemed to think that every company that came out was worth double its value before it had even started business." 2 In Japan, the declaration of peace in August, 1905, was followed by what was described in a subsequent government review as a "fever of enterprise," in which "prices of securities rose higher and higher, " with " a similar rise of prices in general," 3 and of which high banking authority re- 1 Report by Dr. Koch, President of the Reichsbank, Oct. 3, 1905; London Economist's Berlin correspondence, Oct. 7 and Nov. n, 1905. 2 Chairman's address to shareholders' meeting, Bank of Egypt, March 6, 1908. See also report of Sir Vincent Cor- bett, financial adviser to the Khedive, London Economist, Dec. 30, 1905, p. 2108. * Financial and Economic Annual of Japan, 1907, p. 5. 326 American Finance tt90& marked that, by 1906, "men of judgment had already begun to look askance at this state of affairs." 1 From South America, it was reported of 1905, by an observer on the spot, that in Chili, "the only apparent factor that restricts operations in all directions is the scarcity of labor; wages and salaries have risen greatly and continue to rise, as all employers are on the lookout for workers. As money became more plentiful, the price of provisions rose and money became more expensive. " 2 Here, then, were markets in four continents plunging simultaneously into speculation, at the very moment when trade demands were at a maximum, and when the Manchurian war had drawn in such prodigious sums on the world's capital reserves. The process was imitated in the surrounding states. It was not to be supposed that, with its appetite whetted by remem- brance of 1901, and with its own interior commerce, foreign trade, railway revenue, grain harvests, metal and mineral production, iron and textile manufacture, at top notch in its history, 3 the United States, in yet another continent, would fail to follow suit. Of the American speculation in commodities and land I have already spoken; but the spectacular interest of the period attached to the Stock Exchange. During the 1 Annual Report Bank of Japan for 1907. 2 Report of British Consul at Valparaiso; see London Economist, Dec. 14, 1907, p. 2171. 5 U. S. Statistical Abstract for 1906, pp. 657, 676, 677, 678, 680, 685. 1906] The Millionaire Speculation 327 autumn of 1905 this speculation reached a singular position. It was not, like the American stock specu- lation of 1901, conducted on the basis of public partici- pation; the real outside investor now had employment for his own capital in the increasing demands of his private business. But to his absence the speculative leaders, who comprised large groups of immensely wealthy capitalists, bank officers, and railway direc- tors, were seemingly indifferent. 1 Their bank affili- ations enabled them to pursue their course unchecked; their use of credit was practically unrestrained; there seemed no bounds to the audacity of their ventures. 2 Railways with share capital running into the tens of millions were practically cornered on the Stock Ex- change; one of them, a company with $70,000,000 outstanding stock, was put up 20 per cent, in price Vithin a fortnight, and without a particle of news to iffect its value legitimately. The same thing happened in a dozen other properties. These exploits were carried out in the face of rapidly falling bank reserves and rapidly rising money rates. Even at the height of the speculative craze of 1901, mercantile discounts at New York had ranged around 5 per cent.; in the autumn of 1905, the full legal rate was charged, plus a "broker's commission," which brought the actual rate as high as 7 per cent. a very abnormal figure, showing that general trade was feeling 1 New York correspondence, London Economist, Nov. 18, Nov. 25, Dec. 9, Dec. 16, 1905. 3 London Economist, Nov. 18, 1905, p. 1834. 328 American Finance ti906 the strain. * But the Stock Exchange speculation did not halt; in various stocks controlled by powerful groups of capitalists, advances of 10 to 20 per cent, occurred, with enormous trading. When the New York banks reported a steadily weakening position, recourse was had to Europe. Money was raised in London on the collateral of these speculative holdings, and great blocks of American stock shipped from New York to the English market. 2 "Finance bills" re- appeared a device which had first become familiar in 1901 and 1902, and which meant the raising of capital abroad, sometimes in tens of millions of dollars, not on the basis of automatic extinction of the debt by grain and cotton exports, but through outright borrowing on the paper of powerful New York banking houses. 3 Such, however, was the persistence of de- mands on home bank resources, that even this ex- pedient failed to relieve the pressure, and meantime money rates were advancing in Europe also. On November n, 1905, and again on December 9th, reserves of the New York Associated Banks fell below the 25 per cent, ratio to deposits stipulated by the 1 New York Financial Chronicle, Dec. 9, 1905, p. 1632. 3 London correspondence, N. Y. Evening Post, Dec. 9, 1905, Financial Section, p. 3. 3 E. H. Holden, chairman London City & Midland Bank, interview in New York Herald, Sept. 20, 1906; interview in London Standard; reprinted in New York Evening Post, Nov. 17, 1906, Financial Section, p. 3. See Ibid., July 22, 1905, Financial Section, p. 6; Oct. 27. 1906, London Outlook, quoted in Evening Post, Sept. 15, 1906. 1906] Predictions of Coming Danger 329 National Bank Act. Rates for demand loans on Wall Street went to 25 per cent, in November, and still the Stock Exchange speculation for the rise continued. On December 28th, the rate reached 125 per cent. Addressing a gathering of practical New York business men, a few days afterward, and referring to that money rate, an eminent financier declared: "If the currency conditions of this country are not changed materially, I predict that you will have such a panic in this country as will make all previous panics look like child's play. " l Just how far this prophecy was destined to be ful- filled, we are presently to see. But in the light of what we have now reviewed, it may reasonably be asked, whether the laying of responsibility on the currency touched the source of evil. A very different inter- pretation of the same events was made by an eminent European economist, who wrote, at the culmination of this strain on the money market of the world: " The growing industrial states, particularly the new coun- tries, are at this moment demanding more capital than the whole world has accumulated recently, or is accumulating to-day. . . . The civilized world, so far as it can be reckoned up, provides $2,400,000,000 in available capital annually for investment in securities; it is asked in 1906 to provide $3,250,000,000; there was a demand, in America at any rate, for even more than its part of the above estimate to be provided during 1907. But the world has not got it; therefore it cannot provide it. Add to this the effect of catastrophes such as the San Francisco and Valparaiso Speech of Jacob H. Schiff to New York Chamber of Commerce, January 4, 1906. 33 American Finance [1906 earthquakes, which cost something like $200,000,000, and you will have a perfectly clear explanation of the existing crisis, the rise in the interest rate and the fall of investment securi- ties. The truth is, nations, quite as well as individuals, have reached the point where they must limit their undertakings to the possibilities of the case; that will be done, if not will- ingly, then by force of events." 1 1 Paul Leroy-Beaulieu: "La Crise est-elle en Vue?" Economiste Francois, Jan. 5, 1907 ; " Les Marches Financiers, " Ibid., June 22, 1907; "L" Insuffisance des Capitaux, " Ibid., A.ug. 31, 1907. CHAPTER XIV SOCIAL AND POLITICAL RESULTS THE events which I have narrated in the two pre. ceding chapters were of a character to influence profoundly social and political conditions, and no review of the period would be at all adequate which did not make careful account of developments in such directions. The advance in commodity prices; the growth of industrial combinations, on a scale of mag- nitude beyond the imagination of the previous decade; the sensational speculation in securities and com- modities; the overshadowing power acquired, through their bank and company affiliations, by a handful of immensely wealthy capitalists these were the typical phenomena of the day. They were dominant influences on financial markets; but they also touched closely the every-day life and habits of the ordinary citizen. Socially, they had two distinct and opposite effects. The first was extravagance of living more spectacular in the case of men, like the independent steel-producers of 1901, whom the " deals" of the great trade combinations had suddenly made millionaires 331 332 American Finance [1906 many times over, but noticeable also in the community at large. Belief in impregnable prosperity was general, and with that belief came not only lavish private ex- penditure, but appetite for speculation. Newspapers of 1905 were full of advertisements of mining, oil, and miscellaneous ventures many of them fraudulent on their face. The known losses incurred in one group of enterprises of the sort seemed to impose no check on the public's response to the next invitation; people were apparently determined to speculate, and even in the villages, the talk of "tips" and "sure- things" was of constant recurrence in every-day con- versation. Announcements of bureaus which, at the subscription price of $5 to $10 per month, would pro- vide "advance tips" on stocks which were bound to rise, filled columns of advertising space. One notorious expert in the business was accustomed to buy up a full page in the daily papers, using it to entice the thrifty middle classes into his speculations. The objective point in nearly all such schemes was reached: the public, East and West, threw its money into them, and the result, as in the closely parallel conditions of 1872 and 1856 and 1836, was to create among great bodies of our people a false point of view and de- moralizing business standards. But step by step with the progress of this tendency, another and a very different kind of public sentiment was growing. Rise in the cost of living bore heavily on all classes of society whose incomes remained fixed or were not advanced in proportion to the higher prices. 1906] The Public and the Trusts 333 On people in this position and their number in- creased with great rapidity during 1905 and 1906 visible evidence that a few great capitalists were getting control of the sources of production and transportation could not fail to make impression. It may be that the public mind exaggerated the facts. When nearly all the cheap magazines, and a good part of the daily news- papers, were treating the sensational aspects of the situation, it would have been strange had no mis- apprehensions been created. But actual events were of a nature to disturb even experienced men of affairs. That prices of commodities might, in certain cases, be controlled and manipulated by the great trade com- binations, in the interests of the men behind them, had been shown by the Amalgamated Copper Com- pany, and the steel, sugar, oil, and lead trades were equally in the grasp of powerful trusts. Independent railway companies were fast disappearing into the hands of four great systems commonly known as the Vanderbilt, Pennsylvania, Hill, and Harriman groups and the Northern Securities merger suggested what might happen even to these four systems. This, it is true, was not a new tendency of the day, and had long been discussed as a factor in the growth of industrial efficiency. It was declared, even by many eminent economic scholars, that the day of unrestrained competition was past, and that it was best that it should be. Similar industrial tendencies, so far as regards great combinations, were visible in England and Germany as well as in this country. 334 American Finance [190 6 But in America the manner in which the Captains of Industry acquired and exercised their powers put a different face on things. The Steel Corporation, in the face of remonstrance from its shareholders and almost unanimous protest from outside critics, undertook to turn $200,000,000 of its stock into mort- gage bonds, employed an enormously expensive syndi- cate for the purpose, and was eventually stopped only by revolt of some of its own directors. 1 A $52,000,000 company, controlling all the street car lines of New York City, was leased to a small suburban trolley company with four miles of track, and shareholders who, at the ratifying meeting, demanded investigation of the plan before approving it, were calmly told by the chairman to " vote for it first and discuss it afterwards. " 2 It was very much discussed a few years later, when the whole enterprise went into bankruptcy with evidence of "inside" trickery, mismanagement, and plunder. The question was no longer merely that of the size of combinations, but of the purposes of the controlling interests. Mr. J. P. Morgan frankly and publicly avowed his belief in creating corporations with capital stock so large that existing managements could not be unseated. 3 Mr. Harriman, who had won repute not only as a skilful railway manager but as a daring speculator, was authorized by the Union Pacific board, 1 Forum, January, 1904, pp. 367-371. J See report of meeting in New York Evening Post, March 20, 1902. Testimony in Peter Power vs. Northern Securities Co.; New York, March 26, 1902. 1906] Attitude of the Capitalists 335 of which he was chairman, to "borrow such sums of money as may be required for the uses of this company, and to execute in the name and on behalf of this com- pany a note or notes for the amount so borrowed." 1 What use he proposed to make of this autocratic power was shown by his purchase on the Union Pacific's credit, during seven months following June, 1906, of $131,970,000 stocks of other railways, some of them on the other side of the continent from his own. 2 Had Harriman achieved his purpose of capturing the North- ern Pacific in 1901, his success, combined with his previous acquisitions, the Interstate Commerce Com mission declared, "would have subjected to a common will and policy nearly one-half of the territory of the United States a comparatively undeveloped, rapidly growing, and extremely rich territory, into which must necessarily extend the population and business of the Eastern States." Even as regarded the rest of the United States, Harriman defiantly testified, in a public hearing, that if the law would let him alone, he would "spread not only over the Pacific coast, but spread over the Atlantic." "I would," he declared of his policy of buying up one group of railroads on the credit of another, "go on as long as I live." 3 When the Northern Securities holding company, formed to own a majority interest in the Northern Pacific and Great Commissioner Lane; xa Interstate Commerce Commission Reports, No. 943, p. a. * Ibid., p. ao. i Ibid., p. 5. 336 American Finance [1905 Northern railways, came before the court, and its counsel was setting forth the good influence of the merger, he was asked from the United States Supreme Bench if the same machinery might not be employed to buy up all the railways of the United States, and place control of the whole of them in the hands of three or four individuals. He answered that such use of it would be highly improbable, but that it might be so employed. 1 It was not alone, however, the possibilities arising from such power on which public interest was con- verged by the movement of events, but the manner of acquiring the power. On this question, what was deemed at the time an accident poured a sudden flood of light. It had long been suspected, by the general public, that the great promoters were somehow em- ploying in their projects the funds of life-insurance companies. How convenient such recourse should have been, was manifest from the fact that three New York institutions of this class, at the end of 1904, reported investments in stocks and bonds footing up $765,900,000.2 In February, 1905, a quarrel broke out between the President and Vice-president of the Equitable Life, a joint-stock institution with $413,- 000,000 total resources but a share capital of only $100,000, of which $51,000 was owned by one James 1 Justice Brewer, concurring opinion Northern Securities vs. United States; U. S. Supreme Court, March 14, 1904. 2 Reports of Equitable Life, New York Life, and Mutual Life, to New York Insurance Department. 1905] The Life Insurance Scandal 33 7 H. Hyde, a young man of twenty-seven, son of the founder of the company. This stock carried only 7 per cent, dividends; but the majority holding gave to its owner unusual power for overruling policies of the president and trustees. 1 The president of the Equitable sent to his fellow-directors, over his signature and that of other active officers, a flat declaration that the re-election of Mr. Hyde as vice-president "would be most prejudicial to the welfare and progress of the society and the conservation of the trust funds." 2 At the ensuing annual meeting of the Equitable trustees, this protest was again submitted, and a petition to turn the society from a joint-stock into a mutual company was added. 3 The course of the personal dispute need not concern us further; in the event, Mr. Hyde and Mr. Alexander both retired from the company. The real significance of the episode was that it compelled investigation and publicity regarding the use of the Equitable's funds. First, the trustees appointed a committee of their own; this committee, three months later, submitted a report which threw the directors' meeting into dis- order, and led to a searching inquiry by the New York Legislature. The Frick committee found that officers of the Equitable had used the company's funds as subscriptions to "underwritings" organized > Report of Frick Committee to Equitable Trustees, May 31, 1905, pp. 16-17. 2 Statement of President James W. Alexander, Feb. 2, 5- 3 Frick Report, p. 4. 338 American Finance tl903 by themselves, thereby violating the insurance law 1 ; that one of them had without authority carried in his own name large blocks of securities owned by the company 2 ; that the Equitable, which was de- barred by law from speculative undertakings in Wall Street, had bought control of three trust companies with broader powers, 3 and had kept on deposit with those companies the greater part of its own cash sur- plus 4 ; that in 1903, with $36,000,0x30 thus deposited, it had been unable to use for its own legitimate invest- ments any part of the money thus deposited, undoubt- edly because the deposit had been tied up, through these other banking institutions, in illegitimate financial ventures 5 ; and that its president, with that huge sum in bank and with standard investment securities at a most inviting price, had written to a fellow-officer that "we would be buying a good many of such things were it not that we are so strapped for money by en- gagements already made." 6 When a committee of trustees had exposed such per- formances with the trust funds of the people, it was plain that the State would have to take a hand. The New York Legislature promptly named a committee of investigation. Under the leadership of its counsel, 1 Frick Report, pp. 18, 19, 20. Statement of J. H. Hyde, April 15, 1905. Ibid., p. 22. ' Ibid., p. 25. Ibid., p. 30. Ibid., pp. 30, 31, 32. Letter of James W. Alexander, Aug. 13, 1903; Frick Report, p. 33. 19051 Investigating Committees 339 Charles E. Hughes, it began, on September 6, 1905, a searching examination. This committee sat until the close of 1905, and the secrets of the "life insurance connections" of high finance were laid bare. The committee found relatively little of the sale of se- curities to companies by their own trustees, as exposed by the Frick committee, but very much use of the companies' funds to participate in syndicates in which trustees were personally interested 1 . Employment of life insurance funds, through subsidiary companies, for investment in undertakings forbidden to the life concerns themselves including the United States Steel and "Shipping Trust" promotions was found to have prevailed on an extensive scale, and occasionally with misleading entries on the books 2 ; legislators, political committees, and even newspapers had been subsidized in enormous sums. 3 Along with this, ex- orbitant salaries and nepotism had prevailed, 4 but dividends to policy-holders had not only decreased actually, but had fallen far below official and published estimates. 5 The climax of this extraordinary testi- mony was capped by the president of one of the largest companies, who, when confronted with the above conditions, declared on the stand that the promoters of his company had acted " from a pure spirit of phi- Armstrong Committee's Report to New York Legislature, Feb. 22, 1906, pp. 35, 36, 140, 141, 142. Ibid., pp. 68-81, in, 112, 136. Ibid., pp. 17-26, 50-64, 108-110. * Ibid., pp. 12-15, 107. * Ibid., p. 40. 340 American Finance [1905 lanthropy and benevolence," establishing " a missionary enterprise, so to speak"; but that it "wasn't the object to declare a dividend to a man," in order that a policy-holder, having paid his annual premium, should "then at the end of the year get seven dollars and go home and spend it for cigars. " * This investigation, publicly conducted during four successive months, and reported in every newspaper, had an influence on public sentiment which was difficult to measure. Much has been said and written, since, in deprecation of the campaign of sensational ex- posure, insinuation, and investigation, regarding "graft" in high finance, which at once became the popular newspaper and magazine topic of the day. The White House itself publicly disapproved the "muck-raking" tendencies of the day. 2 But the muck-raking was not a popular demonstration without a cause, and we have seen what the causes were. Both causes and consequence were among the social phe- nomena which gave the period its character, and both had an important hand in subsequent events. The insurance scandal itself ended, as was inevitable, in a thorough reform law for life insurance in New York State, whereby not only were the practices thus exposed prevented for the future, but the life companies were prohibited from owning other institutions, and the unlimited increase of capital resources in a single 1 Testimony of R. A. McCurdy; Armstrong Report, ii., pp. 1840, 1841. * President Roosevelt, speech of April 14, 1906. 1905] Effect on the Public Mind . 341 corporation's hands stopped by providing that no company should thereafter accept more premiums when its total outstanding policies had reached $150,- 000,000. Yet the fact that, after all this series of exposures, a notorious promoter should have bought Mr. Hyde 's controlling interest in the Equitable for $2,500,000, and should have then engaged in an angry quarrel with another speculating capitalist, as to whether one of them, or both, should own it, did not throw an agreeable light even on the conclusion of the episode. Mr. Ryan did indeed place the Equitable stock in the hands of trustees of high reputation. But Mr. Harri- man's proposition "I will take half your stock; I don't know what it cost and I don't care" even though rejected, left the public more than ever convinced of the determination of such capitalists to control our fiduciary institutions. * We have seen in what frame of mind the American public regarded these various episodes in high finance. It was a mixture of misgiving, exasperation, and help- lessness; for belief was general, in such periods of industrial consolidation as 1899 and 1901, that the interests behind the movement were as strongly in- trenched in politics as in finance. What the outcome would have been in our political history, had the conditions which people then described as the " existing order of things" continued to prevail at Washington* is a question full of interest. We possess no means Testimony of Thomas F. Ryan and E. H. Harriman; Armstrong Report, pp. 4562 and 5144. 342 American Finance [1902 of judging confidently how far President McKinley's policies, after his second inauguration in 1901, might have been shaped or altered by the new industrial problems which came suddenly into view that year. All we can say is, that his traditions and temperament were not such as to have invoked a collision, between the Executive and the corporations. The question was never tested; it was only five months after his second term began that he was shot by an anarchist at Buffalo, where he died on September 14, 1901. Mr. Roosevelt, who then succeeded him, had been nominated for Vice-President against his own wish and therefore without pledges or commitments. His long record in public life as legislator at Albany, Civil Ser- vice Commissioner at Washington, Police Commissioner at New York City, Assistant Secretary of the Navy, Colonel in the Spanish War, and Governor of New York State had presented him to the people as a man of abounding energy, of vehement ideas on a great variety of subjects, of party regularity but independent leanings, and with a liking for both social and political innovation. Knowledge of these qualities caused some financial perturbation when he rose to the Presidency on McKinley's death. In his speech on taking the oath of office, however, Mr. Roosevelt declared his purpose "to continue absolutely unbroken the policy of President McKinley for the peace, prosperity, and honor of our beloved country, " and he at once requested all of McKinley's cabinet ministers to retain office dur- ing the full term for which they had been selected. In 1906J President Roosevelt 343 his first message to Congress, two months later, he declared the "startling increase ... in the number of very large individual, and especially of very large cor- porate, fortunes" to be due "to natural causes in the business world" a process which "has aroused much antagonism, a great part of which is wholly without warrant." He advised "caution in dealing with corporations," because "to strike with ignorant violence at the interests of one set of men almost inevitably endangers the interests of all, " and because " the mechanism of modern business is so delicate that extreme care must be taken not to interfere with it in a spirit of rashness or ignorance." 1 All this was reassuring to those capitalists whose plans had apparently been disconcerted by McKinley's death. They paid less attention, therefore, to the new President's further declarations that "there are real and grave evils, one of the chief being overcapital- ization"; that "combination and concentration should be, not prohibited, but supervised and within reasonable limits controlled," and that "corporations engaged in interstate commerce should be regulated if they are found to exercise a license working to the public injury." 2 It was out of these three declarations, however, that what are now known as the policies of the Roosevelt Administration grew. These policies soon placed the Government in direct and formidable antagonism with the ambitious designs of capitalists which we have already had occasion to < Annual Message, Dec. 3, 1901, * Ibid. 344 American Finance M906 review. The case, in my opinion, was such that any and all available measures for protection of the public welfare would have been invoked by any government resolved on challenging the pretensions of the great promoters of the day. The instrument selected as the most serviceable on the statutes was the so-called "Sherman Anti-Trust Law" of 1890, and, since that law was largely made the basis of the Government's subsequent moves against over-ambitious corporations, under the Roosevelt regime, the law itself requires some careful examination. The Anti-Trust Law was introduced by Senator John Sherman on March 21, 1890. It was drawn up in response to the very strong public feeling excited by the movement of that day, to which I have heretofore referred, for combination of manufacturing enter- prises in this country into single powerful corporations. From the debates on the bill, it is evident that the legislators had in mind primarily such industrial under- takings, and not combinations of the railways. 1 This was not strange, in view of the novelty of the phenome- non of industrial trusts, of the pledge of political con- vention platforms to restrain the powers of such amalgamations, and of the fact that railway combina- tions were not an incident of the period. With the railways of 1890, indeed, the problem was rather to make both ends meet in the finances of any given company, than to reach out for acquisition of com- Senate speeches, John Sherman, W. B. Allison, George G. Vest, March 31, 1890. 1890] The Anti-Trust Law 345 petitors. 1 But on the other hand, the legislation of 1890 unquestionably did not exclude the railways a point of much importance in its bearing on subsequent discussion. As originally proposed, the Act of 1890 declared illegal "all arrangements, contracts, agree- ments, trusts, or combinations ... to prevent full and free competition," not only in the sale of articles of production and manufacture, but in their trans- portation. 2 As finally amended and enacted, the law made the very broad declaration that "every con- tract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations, is hereby declared to be illegal," and it declared it to be the duty of the federal attorney-general and the several district attorneys "to institute proceedings in equity to pre- vent and restrain such violations." 3 It was alleged, in the controversy during and after 1902, in the courts and in the press, that since Congress manifestly had the industrial trusts in mind in framing its legislation, the law of 1890 did not fairly apply to railways. But the United States Supreme Court, in upholding in 1897 a suit against the so-called Trans- Missouri Freight Association, whereby the railways of that section undertook to prescribe uniform rates, declared that "we see nothing either in contempo- Jay Gould, interview in New York Tribune, March 13, 1889. 2 Congressional Record, March 21, 1890, p. 3455. Act of July 3, 1890. 346 American Finance [1902 raneous history, or in the legal situation at the time of the passage of the statute, in its legislative history, or in any general difference in the nature or kind of these trading and manufacturing companies from the railroad companies, which would lead us to the con- clusion that it cannot be supposed the legislature . . . intended to include railroads within the purview of the Act." 1 Out of five leading cases decided against the companies by the Supreme Court under the Law of 1890, up to 1902, two were directly concerned with railway agreements or combinations, and a third re- sulted in the declaration that the law covered "inter- course for all the purposes of trade, in any and all its forms, including the transportation, purchase, sale, and exchange of commodities between citizens of differ- ent states." 2 It was clear, then, that, in the opinion of the highest court, the Anti-Trust Law applied, not alone to in- dustrial but to railway combinations. We have seen to what extent, under the auspices of the ambitious railway promoters of 1901 and 1906, this consolida- tion movement had gone forward, and to what results it seemed to point. In large measure, the subsequent moves of the Roosevelt Administration's law de- partment were concerned with the industrial trusts or combinations; but it was not illogical that in 1902, its first challenge should have been directed against Justice Peckham, majority opinion, March 22, 1897. 1 U. S. Supreme Court, majority opinion Northern Se- curities vs. the United States, March 14, 1904, 1902] Northern Securities Suit 347 these railway projects. The note was sounded in Febru- ary, 1902, when the Attorney-General, Mr. P. C. Knox, entered suit for the Government against the Northern Securities Company. This concern was an outgrowth of the famous "Northern Pacific corner" of May 9, 1901, when the disastrous contest between the Harriman and Morgan interests, for ownership of the Northern Pacific Railway, was compromised by deposit of their stock and that of the parallel Great Northern Railway Company in the hands of a holding corporation. This corporation had a stock of $400,000,000, which it exchanged for shares in the two railways; its directors were selected from the rival boards. Mr. Knox attacked the merger as "a virtual con- solidation of two competing transcontinental lines," whereby not only would "monopoly of the interstate and foreign commerce, formerly carried on by them as competitors, be created," but whereby, through use of the same machinery, " the entire railway systems of the country may be absorbed, merged, and con- solidated." 1 A year after its introduction, on April 9, 1903, the Circuit Court before which the suit was brought decided for the Government, the essential part of its decision being the dictum that the merger "de- stroyed every motive for competition between the two roads engaged in interstate traffic, which were nat- ural competitors for business. " 2 Appealing thence 1 Petition of U. S. Government vs. Northern Securities Company et al., in Circuit Court for District of Minnesota, March 10, 1902. 3 Opinion of Judge Thayer, 120 Federal Reports, 721, 725. 348 American Finance [1904 to the Federal Supreme Court, the company's counsel fought on the theory that the merger was no restraint of trade because the Northern Securities had com- mitted no overt act in such direction, and because the combination had primarily been formed to protect and develop trade. 1 The court, in its decision of March 14, 1904, found that, "necessarily, the con- stituent companies ceased, under such a combination, to be in active competition for trade and commerce," and that, independently of overt acts, "the mere ex- istence of such a combination, and the power acquired by the holding company, . . . constitute a menace to, and a restraint upon, that freedom of commerce which Congress intended to recognize and protect. " 2 In a bench of nine, four justices ruled on this ground against the appeal and four in favor of it. The ninth member, Justice Brewer, dissented from the larger application of the above-cited principles, on the ground that "the broad and sweeping language of the opinion of the court might tend to unsettle legitimate business enterprises, stifle or retard wholesome business ac- tivities," and he rejected the application of the Anti- Trust Law to "minor contracts in partial restraint of trade," already recognized by common law. But he held the Northern Securities device to be one which "might be extended until a single corporation whose stock was owned by three or four parties would be in practical control ... of the whole transportation > Argument of John G. Johnson, Dec. 14, 1903. a Opinion of Mr. Justice Harlan. 19041 Railway Merger Dissolved 349 system of the country," and on that ground concurred in dismissing the appeal. The order of the lower court, that the Northern Securities Company be dissolved, was therefore reaffirmed. In due course, though not until after another legal fight over methods of redistributing its holdings to owners of Northern Securities shares, the company surrendered its North- ern Pacific and Great Northern stock, and practically went out of existence. It was a victory of high importance, and a check, whose completeness was not fully recognized at first, to the effort of consolidated capital to seat itself in complete and impregnable control of industry. Much was made, by critics of the Administration's attitude, of the fact that redistribution of the holdings left the Morgan and Harriman interests still in possession of their part of the disputed shares. But this argument overlooked the facts that the stocks were now again very largely on the open market, and that the most promising machinery ever contrived for complete event- ual monopoly had been shattered. In my judgment, the overthrow of the Northern Securities combination was the most positive achievement of the Roosevelt Administration in the field of corporation finance. It was something more even than protection of the citi- zen from the aggression of capital suggested by Justice Brewer; the interest of investors, of the financial mar- kets themselves, would have been placed in the most serious jeopardy had that merger been upheld. For the promoters of the Northern Securities were travel- 350 American Finance tl906 ling on a path of capital inflation which logically had no end except in eventual exhaustion of credit and general bankruptcy. The Northern Securities victory by no means ended the activities of the Government prosecutors against corporations, though no subsequent achievement was of equal importance. To a large extent, the later moves of the Roosevelt Administration had to do with secret discriminations in railway rates. In some of these suits the gravity of the abuse was not so clear, and in others the outcome much less gratifying, than in the Northern Securities case. The Standard Oil prose- cution, announced by the President in a special message of May 4, 1906, ended in such a way as largely to defeat the Government's own purposes. The exploits of the Standard Oil Company, in the matter of secret con- cessions from the railways, had been exposed sensa- tionally in the popular magazines, and the Government won a jury verdict, in August, 1907, wholly against the company. The Elkins Law, on which the suit was based, provided that "every person or corporation who shall offer, grant, give or solicit, accept or receive " from a railway any " rebates, concession, or discrimina- tion," should on conviction be punished for each offence by a fine of not less than $1000 or more than $20,000." Judge Landis, sitting in the Federal District Court of Indiana, had to pass on the question how many separate offences were to be subject to such fine. The railway rebates had been granted during the period t907] Standard Oil's Enormous Fine 351 from September, 1903, to March, 1905, inclusive; counsel for the company asked, first, that the whole series be adjudged one infraction of the law, or, second, that the violations be fixed at three in number, be- cause the rate was determined once a year, or, third, that the number be declared as thirty-six, because that number of bills were rendered. The court rejected all three suggestions; declared on August 3, 1907, that each of the 1,462 loaded cars forwarded at the discriminating rate was a separate offence; imposed for each the maxi- mum fine of $20,000, and thereby arrived at the some- what extraordinary penalty of $29,240,000. This fine, imposed as it was, not on the $98,000,000 "Standard Oil Trust," but on the immediate offender, the $1,000,000 subsidiary Standard Oil Company of Indiana, went, even in the popular judgment of the day, beyond the bounds of reason; it was commonly expected that the higher courts would set it aside, and, as a matter of fact, the Illinois Circuit Court, in July, 1908, found that a fine thus computed " had no basis in any inten- tion or fixed rule discoverable in the statute," and was many times confiscatory. The Court to whom the case was remanded for retrial directed, in March, 1909, a verdict of acquittal for lack of proper evidence. In this matter, despite an overwhelming and not unfounded dislike to the methods of the Standard Oil Company, public sympathy was with the corporation. On the railway rate legislation, passed by Congress in response to the President's urgent messages, popular 352 American Finance [1906 approval and disapproval were more evenly balanced than in the two great suits above referred to. There had been abundant provocation in the past relations of numerous important railways with favored com- munities and favored corporations; the demand for regulation was urgent, in the West especially; and the Hepburn Act, passed by the House in February, 1906, by a vote of 346 to 7, and by the Senate in June, on a vote of 71 to 3, authorized the Inter-State Commerce Commission, on complaint, " to determine and prescribe what will be the just and reasonable rate or rates ... to be thereafter observed in such case as the maximum to be charged. " It further declared that for each vio- lation of the laws by a railway's officer or agent a fine of $5000 should be imposed, and that " every distinct violation shall be a separate offence, and in case of a continuing violation, each day shall be deemed a sepa- rate offence." This law is an important landmark, because the railway interests have ever since ascribed to it, and to the sweeping powers conferred on the inter-state tribunal, the financial disorder of the ensu- ing year. It became, in 1908 and 1909, the common- place of every annual railway report to ascribe the panic of 1907, and the reduced railway traffic which ensued, to the Hepburn Law of 1906. The law was undoubtedly regarded with much mis- giving by the railways; it was dissected and opposed, on grounds of constitutionality, of the rights of prop- erty, and of the dangerous public policy invoked through committing such powers to a board of commissioners, 1906] The Hepburn Railway Rate Law 353 by some of the ablest Congressional lawyers. 1 Yet it is not easy to doubt, conditions being what we have seen them to be in the great corporations of the coun- try, that the gbod results of the Government's policy, taken as a whole, very far outweighed the incidental evils. In the case particularly of the great combinations, the dangers and abuses which existed were most formidable; it may be questioned whether a cautious and deliberate policy of restriction would have stopped them. Much was achieved for the general welfare by the mere assurance that the Government's hand would be laid instantly and heavily on the conspicuous offenders, and the people at large, who understood the gravity of the situation better than Wall Street under- stood it, had reason for their overwhelming support of Mr. Roosevelt's general plan of action. As for the theory that the Rate Law caused financial disaster and collapse of credit, that theory may be readily tested by reviewing the actual response of the markets to the legislation. The Hepburn Act became law in July, 1906. Its enactment, on the theory sup- posed, should have been preceded and followed by immediate withdrawal of foreign capital from our railway industries, and by wholesale liquidation of such investments by American investors. What followed, on the contrary, was such excess of confidence in our investments, on the part of European money-lenders, that almost all traditional restraint was abandoned Senate speeches: J. B. Foraker, Feb. 28, 1906; P. C. Knox, Mar. 28; J. C. Spooner, Apr. 27. 354 American Finance U906 in the advancing of money to the great railway opera- tors who were dominating Wall Street. The facilities thus provided were used to the full. Instead of realizing on the investments which they declared to be jeopar- dized through Mr. Roosevelt's activities, certain rail- way managers, who were as active in Wall Street speculation as they were in transportation matters, started a speculation for the rise during August, 1906, in shares of the very railways affected by the law, which reached such proportions as to alarm the whole con- servative community. That is to say, the administra- tive and legislative action which is presumed to have been a cause of financial trouble was, in the immedi- ate sequel, followed by enthusiastic confidence, by increased credit facilities, and by unbridled specula- tion for the rise. It remains to inquire what was the real cause for this singular response, and to see how the extraordinary financial situation which had arisen throughout the world was now to end. CHAPTER XV THE PANIC OF 1907 WE have seen what warnings were finding utter- ance during 1906, both in the comments of experienced critics and in the action of the money markets, as to a possible approaching crisis. The powerful capitalists who were conducting the Ameri- can speculation of the day paid no heed to them. Nor, apparently, did financial Europe, where it was stated on the highest banking authority, in the middle of 1906, that the United States, if it wished, "can borrow from Europe to a practically unlimited extent this season." 1 This promise was made good. Serious estimates of the use of outside capital, in con- nection with Wall Street's undertakings of the season, name sums which bewilder the imagination. Credit for upwards of $500,000,000 was asserted in conser- vative quarters to have been obtained from Europe, 2 ' Berlin correspondence New York Evening Post, July 2 1 , 1906, Financial Section, p. i. Alexander Gilbert, President of New York Clearing House, speech to New York State Bankers' Association, Jan. 37, 1907. London correspondence New York Evening Post, Oct. 37, 1906, Financial Section, p. i. 355 356 American Finance and a private investigation by the New York Clearing House Association showed that not less than $300,000,- ooo in loans had been placed at New York by our own interior banks. * It can hardly be supposed that all of this huge sum was devoted to Stock Exchange speculation pure and simple; but the speculators none the less relied on it to protect them against the handicap of the rapidly dwindling surplus reserves of New York banks. Their position was fortified in another way. The Union Pacific Railway, having received its share of Northern Pacific and Great Northern stocks in the Northern Securities liquidation, had sold a good part of them in the market. As a consequence, the company held, on June 30, 1906, in cash and money loaned on call, the sum of $55,968,000, as against $7,345,000 twelve months before. 2 It embarked this mass of capital in purchase of railway shares such as New York Central, Atchison, Topeka & Santa Fe, and Baltimore & Ohio, all of them active centres of speculation, some of them apparently procured from holdings of "inside" finan- ciers, others from the open market. 3 Not content with this, the Union Pacific management borrowed $75,000,- ooo more on its notes and used the proceeds similarly. In all, $131,970,000 was thus thrown into railway stocks by the Union Pacific, under the auspices of Mr. 1 Gilbert speech. 3 Annual Report for 1906, Union Pacific Railroad Company. 'Report of Commissioner Lane, Int. Com, Rep. NQ. 943, Pp. 17, J 9, 20- 1906] Speculation on Eve of Panic 357 Harriman, its chairman, between June 30, 1906, and February 28, 1907. 1 In August, 1906, the Union Pacific's annual dividend was suddenly and unexpectedly increased from 6 to 10 per cent., and a speculation of excessive violence en- sued on the Stock Exchange. It was believed to be conducted under the personal leadership of the com- pany's controlling interests. Union Pacific stock rose 35 points within a fortnight; numerous other stocks 10 points or thereabouts; and then, as they ought to have expected, the speculators heard from the money mar- ket. Such, indeed, was the strain now imposed on bank resources that, before the month was over, not only Wall Street demand loans, but merchants* dis- counts, commanded the highest rate reached during August, outside of actual panic, in more than thirty years. With the opening of September, the New York banks reported a deficit in reserves. The United States Treasury was urgently appealed to for relief, and Secretary Shaw responded by depositing Govern- ment surplus funds in banks which promised to use them for importing gold. The very large credits raised abroad by Wall Street bankers made this opera- tion feasible; in September, no less than $36,000,000 gold was engaged in Europe for New York. This was apparently a turn in events for which Europe had not looked, but which those European bankers, who, in the glamour of seemingly invincible Report of Commissioner Lane, Int. Com. Rep. No. 943, p. 20. Annual Report for .1907, Union Pacific Railroad Company. 358 American Finance [1906 speculative success, had equipped the great manipu- lators of American values, had themselves invited. Its first result was the crumbling away of the Bank of England's reserve, which fell, at October's opening, to very much the lowest level reached at that date since 1893, its ratio to deposits being only 35$ per cent. an abnormally weak position for the autumn season. On October nth the bank rate rose from 4 to 5 per cent., and on the ipth, at a special meeting of the governors, from 5 to 6 the last-named rate having been reached only twice since 1873, in the London panic of 1890 and the Boer War panic of 1899. * Lombard Street's own position was openly declared to be the worst since 1890. 2 In London, it was an open secret that the Bank had warned the London joint-stock institutions to call a halt in their granting of wholesale credits to New York, and had threatened a 7 per cent, bank rate if the warning was not heeded. 3 Fortunately for London, it was heeded, and one main- stay of the American speculation was cut off. The rise on the Stock Exchange stopped abruptly; it now began to look as if the great speculators had got them- selves in a trap. For exhaustion of credit resources 1 London cable to New York "Evening Post, Oct. 20, 1906. Financial Section, p. i. See article on same page. 2 Ibid. See also London Economist, Oct. 20, 1906, pp. 1693 and 1694. 3 London cable to New York Evening Post, Nov. 3, 1906. London Economist, Oct. 20, 1906, p. 1694; Berlin letter, Oct. 13, p. 1668; Commercial Review of 1906, Feb. 16, 1907, p. 6. London correspondence New York Financial Chroni- cle, Nov. 17, 1906, p. 1207; Nov. 24, p. 1268. 1906] Railways Unable to Place Loans 359 now began to make itself felt in other quarters than the stock market. The railway companies, imbued with the spirit of the times, had been laying plans of the most ambitious scope for improvement and ex- tension. One of the most eminent of the railway presi- dents had publicly declared that, in order to avert such "commercial paralysis" as, "long continued, would mean slow commercial death," they must raise not less than one thousand million dollars of new capital per annum during the next five years. 1 This estimate compared with a total borrowing of less than $500,000,000 even in such a year as 1901, and with an average of only $700,000,000 in the five ensuing years. 2 But Mr. Hill's prediction had been scarcely uttered when the railways suddenly found the money market shut against their stocks and bonds. Un- luckily, most of the companies had already committed themselves to the costly undertakings, on the basis of borrowings from the open market. 3 In any case, they had to meet that indebtedness. This was exactly what brought the crisis in the panic of 1873, when Jay Cooke & Co. and the Northern Pacific Railway both went down under a mass of floating debt which could not be extended; 4 it was what caused the three 1 James J. Hill, speech to Merchants' Club of Chicago, Nov. 10, 1906, New York Financial Chronicle, Nov. 17, 1906, p. 1198. 3 Poor's Manual of Railroads, 1907, p. xvi. * James J. Hill, interview in New York Tribune, June 14, 1907. 4 New York Financial Chronicle, Sept. 20, 1873, p. 382. 360 American Finance [1907 largest railway failures of I893. 1 As their floating debt of 1906 approached maturity, the railways made vigorous efforts to avert the impending crisis from themselves, and the efforts were successful, but only through the placing of notes with one to three years to run, at interest rates which ranged from 5 to 7 per cent., plus a heavy bankers' commission. During the first half of 1907, no less than $299,000,000 was raised on this insecure and temporary basis. 2 Meanwhile, in March, 1907, and again in August, there occurred on the Stock Exchange sales so enormous, and at such sacrifice of values, as to convince the experienced Wall Street man, despite official denials, that forced liquida- tion by the largest financiers was under way. 3 We have learned, in another chapter, to what extent the conditions prevalent in America had prevailed in other communities. The money-market crisis at the end of 1906 had brought the reckoning in those markets also, and in 1907 their structure of inflated credit set the example of collapse. Egypt went first. In April, 1907, this was the course of events at Alexandria, as described by a competent observer on the spot: " The financial crisis threatening Egypt since January culminated, at the beginning of the present week, in a dead- lock from which it seemed impossible for the market to ex- 1 See pp. 1 88 and 218. 2 New York Evening Post, June 29, 1907, Financial Section, p. 4- J New York Financial Chronicle, March 16, 1907, p. 610; New York Tribune, March 15, p. i, March 16, p. i ; New York Evening Post, March 16, 1907, Financial Section, p. i. 1907] Panics on Foreign Markets 361 tricate itself. Piles of shares were waiting to be sold, though the market was so satiated with paper that the offer of threescore shares in any security sent down quotations whole points. It was equally difficult at one time to buy. It was well known that a number of small houses were tottering, and when the crisis became most acute, one of these firms suspended payments." 1 A "hoarding panic" followed, which was broken only by instantaneous shipment of $3,000,000 gold from London. 2 " The consequences of the crisis, " said the Chairman of the Bank of Egypt, at the shareholders' annual meeting later on, " were felt not only by the per- sons immediately concerned in the speculative business which had been going on, but by all other undertakings in Egypt." 3 In May of 1907, runs of depositors at the Egyptian capital began, and one of the important banks was compelled to close its doors. The situation was epitomized by an important Egyptian financier in these words: "We have been working beyond our means, by using capital which was not ours." 4 At almost exactly the same time, and on the other side of the world, the Japanese market was similarly falling into panic. The review of the episode, by the Governor of the Bank of Japan, thus described what happened : "From the second half of the preceding year (1906) when the fever of enterprise rose high and when various causes contrib- 1 London Economist, April 27, 1907, p. 720. 1 Ibid., July 6, 1907, p. 1138. Annual meeting, London, March 6, 1908. Statement of Harari Pasha, July 4, 1907. 362 American Finance [1907 uted to aggravate it, men of judgment had already begun to look askance at this state of affairs. But as there were no means to check the trend of public feeling, it continued. To our deep regret, nevertheless, in May and June some banks were compelled to suspend payment because, the root of their trouble being deep-seated, no means of getting efficient succor were available." 1 On October 17, 1907, there occurred in Hamburg what a correspondent of the London Economist de- scribed as "the biggest financial disaster that had overtaken the city since 1857. " 2 A few weeks later the same correspondent continued the story: " Since the first severe shock to credit was experienced here some weeks ago, in the downfall of Messrs. Haller, Soehle & Company, it was fully expected that many other firms would feel the strain of 8 per cent, and 10 per cent, money almost to breaking point, and, indeed, suspensions of important commercial and industrial firms have since then multiplied, both here and in other parts of Germany." 5 These three foreign panics occurred, it will be no- ticed, in Europe, in Asia, and in Africa, a fairly world- wide distribution. It was left for the next, a very serious panic, to occur in yet another continent. Early in October^ 1907, a panic of the first magnitude broke out in Chili. Beginning some months before the actual crisis, Chilian exchange on London had fallen from 13! pence per peso, which itself was far out of line with parity, to 12 in the early days of October and Annual report for 1907, Bank of Japan, Tokio, Feb. 15, 1908. J Hamburg correspondence, London Economist, Oct. a 6, 1907, p. 1814. Ibid., Nov. 30, p. 2083. 1907] Disbelief in Coming Panic 363 to 8 before the year was over. 1 This amounted prac- tically to depreciation of the currency. It was followed by a run on the Chilian banks and by complete dis- order in business circles at Santiago and Valparaiso, by the failure of the large Mobiliario Bank of the first of these cities, and by a banking crisis which was re- ported to have inspired an effort at relief by the Chilian Government, through issue of short-dated Treasury bonds to the threatened institutions. Holland and Denmark similarly, before the year was over, passed through a formidable convulsion of their credit mar^ kets, with numerous banking failures. But the turn of New York came next. It had for many years been a cardinal doctrine, in American banking circles, that a panic like those of 1893 and 1873 would never again be witnessed in thif country. The ground for this belief lay in the phe- nomenal increase of our economic strength, the "co- ordination of American industry " since 1899, the es- tablishment of the gold standard of currency, and, more particularly, the great and concentrated resources of our banks. 2 We have possibly discovered, in our narra- tive, the weak point of this argument; the strain im- posed on credit had as greatly exceeded precedent aa did the strength of the organism subjected to it. But there were other reasons why the idea of an Ameri- can commercial crisis in 1907 had not been entertained, 1 London Economist, Dec. 14, 1907, p. 2171. "Commercial Panics, Past and Future, " Atlantic Monthly , October, 1906; "A Year after the Panic of 1907," Quarterly Journal of Economics, February, 1909. 364 American Finance [190? One was the fact that predictions of the sort, in 1901 and 1903, had failed so signally of fulfilment. An- other was prevalent belief in the "twenty-year cycle" between two great panics. 1 Such an interval had separated 1837 from 1857, and 1873 from 1893, and the theory would have fixed the next great panic, not for 1907, but for 1913. This last consideration will probably enough become a topic of future economic discussion. Perhaps it will be concluded that the extravagance of the demands on credit after 1904, in America especially, was so much greater than in any former epoch as to shorten the period of immunity. Perhaps more weight than heretofore will be allowed to the fact that the cycles of prosperity which ended respectively in 1857 and 1893, and which had lived out the full two decades, were marked by prolonged inter- national peace, whereas the sixteen years between 1857 and 1873 contained the American Civil War and the Franco-Prussian conflict, and the fourteen- year interval prior to 1907 had covered, as we have seen, three other wars involving prodigious waste of capital. 2 Even if not prepared, however, for another panic of the sort, the community found itself, as 1907 drew on, in a thickening amosphere of apprehension. In June, an $8,000,000 iron-manufacturing house went down at New York City; in midsummer, two New York City > Burton, Financial Crises, p. 24. 2 "The Cycle of Prosperity," Century Magazine, February igo8. 1907] " Chain Banking " 365 loans, offered for public subscription, failed to find a market 1 ; in the early autumn, the $52,000,000 New York street railway combination went into receivers' hands, followed, a few weeks later, by the $34,000,000 Westinghouse Electric Company; early in October t the storm broke with the utmost suddenness and vio- lence on the New York banks. One of the characteristic incidents of the era of speculation, watched by conservative financiers with much uneasiness, had been what was called "chain banking." In New York City, half a dozen banking institutions of the second rank had been bought up by a speculating financier. He had used his stock in one institution as collateral on which to borrow money; the proceeds he had used to buy stock in another bank, repeating the process with each new acquisition. Con- trolling his "chain of banks" on such a tenure, he had utilized the whole of them to promote his personal speculations. 2 This had been going on during half a dozen years. On Wednesday, October 16, 1907, one of these institutions, the Mercantile National of New York City, a bank with $11,500,000 deposits, applied to the other banks of the Clearing House for help. While the Clearing House committee was investi- gating the Mercantile's condition, financial uneasiness 1 New York Financial Chronicle, June 29, 1907, p. 1514; Aug. 17, p. 371. 3 Testimony in trial of Charles W. Morse, U. S. Circuit Court, New York, Oct. 31 and 33, 1908. 366 American Finance [1907 began to spread to the community at large. On Thursday, the committee announced that the crippled bank would be helped through, and an interval of relief occurred. Other events, however, which oc- curred at the same time, and the demand of the Clearing House banks that, as a condition for their assistance, all the directors of the Mercantile should resign, dis- closed the fact that the bank's predicament had occurred through misuse of its capital, by its president, in copper share speculation. During the two or three ensuing days, bankers were very generally employed in overhauling accounts of other institutions with which they had engagements. Late Monday afternoon, October 2ist, the National Bank of Commerce sud- denly announced that it would no longer accept for collection checks of the Knickerbocker Trust Company. With the next day's opening, a run began on that institution, a concern with 17,000 depositors and total deposit liabilities of $35,000,000. By noon the Knick- erbocker had closed its doors; next day, nearly every trust company in the city was besieged by a line of panic-stricken depositors. Nothing like this had been seen in New York City since 1873; even in 1884 and 1893, the New York bank runs were confined to one or two crippled institutions. The extraordinary phenomena which followed the Knickerbocker failure cannot be understood except by a glance at the nature and history of the institu- tions on which the panic of 1907 now converged. In New York State, both the original acts chartering 1907] The Trust Companies 367 companies of this nature, and the general trust company law of 1887 and 1893, had in view merely banking organizations which should perform the duties of ex- ecutor, administrator, or trustee. In these statutes there was therefore no provision looking either to per- formance of a general banking business or to accept- ance of demand deposits from the general public. 1 No cash reserve was required, as in the case of banks, to be maintained against deposits. Not only was no cash reserve required, but the companies were em- powered to invest their deposit funds in real estate, to buy and sell stocks, to lend money on realty powers which, as a result of long experience, were either de- nied outright to deposit banks by law, or were most scrupulously restricted. 2 It was not until the great financial revival after 1896 that the companies began to invade, on an extensive scale, the field of deposit banking. They found their authority in a section of the Trust Company Act, prob- ably not intended for this application, but which pro- vided for their acceptance of "any and all such trusts and powers, of whatever nature and description, as may be conferred upon or intrusted or committed to it by any person or persons. " The language, broadly interpreted, covered acceptance and solicitation of de- mand deposits, and on the basis of such interpreta- > Banking Law of New York State, Article IV., Section ^56. Kilburn's "New York's State Banking Institutions." "The Trust Companies," Political Science Quarterly, June, 1901. 1 Political Science Quarterly, June, 1901, p. 257. 368 American Finance [1907 tion the greater number of the trust companies engaged, without the restraints imposed by law and experience on deposit banks, in general deposit banking. What opportunities and what temptations opened be- fore these institutions, in a period such as I have re- viewed in the last three chapters, is easy to imagine. We have already seen how certain life insurance managers utilized the trust companies for illegitimate financiering; some of them were involved in the worst phases of the promoters' schemes of 1901 and 1902; the old and conservative institutions of the class dropped into the background as their younger competitors exploited the field of general deposits. Between 1899 and the end of 1906, their number increased in New York State from sixty-two to eighty-six. Offering interest on demand deposits which banks, with their 15 or 25 per cent, reserve requirement, could not afford to pay, they ran up the aggregate of such demand deposits from $198,000,000 in 1898 to $834,000,000 in 1906; in addition to which sum, they held in the last-named year $115,000,000 more, due to other banking insti- tutions. In 1901, the actual cash holdings of the New York companies footed up only i per cent, of all de- posits, or 2$ per cent, of all except such as were classi- fied as "trust deposits," and the ratio was not greatly changed up to 1906. l Now it is true that the companies supplemented this meagre cash reserve by keeping large credits with 1 Annual Reports, New York Banking Superintendent on savings Banks, Trust Companies, etc. 1907] Defective Protection for Depositors 369 the banks. But these so-called "reserves on deposit" were not cash at all; in the banks' hands, they became liabilities; protected, like other city bank deposits, only by 25 per cent, reserve in cash. It was an inverted pyramid, and an uneasy feeling spread among con- servative bankers, long before 1907, as to what might result from so ill-guarded a credit system. For the purpose of redeeming checks deposited or drawn in connection with this new branch of their business, trust companies were accustomed to use indirectly the regular bank clearing-house; that is to say, although they were not members, they "cleared" or exchanged their checks through banks which were. As early as 1902, the Clear ing-House authorities expressed the purpose of requiring trust companies which enjoyed such facilities to keep larger cash reserves; on February n, 1903, a rule was formally adopted by the clearing- house stipulating minimum cash reserves of 10 per cent. * A controversy of much warmth broke out. During the discussion, such contemptuous terms were used, in public statements, as "the foolish fetich of a cash re- serve." Banks were accused of trying to cripple trade competitors who had got ahead of them; in the end, nearly all the trust companies broke off their clearing-house connections, merely maintaining their balances in bank. Let it be observed that this action not only left the companies with the same inadequate 1 New York Financial Chronicle, Feb. 14, 1903, p. 358. Speech of J. Edward Simmons to Clearing-house Associa- tion, Feb. it, 1903. 34 370 American Finance [1907 cash reserve, but made it necessary to redeem across the counter all such checks as might be drawn upon them, and to send messengers to collect, across the counter of other institutions, all such checks as should be received upon deposit. This was reversion to methods and practices of a primitive banking era methods to escape which clearing-houses were in- dented, a hundred years ago. It was adopted by a body of institutions with a larger number of depositors and a larger aggregate sum in deposits payable on demand than all the New York banks possessed in 1873, and with a very considerable part of their client- age drawn from the ranks of savings bank depositors by payment of interest on deposits, and subject, as savings bank depositors notoriously are, to sudden fright. We are now to see how all these conditions operated in a great financial storm. The Knickerbocker closed its doors on October 22d; that night, certain other trust companies sought aid from the banks to safeguard them against a run. Knowledge of this conference, reported next morning in the daily papers, brought the run at once; and long before business opened on October 23d, lines of de- positors had formed outside the doors of other com- panies. The Knickerbocker had catered especially to the so-called "up-town clientage" of the shopping and residence district; its main competitor in this line of business had been the Lincoln Trust Company, with something like 8000 depositors and demand depos- its of $16,000,000. On Broadway and Wall Street, 1907] Run on the Trust Companies 371 the Trust Company of America had accumulated $42,000,000 demand deposits from 12,000 separate de- positors. 1 Against these demand liabilities the Lin- coln had been keeping $1,100,000 in its cash reserve and the America $3,200,000. 2 On these two institu- tions, there now converged such a run as was probably never witnessed in the history of banking. It must be remembered that banks and other trust companies, to whom the beleaguered institutions were indebted, or with whom checks on the Lincoln or America were deposited, had no other way of collecting than by stationing messengers in the line of frightened de- positors; this was the punishment for the events of 1903. Recognizing the gravity of the crisis, the Secre- tary of the Treasury, Mr. Cortelyou, came on at once from Washington, and arranged to deposit $35,000,000 of the Government surplus with the national banks, by whom it was hurriedly advanced to the trust com- panies against their liquid assets. 3 This great sum was almost instantly ingulfed in the withdrawals by depositors; the Trust Company of America alone had to pay out $34,000,000 to depositors. 4 The runs con- tinued fourteen successive days, depositors holding 1 Statements of Aug. 22, 1907; New York Banking Super- intendent's Report on Savings Banks, Trust Companies, etc., p. 672. Ibid., p. 667. J Secretary Cortelyou, report in response to U. S. Senate resolution of inquiry, Jan. 29, 1908. 4 Statement of Oakleigh Thorne, president Trust Company of America, Nov. 6, 1907. 372 American Finance H907 their places in line by night to get a chance to withdraw their funds next day. Ten million dollars cash pro- vided by other institutions went with the rest; the run was not stopped until, on November 6th, the older trust companies had organized in committee to assume responsibility for the two hard-pressed institutions* In the meantime, during the panic week itself, six banks in Greater New York and three trust companies other than the Knickerbocker mostly small institu- tions, but with deposits aggregating $57,000,000 closed their doors, and a general run upon the savings banks caused application of the "sixty-day notice rule" for withdrawal of deposits. 1 On Thursday, October 24th, panic swept over the Stock Exchange. The bank position being then in its most critical phase, restriction of credit occurred on a scale which, if continued, would probably have re- duced the Stock Exchange community to general in- solvency. 2 This day of suspense an unvarying incident of formidable credit panics brought the rate for Stock ExcKange demand loans up to 125 per cent.; before the day was over, however, personal intervention of the president of the Stock Exchange and of Mr. J. P. Morgan with the banks caused release of $25,000,- ooo which, in accordance with sound rule, was loaned out at high rates, but in such manner as to meet press- ing exigencies. This averted the formidable aspect Annual Report on Banks, New York State Banking De- partment, Dec. 31, 1907. J New York Evening Post, Oct. 26, 1907, Financial Section, p.i. 1907] The Banking Crisis 373 of the crisis which, in 1873, made necessary the closing of the Stock Exchange and which in 1907 forced the government of several Western States to decree a series of special holidays. The crisis of the banks, however, had only begun, and it followed the lines made familiar by all former crises. The New York City national banks alone held in 1907 no less than $470,000,000 de- posits due to other institutions * ; considerably more than double what had been thus held in 1 893.2 Banks of interior cities, most of which had three fifths of their 15 per cent, reserve thus deposited in other hands, took natural alarm at the panic news, remembered 1893, and called for return of part of these deposits. What followed, merely repeated history a history, however, which the country had been assured could never be repeated. The New York banks, on Satur- day, October 26th, determined to take out clearing- house loan certificates. The intent of this expedient, never adopted since the panic of 1893, was to help out hard-pressed banks through loan of the cash rer sources of their neighbors; but its result, in 1907 as in 1893, was to bring about general suspension of cash payments in the clearing-house. Before the panic of 1907 was over, the New York banks had $88,420,000 of such loan certificates in use, as against a maximum of $38,280,000 in the panic of 1893, and the loan certificates remained in use during twenty- > Reports to U. S. Comptroller of the Currency, Aug. 23, 1907. J See pp. 189 and 190. 374 American Finance [1907 two weeks, as against only nineteen weeks' duration in the earlier panic. 1 Two days after New York had set the example, practically every clearing-house in the country took similar action a wholly unprecedented event, which resulted in issue, throughout the whole United States, of $238,000,000 of such certificates, as against $69,000,000 during 1893. 2 Notwithstanding this recourse, reserves of the New York banks, which had stood at a surplus of $11,182,000 in the week before the panic, fell to a deficit of $54,103,000 on November 3d, very much the largest shortage of the kind in our banking history, the maximum deficit of 1893 having been $16,545,000. This formidable shrinkage was occasioned by an actual loss of $51,000,000 cash in the five intervening weeks, and the position thus created brought suddenly into view two other phenomena of 1893.3 Hoarding of cash by individuals set in; it was estimated in high quarters that, in the country as a whole, no less a sum than $296,000,000 actually disappeared from sight. 4 This hoarding partly caused, and was partly caused by, the policy of banks in limiting the amount of cash which they would pay out to depositors, and one im- mediate result of such restriction being the issue of emergency currency by the banks of cities like Pitts- 1 Reports of Clearing-house Loan Committees, Apr. 7, 1908, and Oct. 31, 1893. 1 A. P. Andrew, "Substitutes for Cash in the Panic of 1907, " Quarterly Journal of Economics, August, 1908. * See pp. 194, 195, 196. * Secretary Cortelyou, report to U. S. Senate, Jan. 29, 1908. 1907] Collapse of Credit on all Markets 375 burgh and Chicago, where manufacturers' pay-rolls created urgent need for great sums of currency. 1 The amount of such makeshift money has been estimated at upwards of $96,000,000. 2 The next result of the bank restriction was a premium on currency, paid in checks on such institutions, which rose to 4 per cent, and which continued for two months, as against only one month's duration in the panic of 1893. 3 As in 1893, so in 1907, this premium caused a stampede to draw on Europe's gold supply. Gold was engaged at London, in November, at the abnormal exchange rate of $4.91 for the pound sterling, 4 and $90,000,000 gold came from Europe in the next two months. As we have seen, Europe was in no position to regard com- placently such a raid on its gold reserve. London alone lost $73,400,000 gold to New York in November and Decembers; the Bank of England's gold reserve fell $31,000,000 in the two weeks after the New York panic, and on November 7th the bank rate, for the first time since 1873, was put up to 7 per cent. 6 In the dismay and bewilderment of the hour, intimations were made, in conservative quarters, of an 8 per cent, rate, or even 9, if the gold outflow to New York con- 1 Pittsburgh correspondence New York Journal of Com- merce, Nov. 14, 1907; Pittsburgh correspondence New York Evening Post, Nov. 16, Financial Section, p. 3. 1 A. P. Andrew. See p. 195. New York Financial Chronicle, Nov. 9, 1907, p. 1175. ' British Board of Trade reports. London Economist, Nov. 9, 1907, p. 1901. 376 American Finance 11907 tinued, and high, banking authorities in London gave out word that the time had come for some arbitrary intervention by the United States Government to guarantee the banks. 1 That recourse was not neces- sary. As usually happens on occasions of the sort, markets were passing out of the stage of actual crisis at the moment when despair seemed to have gained full sway in the financial community. The excited clamor for help through issue of Government fiat money was echoed, on this occasion, even in the recommenda- tions from Lombard Street, and was followed by a futile expedient of the Treasury, whereby $50,000,000 Government bonds and $100,000,000 one-year Govern- ment notes were offered to the banks with a view to providing a basis of new circulation. 2 Only $24,998,040 of the bonds and $15,436,500 of the notes were taken. 3 It soon appeared that the recourse was superfluous, and that the operation complicated rather than relieved the financial strain, and a few weeks after the announce- ment of the loans, they were suddenly withdrawn from the market by the Government. With the arrival of the first few large consignments of gold from Europe, the acute stage of the panic ended. There were left the larger after-effects, of which the panic itself was only a premonitory symptom, and which came only gradually into sight, along with asser- tions that they would not come at all, on this occasion 1 London Economist, Nov. 9, 1907, p. 1902. J Secretary Cortelyou, response to Senate inquiry. ' Ibid. 1907] Industrial Sequel to the Panic 377 as on others of the kind. The panic of 1907 was unlike the panic of 1893, which followed a period of uncer- tainty and misgiving, leading to acquiescence, on the part of the community at large, in the certainty of prolonged reaction and depression. It resembled far more intimately the panic of 1873, which came, like the traditional "bolt from the blue," on a situation presenting so brilliant an aspect of assured prosperity that the people most of all the great capitalists whose schemes had come to earth refused for many months to admit that one chapter in finance and industry had ended and that another and different one was opening. The visible sequel to the panic of 1907 was necessarily recognized. That commercial failures in the United States should not only have increased, in the panic months of November and December, 30 per cent, in number as compared with 1906 and 125 per cent, in liabilities, but that the first nine months of 1908 should have shown increase of 55 per cent, over 1907 in number and 1 20 per cent, in liabilities, was a matter of record. * So was the shrinkage in the iron trade, in December, 1907, to 36 per cent, of normal, 2 and the 50 per cent, reduction in iron production during the first half of 19083; the decrease, for the full year 1908, of $290,- 000,000, or i if per cent., in traffic receipts of American Bradstreet's figures. Statement of President Corey of the U. S. Steel Corpora- tion, Feb. 7, 1908. 3 American Iron and Steel Association, semi-annual re- port. 378 American Finance [1907 railways 1 ; the shrinkage of nearly 17 per cent, in checks drawn on American banks 2 ; the reduction in March, 1908, of 25 per cent, in output, 10 per cent, in wages, and 25 to 50 per cent, in prices in the textile trade, and the great increase in number of unemployed. But a full year had elapsed before the financial markets, and the trades dominated by great combina- tions of capital, were willing to recognize the changed conditions. Recovery from the acute stage of de- pression in general industry, as on the Stock Exchange, was misinterpreted as meaning immediate restoration of the old order of things a tendency which found its complete expression in that extraordinary novelty of the after-panic year, known at the "Sunshine move- ment" and embodied in the "Prosperity League," the basis of whose organized action was to persuade the community that, if they believed themselves to be prosperous, they would be prosperous, and whose methods were illustrated by the fixing, by resolution, of an arbitrary date as " Re-employment Day. " Dur- ing this same year 1908, an equally remarkable position was assumed in the steel trade, where the billion- dollar United States Steel Corporation was dominant. The head of the company, declaring that "the mere fact that the demand is greater than the supply does not justify an increase in price, nor does the fact that the demand is less than the supply furnish an argument for lowering the price," announced that the price of > New York Financial Chronicle, Feb. 13, 1909, p. 411. 3 Ibid., Nov. 7, 1908, p. 1199. 1907] The Story of 1908 379 steel, a basic material of industry, would not be re- duced in response to the impaired demand, and that although consumption of steel was barely fifty per cent, of what it was in 1907, prices of 1907 would be maintained. l Throughout 1908 they were maintained, except for a trifling and ineffectual reduction. On the Stock Exchange, repeated outbursts of speculation for the rise occurred, in each of which it was confidently affirmed that the after-effects of panic were over, and that the " boom of 1906" was about to be resumed. In November, the people gave Mr. Taft a plurality over Bryan scarcely one-half the Roosevelt plurality of 1904, but except for that, the largest plurality of any presidential vote, and the first plurality ever polled for the Administration party in the election following financial panic. The speculative public rushed again impetuously into the Stock Exchange; the speculating capitalists resumed their manipulation of the market; many stocks rose to a higher price than in either 1907 or 1906. The end of this singular demonstration came with the opening of 1909, when facts were suddenly recog- nized, when prices for steel and other commodities came down, and when the Stock Exchange demon- strations ended. With the closing of the year 1908, this history may properly close; for it marked the end- ing of a chapter. What shape the next distinct epi- sode of American finance will take, is a question to be determined by other influences. In the future, as in Statement of E. H. Gary, Apr. 9, 1908 380 American Finance 11907 the past, the trend of the country's financial history will be fixed by the interplay of its natural resources, its capacity for production, the industry, inventiveness, and versatility of its people, and their disposition towards rash exploitation of such resources and towards venturesome experiments with capital. INDEX Agricultural Department of United States government, declares 1884 wheat prices unremunerative, 102; un- derestimates wheat crop in 1891, 165; early pre- dictions of good corn crop in 1894, 221 Agriculture, extension in the United States after 1865, 3 ; in Europe, 4; its influence on politics, 5; depressed condition of, early in 1879, 52; foreign reverses in, 53- 55; great prosperity in, for the United States, 56, 59, 60; influence on resump- tion, Sherman's opinion regarding, 67; foreign com- petition in, after 1881, 86, 114; depression in, during 1885, 117; severe depres- sion in, during 1894, 221; recovery in, during 1896, 2 S3 1 prosperity of, after 1897, 261 ; world- wide pro- ductiveness in 1905 and 1906, 314 Aldrich, N. W., U. S. Senator, his overestimate of re- venue under McKinley Tariff Act, 135 Alexander, James W., pre- sident Equitable Life As- surance Company, his ac- tion starting investigation, 337; his letter regarding Equitable's bank deposits, 338 Allen, W.. V., U. S. Senator, attacks bond-issue of 1894, 211 Allison, W. B., U.S. Senator, speech on $100,000,000 ald reserve, 167; on Anti- rust Bill, 344 Amalgamated Copper Com- pany, breakdown of effort to control 1901 copper market, 307; cuts its divi- dend, 308; activities dur- ing 1906, 316; public atti- tude regarding its control of prices, 333 America, Trust Company of, its depositors and reserves, 371; run of 1907 on, 371; enormous withdrawal of cash from, 371 American Railway Union, strike of, in 1894, 220 American Steel and Wire Company, extravagant capitalization of, 287 Anti-Trust Law of 1890, in- yoked by Roosevelt Admin- istration in 1902 against railway mergers, 344; its legislative history, 344, ?45; primarily designed or manufacturing com- binations, 344 ; railways 382 Index Anti-Trust Law Continued not excluded from scope of, 345; applied to railways in 1897 by Supreme Court, 345, 346; used by Roose- velt Administration in at- tack on Northern Securi- ties, 347; held to apply by U. S. Circuit Court, 347 ; by U. S. Supreme Court, 348, A 349 Appropriations of Congress, vicious methods employed in, 133. See also Expendi- tures of U. S. government Argentine Republic, increase in wheat exports from,, after 1887, 1 2 2 ; investment of British capital in, 122; crop failure and financial Einic in, during 1889, 157; nglish demand for its securities slackens, 157; foreign capital withdraws from, 158 Arthur, Chester A., President of the United States, urges reduction of import tariff, 88; vetoes River and Har- bor Bill, 90; Republican approval of his veto, 91; his opinion regarding me- thods of appropriation, 134 Atchison, Topeka, and Santa Fe Railway, escapesGould's domination in 1880, 64; its deceptive reports of earnings, 219; reorganized out of bankruptcy in 1895, 277; shares of, bought in 1906 by Union Pacific, 356 Austria, railway extension in, prior to 1878, 4; crop failure of 1879 in, 55; ac- cumulates gold for resump- tion purposes, 160; crop failure of 1897 in, 270 Baltimore, banks of, issue loan certificates in 1893, 192 Baltimore and Ohio Railroad, stock of, bought in 1906 by Union Pacific, 356 Bank of Egypt, report on Egyptian speculation of 1906, 325; report on Egyp- tian panic of 1907, 361 Bank of England, high in- terest rate in Overend- Gurney panic, 15; opposes gold withdrawals for U. S. Treasury, 26; its relations with British Exchequer, 33 , 1 24 ; its practice regard- ing note redemption, 48, 49 ; security for its note cir- culation, 109; action of, in panic of 1890, 158; in- creases its gold reserve in 1891, 1 60; gold withdrawn from, in 1893, * or New York, 196; raises rate to 6 per cent, in Transvaal War, 281; warns London bankers against lending to Wall Street in 1901, 306; weak position of, in 1906, 358; warns other European banks against New York, 358; heavy withdrawals of gold from, for New York, during 1907 panic, 375; rate goes to 7 per cent., 375; higher rate threat- ened, 376 Bank of France, lends gold in 1890 to Bank of England, 158; attracts gold in 1891, 160, 161 Bank of Germany, rate goes to 7 per cent, in Transvaal War, 281 ; puts rate from 5 to 6 per cent, in 1905, to check speculative mania, 325 Bank of Japan, report on Japanese boom of 1906, Index 3*3 Bank of Japan Continued 326; on Japanese panic of 1907, 361 Bank of Russia, lends gold to Bank of England, 158; at- tracts gold in 1891, 1 60 Bank checks, tax on, repealed in 1883, 95; sold at a dis- count for cash in 1893 panic, 194; in 1907, 375 Bank deposits by U. S. Treasury, Secretary Sher- man's methods in, 32, 33; reasons and authority for, 33; heavy increase in, dur- ing 1888, 124; difficulties in the way of, 125 Bank deposits, recall of, by interior institutions, 189; heavy withdrawal of, in 1893, 190, 191; suspension of cash payment on, 194, 374 Bank notes, national, de- signed as permanent cur- rency by authors of Legal Tender Act, 8; large circu- lation of, in 1884, 108; volume of, dependent on government bonds, 109; rapid retirement of, be- tween 1883 and 1891, 109- 1 1 1 ; contraction of, comes to a stop in 1891, 159; large issue of, during 1893 panic, 202 Banks of the United States (see also Banks of New York City), their policy regarding money holdings, 75; heavy retirement of their circulation, 109-112; government deposits with, in 1888, 124, 125; cash withdrawals from, in panic of 1893, 189; their re-de- posit of reserves, 189, 190; run of interior depositors on, 190; recall of their Eastern deposits, 191; nu- merous failures among, in interior, 192, 193; de- mand for gold by, to equip new institutions, 272; loans for Wall Street speculation of 1906, 356; special holidays declared for, in 1907 panic, 373; panicky recall of New York deposits by, 373; amount of cash withdrawn from, 373; partial suspen- sion of payments by, 374; issue of emergency cur- rency by, 374, 375; esti- mated amount of such issues, 375; premium on currency caused, 375; re- luctance to take govern- ment note issues in panic, 376; after-panic shrinkage in checks drawn upon, 378 Banks of New York City, re- luctant to subscribe to the resumption bonds, 29; abolish gold deposits, 46; specie and legal-tender holdings of, in 1879, 48, 58; oppose payment of bal- ances in silver, 76-80; pay gold for Treasury silver, 81-83; failures among, in 1884, 99, i op; issue loan certificates in panic of 1884, 100 ; lend five mil- lions gold to the Treasury, 104; issue loan certificates in panic of 1890, 158; legal- tender holdings of, in- crease rapidly, 168; gold payments of, to one an- other, suspended, 169; to the Treasury, 169; provide export gold prior to 1892, 171; present legal tenders for redemption, 172, 173; ship legal tenders to in- terior, in 1892, 182; lend 384 Index Banks of New York City Continued gold to the Treasury, 183- 185; heavy increase in de- posits of, by interior banks, 189, 190; recall of interior deposits from, in 1893, 191; heavy decrease in cash re- serves of, 191-193; issue loan certificates, 192; draw gold from Europe, 194; suspension of cash pay- ments among, 194; sub- scribe to loan of February, 1894, 214; draw out Treas- ury gold for subscription, 215; repeat the process in November, 231; lend gold to Treasury, 231; co-oper- ate with Belmont-Morgan syndicate, 241; their co- operation in stock specula- tion of 1905, 327; deficit in their reserve, 328; strain of 1906 speculation on, 357; deficit occurs again, 357; speculative uses of, 365 ; controversy with trust companies over cash re- serves, 369; attitude to- wards Stock Exchange in panic of 1907, 371; severe strain on, through with- drawals of cash by interior banks, 373; decide to is- sue loan certificates, 373; amount issued, compared with previous panics, 373; duration of issue, 374; heavy loss in reserves, 3 74 ; panic deficit in, 374 Banks of European cities, bid for gold in Transvaal War, 281; recall loans in 1901 from Wall Street, 306; heavy loans of 1905 to New York on finance bills, 328; warned against Wall Street by Bank of England, 358; American loans recalled in 1906, 358 Baring Brothers, their Argen- tine operations, 157; their suspension in 1890, 157 Belmont, August, complains of Secretary Sherman's terms with bond-subscrib- ers, 30 Belmont-Morgan syndicate of 1895, its contract with the Treasury, 235, 236; its arduous undertaking, 238; its apparent success, 242-244; its mistakes, 247; breakdown of its under- taking, 248. See also Pre- face. Elaine, James G., candidate for presidential nomination in 1880, 70; nominated in 1884 and defeated, 102 Bland, Richard P., U. S. Con- gressman, introduces free- silver coinage bill, 1877,37; threatens paper inflation, 38; proposes free-coinage substitute for Silver-Pur- chase Bill, 148 Bland silver-coinage bill, de- bated in Congress, 35-38; sectional character of vote on, 40 ; modified by Senate compromise, 4 1 ; vetoed by President Hayes,4i ; passed over veto, 41 Bonds of the U. S. govern- ment, power to issue for note redemption, granted in 1866, 10, ii ; Democratic party declares for their payment in legal tenders, 16; power of issue, con- ferred by Resumption Act, 21, 23, 24, 29; sales of, by Secretary Sherman, 30, 31 ; the long term of the 4 per cents., 31; bill to revoke Treasury's power of issue, Index 385 Bonds of U. S. government Continued 355 payment in silver ad- vised by Congress, 38; Sherman promises pay- ment in gold, 29, 39; for- eign investors in, 38, 39; sales of, by London, in 1879, 52; amount out- standing in 1882, 88; purchases of, with the Treasury surplus, 88 ; their use as security for nation- al bank circulation, 109; heavy redemption of, by the Treasury, 109, in, 125, 126; high price of, in 1888, 125; redemption of, abandoned by Harrison Administration, 137, 159; issue of, contemplated by Harrison Administration, 183; Carlisle's reluctance to issue under act of 1875, 207, 209 ; issue of February, 1894, announced, 210; issue of, attacked by Congress, 21 1 ; sustained by the courts, 212; slow subscrip- tions to, on market, 212; taken by New York banks, 214; how paid for, 215; second issue of, in 1894, 231 ; its speedy failure, 232 ; issuepf.to Belmont-Morgan syndicate, 236 ; foreign holdings of, re-sold to New York, 246; large issue of, in 1896, 251; authorized in 1900 for redemption pur- poses, 755 ; issued for Span- ish War, 279 ; abortive issue of, during 1907 panic, 376 Boston, its banks issue loan certificates in 1893, 192 Boutwell, George S., U. S. Congressman, opposes con- traction of legal tenders, 12 as Boycott, principle of, ap- proved oy Populist Na- tional Convention, 180 Bradley, Joseph P., Justice U. S. Supreme Court, be- lieves the legal tenders to have been created as a temporary currency, 8 Brewer; David J., Associate Justice U. S. Supreme Court, his question put to Northern Securities coun- sel, 336; his attitude on Northern Securities de- cision, 348 Bristow, Benjamin H., Secre- tary of the Treasury, his scepticism over obtaining foreign gold for resump- tion, 26 Bryan, W. J., his speech at the Democratic convention of 1896, 262; nominated for President, 263; de- feated by McKinley, 266; renominated in 1900, 291; shifts issue from bimetal- lism to imperialism, 291; defeated, 293 ; defeated for third time in 1908, 378 Butler, Benjamin F., elected Governor of Massachusetts in 1882,92 Cairnes, J. E., on relation of increasing gold production to prices, 259 California, its Congressmen vote solidly for Bland Silver Bill, 40; carried in 1882 by Democrats, 92 Call, Wilkinson, U. S. Sena- tor, predicts gold redemp- tion under Silver-Purchase Act, 150 Cannon, Joseph G., II. S. Con- gressman, his opinion on Congressional methods of appropriation, 133 3 86 Index Carlisle, John G., Congress- man and Secretary of the Treasury, votes in 1877 for repeal of Resumption Act, 41; borrows gold in 1893 from New York banks, 1 84 ; suspends issue of gold certificates, 185; his inter- view regarding gold re- demption, 1 86; his attitude in the emergency, 187; pays out the gold reserve for regular expenses, 204, 206; his embarrassing posi- tion, 207; proposes exche- quer bills, 208; expresses doubt over Treasury's bond-issue powers, 208; asks Congress for plainer authority, 209; decides to issue bonds, 210; Con- gressional attacks on, 211; his policy with the bankers, 213; its unfortunate re- sults, 214, 215; urges thorough reform of U. S. currency, 252 Carnegie, Andrew, threatens aggressive combination in 1900 against new steel trusts, 297; former negotia- tions to sell out, 298; his price to Morgan, 298; bought out by Steel Trust, 298 Cattell, A. G., U. S. Senator, blames McCulloch policy for hard times of 1866, 15 Cattle, large exports of, in 1879, 56 Cervera, Admiral, defeated by American fleet in 1898, 279 "Chain banking," in New York, its part in 1907 panic, 365 Chamber of Commerce, New York, declaration of 1896 on the public credit, 253; prediction to, in 1906, of coming panic, 329 Chaplin, Henry .member Brit- ish Parliament, opposes free right of entry to Amer- ican grain, 55 Chase, Salmon P., Secretary U. S. Treasury, regards the legal tenders as a tempo- rary currency, 8 Chicago, railway strike at, 220 Chicago, Burlington, and Quincy Railway, its large earnings in resumption period, 65; strike on, in 1888, 116; bought up in 1901 by Northern Pacific and Great Northern com- panies, 296; Morgan-Harri- man contest over, 304 Chicago, Rock Island, and Pacific Railway, doubles its stock in 1880, 64; its heavy earnings in resump- tion period, 65 Chili, industrial boom of 1905 in, 326; earthquake losses of 1906 in, 329; panic of 1907 in, 362; currency depreciation and bank fail- ures in, 363 China, its import of silver de- creases, 78 Civil War, the, in U. S., its effect on industrial condi- tions, 2 Clearing-house, at New York, abolishes gold deposits, 46; admits Sub-Treasury to membership, 47; excludes silver from its balances, 76 ; denounced by Congress, 7 7 ; revokes its silver rule, 80; issues loan certificates in 1884 panic, 100 ; in 1890, 158; its use of gold in balances between banks, 163; legal tenders displace Index 387 Clearing-house Continued gold in payments of, during 1892, 169, 170; its function in gold export operations, 171, 172; issues loan certifi- cates in 1893 panic, 192, 194; assists embarrassed Mercantile Bank, 366; re- fuses in 1903 to exchange trust company checks un- less reserves are increased, 369; suspension of cash payments at, in 1907, 373 ; issues loan certificates, 373; amount of, outstand- ing, 373, 374 Clearing-house, at Boston, abolishes gold deposits, 46 Cleveland, Grover, elected Governor of New York, 9 1 , 92 ; elected President of the United States, 102; his un- favorable view of Treasury situation in 1885, 103; financial operations of his Administration, 104, 105, 106, 107, no, 112; defeated by Harrison in 1888, 130; his popular plurality over Harrison, 130; his view as to manner of tariff revis- ion, 131; renominated in 1892 by Democratic party, 178; sources of his support, 179; South Carolina Demo- crats protest against nom- ination of, 179; re-elected President, 181; his large popular plurality, 181; pledges gold redemption of legal tenders, 186; sum- mons Congress in extra session, 197; repudiates compromise repeal of Sil- ver-Purchase Act, 199'; stops blockade of traffic 220; denounces Senate in Railway Union strike, Tariff Bill of 1894, 226; refuses to sign it, 228; vetoes seigniorage bill, 230 ; his remark on the "endless chain," 232; defends the bond contract of 1895, 236; his final and successful currency operation, 252 Cockrell, F. M., U. S. Senator, denounces foreign bond- investors, 39; declares Sil- ver-Purchase Act an aban- donment of bimetallism, 15 Codman, Charles R., opposes McKinley on imperialism issue, 292 Coinage of silver dollars, see Silver Collateral trust bonds, use of, in 1901 promoting craze, 296 Colorado, carried by Demo- crats in 1882, 92; its Sena- tors vote against Silver- Purchase Bill, 147; its Democratic Convention of 1892 demands free coinage, 179; repudiates national convention's currency plat- form, 179; carried in 1892 by Populist party, 181 Commercial failures, see Fail- ures in business Congress of U. S., pledges in 1865 retirement of the legal tenders, 1 1 ; passes contraction bill, 1 1 ; its de- bate on contraction, 1 2 ; revokes contraction power, 15; condemns Johnson's repudiation plan, 1 7 ; passes Public Credit Act of 1869, 1 7 ; scandals of, during in- flation period, 18; passes Inflation Act of 1874, 20; Republicans lose control of, 20; passes Resump- tion Act, 2 1 ; undertakes 3 88 Index Congress of U. S. Continued to wreck the resumption plan, 34; House votes re- peal of Resumption Act, 35 ; passes Free-Silver Coinage Bill of 1878, 35, 38; motives of, in 1878, 37; its attack on foreign bond- subscribers, 3 9 ; party chaos in, during 1878, 40; its sectional votes, 40; passes Silver Bill over Presidential veto, 4 1 ; ad- journs, 42; influence of 1878 elections on, 44 ; votes for compulsory reissue of le- gal tenders, 49; denounces New York Clearing-house, 77; forces revocation of Clearing-house rule re- garding silver, 77; its un- willingness in 1882 to re- duce the tariff, 88; adopts policy of extravagant ex- penditure, 89 ; increases pension appropriations, 89 ; S asses River and Harbor ill over veto, 90 ; its policy rebuked in 1882 elections, 9 1 ; resists the tariff re- vision movement, 92; passes Tariff Act of 1883, 93 ; authorizes issue of small silver certificates, 108; defeats free-coinage bill of 1886, 117; House of Representatives passes Mills Tariff Bill, 125; au- thorizes bond redemptions at a premium, 125; its vicious methods of appro- priation, 133; adopts Mc- Kinley Tariff Act, 134; its estimates of revenue re- duction, 135, 136; its wild extravagance during 1890, ^36; political situation of, 111 1889, 141 ; tariff changes opposed jn, 141; silver sentiment in, 141; action on Silver-Purchase Bill, 147, 148, 149; defeats free- coinage substitute, 148; asserts gold redemption under the Act, 150; fixes the hundred-million gold reserve in 1882, 166, 167; House divides equally in 1892 on free-coinage bill, 174; Senate passes bill, 1 74 ; tariff reduction bills of 1892, passed by House, 175; rejected by Senate, 175; promises economy, in 1892, 176; increased extrava- gance of, 176; Democrats obtain control of, 1 8 1 ; extra session of, in 1893. 197; struggle over repeal of Silver-Purchase Law, 197-199; sectional division in, 198; repeals the law, 199; refuses relief to the Treasury, 208, 210; at- tacks the bond-issue of 1894, 21 1 ; apathy of con- servatives in, 212; its atti- tude towards tariff revi- sion, 223; motives of the House, 225; of the Senate, 225; action of the two houses on Wilson Bill, 225, 226; delusive hopes of, from income tax, 227; passes seigniorage bill, 230; refuses to authorize gold bond, 235; outcry of, against 1895 bond-issue, 236; Republicans regain control of, 249; passes Gold Standard Act, 254; tariff legislation of, in 1897, 269; Anti-Trust Bill of 1890 in, 344; passes Railway Rate Bill of 1906, 351, 352 Connecticut, goes Democratic in 1877 and Republican in Index 389 Connecticut Continued 1878, 44; Democrats carry, in 1882, 92 Consolidated Lake Superior Company, failure of, in 1903, 310 Consols, British, low price of, in 1894, 213 Copper, effort of 1901 to control market for, 308; violent rise of 1906 in, 316 Corn, large crop of, in 1879, 56; failure of crop in 1894, 221 ; influence of failure on syndicate operations, 245; failure of crop in 1901, 300; maximum yields of 1905 and 1906, 315 Cornell, Alonzo B., elected Governor of New York in 1879, 68, 91 "Corners," in wheat, during 1879, 60; in wheat and coffee during 1887, 114; in wheat during 1888, 115; in wheat during 1898, 280; of 1901, in Northern Pacific stock, 306 Cost of living, great rise in, during 1905 and 1906, 318; hardship caused by, 332 Cotton, depressed market for, after resumption, 51; re- vival of market for, in !879, 57; speculation in, during 1882, 85; over- production of, in 1882, 87; large American consump- tion of, in 1889, 120; rise in price of, during 1895, 242; rise in price of, be- tween 1897 and 1900, 261; export of, after 1896, 261; its low record price in 1895, 262 ; large yield of, in 1905, 315; high price of, in 1906, 317; effort of planter to fix price, 317 "Coxey's Army," march of, in 1894, 219 Crossman, W. H., & Co., break through bond syndi- cate's plans in 1895 gold market, 248 Cuba, loans to, by American capital, 258 Currency, of the United States (see also Bank notes, Gold, Legal tenders, and Silver), discussions on, effected by price of grain, 5 ; condition of, at close of the Civil War, 7, 9; con- traction plan of 1866, ii, 12, 15; danger to, opinion of President Hayes, 72; movement of, in 1879, 75, 76; active interior demand for, in 1880, 81, 82; in- crease of, while trade de- mand decreased, 97 ; opera- tions in, by the first Cleve- land Administration, 105, 106, 107, 108; change in composition of, after 1885, ui, 112; heavily con- tracted in 1888, through Treasury surplus, 123, 126; party declarations on, in 1888, 138, 139; Secretary Windom's views regarding, 145; inflation of, under the lawsof 1890, 151, 154, 155, 159, 162; effect of its re- dundancy, on foreign-ex- change market, 162; vol- ume of, not a necessary cause for high prices, 165; party declarations on, m 1892, 177, 178, 179; Popu- lists demand that it be doubled, 180; hoarding of, during 1893 panic, 190, 194; premium on, in New York City, 194, 195; enor- mous increase in, during 1893, 202; reaches its larg- 39 Index C urrency Continued est volume in 1894, 230; syndicate operations in- crease supply of, 247; re- duction of, through bond- issues, 250, 251, 252, 253; hoarding of, in 1907 panic, 374; makeshift issues of, by banks, 374; premium on . 375 Customs revenue, require- ment of payment in coin revoked, 47; large increase in, after resumption, 87 ; not materially affected by Tar- iff Act of 1883, 96; heavy expansion of, after 1886, 113; causes for rise in, 114, 115, 121, 123; decrease in, under McKinley Act, J 34i X 35I effect of 1893 panic on, 205; insufficient, under Act of 1894, 226, 227; effect of Dingley Tariff of 1897 on, 269 Daniel, John W., U. S. Sena- tor, his opinion of Silver- Purchase Act, 150 Darling, W. A., U. S. Con- gressman, his opinion of the legal tenders, 13; of protective tariff, 13 Deficit of revenue in U. S. government finances, be- gins in 1891, 138; Congress of 1892 fails to remedy, 175, 176; met out of the gold reserve, 204; Sher- man's theory regarding, 222; mistaken views of, in Congress, 224; amount of, under Tariff Act of 1894, 227; influence of in- come-tax annulment on, 229; effect of Dingley Tariff of 1897 on, 269 Democratic party, adopts re- pudiation issue in 1868, 16; loses the Presidential elec- tion, 16; gains control of the House, 20; its Con- gressmen vote unani- mously against Resump- tion Act, 2 1 ; threaten to repeal the act, 21; its opposition to resumption plans, 35, 37, 42; its divi- sion of opinion in 1878, 44; its pro-silver tendencies in 1879, 66; its defeat, 68; its currency plank in 1880, 69; defeated in the Presi- dential election, 7 1 ; elec- toral victories in 1882, 91; elects Cleveland President, 102; demands tariff reduc- tion in 1888, 128; defeated in Presidential election, 130; attitude of, regarding silver in 1888, 139; its Congressmen vote unani- mously against Silver-Pur- chase Bill, 151; victory in 1890 elections, 173, 174; its equivocal money plat- form of 1892, 177, 178; attitude of, in West and South, 179; wins the 1892 election, 181; breach in, during session of 1893, 198; majority of its Congress- men vote for free coinage, 198; attitude of, on bond- issue question, 207; tariff revision in Congress de- manded by, 223; conflict- ing tariff views of, in House and Senate, 225; its dis- ruption in 1896 over sil- ver, 262 ; nominates Bryan, 263; its free-coinage plat- form, 263; defeated, 266; renominates Bryan in 1900, 291; declares again for silver, 291; political chaos in, 292; defeated, 293; unprecedented majority of 39 1 Democratic party Continued 1904 against, 311; de- feated again in 1908, 379 Denmark, panic of 1907 in, 363 Dewey, Admiral George, de- feats Spanish fleet, 279 Dingley Tariff Law, see Tariff. Dry-goods industry, depres- sion at resumption of specie payments, 5 1 ; pros- perity in, at close of 1879, 58; profitable trade in, during 1888 and 1889, 114; improvement of, in 1895, 242 ; heavy cut in prices and wages in, during 1908, 378 Dun's Review, its index num- ber of prices after 1897, 260 Eckels, James H., U. S. Comptroller of the Cur- rency, his opinion of inter- est payment on deposits of interior banks, 189 Economist, London, its view of agricultural conditions in 1879, 55; of the U. S. gold exports in 1891, 165; of the syndicate under- taking of 1893, 2 39> ^ the American shipping com- bination, 302 ; of copper manipulation in the U. S., 316; of London's loans to New York in 1906, 358; its index number of prices, 260, 315, 316 Edmunds, George F., U. S. Senator, draws up Specie Resumption Bill, 21 Egypt, land and stock spec- ulation in, between 1905 and 1907, 325; panic of 1907 in, 360; crisis de- scribed by Egyptian bank- ers, 361 Elections, of 1868, 16; of 1874, 20; of 1876, 34; of 1878, 44; of 1879, 65, 68; of 1880, 71; of 1882, 91, 92; of 1884, 102; of 1888, 130; of 1890, 173; of 1892, 180, 181; of 1894, 249; of 1896, 253, 262; of 1900, 291; of 1904, 311; of 1908, 379 Elkins Anti- Rebate Law of 1903, used as basis of suit of 1907 against Standard Oil Company, 350 England, relations to the American money market, 14, 15; crop failure of 1879 in, 53, 54, 55 ; ships gold to U. S., 58; increase in man- ufacturing trade of, after 1886, 119; export trade expanded, 119, 120; enor- mous investments of, in foreign securities, 120, 122; speculative markets of, early in 1890, 156; London panic in, 157; liquidation of security holdings by, after 1890, 158; heavy sales of American securi- ties by, in 1891, 165; se- curity issues in, after 1890, 243 ; gold-mining craze of 1895 in, 243; buys Ameri- can securities, 244; slow- ness of responding to trade boom after 1897, 260; war with Transvaal, 280; gold supplies cut off, 281; its heavy war loans, 282; borrows from American bankers, 282 ; alarmed over American buying of steam- ship lines, 302; finances Japan in Manchurian war, 320; iron production of 1906 in, 324; large gold 392 Index England Continued imports of 1907 from, by New York, 375; advises government intervention in our panic, 376 Equitable Life Assurance Company (see also Life In- surance), quarrel in its management in 1905, 336; its resources and capital stock, 336; committee of trustees investigates, 337, 338; legislative committee investigates, 338, 339; sold to Thomas F. Ryan, 341 Erie Railway, failure of, in 1893, 194; reorganization of, in 1895, 277 Europe, investments by, in United States, 3, 15; crop failure of 1879 in, 55; large sales of merchandise by, in 1883, 97; after 1886, 119; crop failure of 1891 in, 163, 164; its appreciation of the American currency dan- gers, 165; estimated vol- ume of its investments in American securities, 217, 218; its heavy liquidation of such securities, in 1893, 217; in 1894, 218; large wheat harvest of 1894 in, 221; buys American securi- ties in 1895, 241, 243; sells them back again, 246, 25 1 ; ships gold to the United States in 1896, 253; crop failure of 1897 in, 270; industrial invasion of, by America, predicted in 1897, 273; its own industrial revival, 274; imports steel from United States, 275; sells back American securi- ties to New York, 280; American credit balance of 1900 in, 282; recalls its Wall Street loans of 1901, 305; extinction of Ameri- can credit balance in, 307; loans of 1905 to Wall Street speculators, 328; not dis- turbed over Railway Rate Law of 1906, 353; enor- mous advances of 1906 to Wall Street, 355; money troubles arise in, 358; stops loans to New York, 358; panic on markets of, in 1907, 362, 363; raid of New York market on its gold reserves, 375 Ewing, Thomas, nominated by Democrats in 1879 for Governor of Ohio, 66; his overwhelming defeat, 68 Expenditure of U. S. govern- ment, extravagance of, in 1882, 89; Republican Con- vention of 1888 recom- mends increase in, 129; President Harrison sug- gests increase in, 132; Con- gressional recklessness in, during 1890, 136; Congress of 1892 promises to reduce, 176; instead, it increases, 176 Export trade, in wheat, rise of, alter the Civil War, 4; increase of, in all commodi- ties, after the panic of 1873, 19; decrease early in 1879, 51; in wheat, heavy increase later in 1879, 56; in other commodities, increase of, 56; of 1879, checked by speculation, 60; of 1 88 1, reduced by the crop failure, 84; decrease in, after 1885, 121; checked in 1895 by speculation, 245; in wheat, large in- crease of 1897 in, 271; of steel and iron, 275; ex- traordinary increase, be- tween 1897 an d 1901, 276; Index 393 Export trade Continued enormous excess over im- ports in 1898, 280; ship- ments of 1900 to Europe checked, 290 Export, of gold, see Gold; of Silver, see Silver Failures in business in the United States, in 1877 and 1878, 34; in 1880, 65; in 1886 and 1888, 119; in 1893, 201; large numbers of, in 1897, 268; record of, after 1907 panic, 377 Fairchild, Charles S., Secre- tary U. S. Treasury, his operations with the Treas- ury surplus, 123-125; his opinion of bond-buying at a premium, 123 Felton, W. H., U. S. Senator, denounces foreign bond investors, 39 Fessenden, W. P., Secretary U. S. Treasury, regards the legal tenders as a tempo- rary currency, 8 Field, Stephen J., Associate Justice U. S. Supreme Court, pronounces income tax of 1894 unconstitu- tional, 229 "Finance bills," Wall Street borrows from Europe on, 328; used again in 1906, 355 Florida, Democrats of, de- mand free coinage, 179 Folger, Charles J., Secretary U. S. Treasury, urges re- duction of tariff duties, 88 ; warns Congress of dangers in silver coinage, 96 Foraker, J. B., Senate speech of 1906 on Railway Rate Bill, 353 Ford, W. C., Chief U. S. Bu- reau of Statistics, his esti- mate of revenue under income tax, 229 Foreign exchange, high rates of, after resumption, 48, 52 ; fall in, during 1879, 57; re- lation to the currency, 78, 79; rise in, during 1881, 85; during 1891, 159, 161; nature of New York opera- tions in, 1 6 1 ; rise in, dur- ing 1892, 1 66, 171; during 1893, 1 86; sharp decline in, during 1893 panic, 193; forced up by New York premium on currency, 196; renewed rise in, at close of 1893, 206; in 1894, 216 218; bond syndicate's oper- ations in, 238-240; fall in, during 1895, 244; quick recovery in, 246; high rates for, 248 Foster, Charles, Secretary U. S. Treasury, stops gold disbursements by Treasury in 1892, 170; prepares for a bond-issue, 183; borrows gold from New York banks, 183 France, accumulates gold during Sherman's prepara- tions for resumption, 26; crop failures of 1879 in, 55; ships gold to U. S., 58; gold shipped to, in 1891, from U. S., 160, 161; crop failure of 1891 in, 163; its short crop of wheat in 1897, 2 70 ; its holdings of Russian bonds, 320; finances Russia in Manchurian war, 321 Franco-Prussian War, influ- ence of, on the price of wheat, 4 Frick committee, investigates Equitable Life Assurance Fuller, M. W., Chief Justice U. S. Supreme Court, pro- 394 Index Fuller, M. W. Continued nounces income tax of 1 894 unconstitutional, 229 Garfield, James A., nomi- nated for President in 1880 by Republican party, 70; his electoral majorities, 7 1 ; effect of his death on the markets, 83; declares in 1872 that proper maximum of pension expenditure had been reached, 89 Gary, E. H., chairman U. S. Steel Corporation, his ar- gument for maintaining steel prices after panic of i97, 37 8 Gates, John W., his testi- mony about his industrial amalgamations, 287 George, Henry, runs for May- or of New York in 1886 on labor ticket, 117 Georgia, Democratic Con- vention of 1892 demands free coinage, 179 Germany, accumulates gold during this country's re- sumption operations, 2 6 ; adopts gold standard of currency, 36; sells its old silver coin, 36, 37; crop failure of 1879 in, 55; exports gold to U. S., 58; borrows from American bankers in 1900, 282; its steamship lines withdraw from Shipping Trust nego- tiations, 302 ; large issue of new securities in, during 1905, 323; iron output of 1906 in, 324; speculative mania of 1905 in, 325; pan- ic of 1907 in, 362 Gilbert, Alexander, president N. Y. Clearing-house Asso- ciation, on Wall Street's enormous borrowings of 'QoS, 355, 356 Gold, premium on, influence upon prices, 9; entire American product ex- ported during inflation years, 14, 25; sales of, by the Treasury, 14, 26; con- spiracy in the market for, during 1869, 18; export of, checked, 19; stock of, in United States in 1877, 25; foreign banks unwilling to part with, 26; govern- ment bonds declared pay- able in, by Secretary Sher- man, 29; hostile operations in 1878 market for, 30; adopted as currency stand- ard by Germany, 3 6 ; Treas- ury's holdings of, at re- sumption, 45; special bank accounts in, abolished, 46; New York holdings of, at resumption, 48 ; exports of, in 1879, 53 ; heavy imports of, from Europe, 58; Treas- ury holdings-of, increased, 58 ; used for regular govern- ment expenditure, 59 ; legal tenders recognized as re- deemable in, 74; silver dollars not legally con- vertible into, 77; Treasury reserve of, decreases in 1882, 80; payments of, by banks, for Treasury silver, 82; exports of, in 1881, 85; heavy shipments during 1884, 97 ; use of, in revenue payments decreases, 97; McCulloch's views regard- ing displacement of, by silver, 103; Treasury re- serve of, declines, 104; five millions of, borrowed in 1885 by Treasury from banks, 104; redemption of notes of 1890 in, provided Index 395 Gold Continued for, 149, 150; large amounts of, borrowed by Bank of England from France and Russia, 158; imports of, by U. S., in 1890, 158; heavy exports of, early in 1891, 159; pop- ular explanations of ex- ports of, 1 60; exports of, caused by redundant cur- rency, 161, 162; Treasury's enormous disbursements of, in 1890 and 1891, 162; importation of, in 1891, 164; presented again to Treasury for legal tenders, 164; large exports of, in 1892, 1 66; fall in Treas- ury's reserve of, 166; amount of, reserved by law for redemption purposes, 167; decrease in payments of, in public revenue, 168; decreased use of, in settle- ments between banks, 1 68, 169; Treasury abandons use of, in its own pay- ments, 170; provided by banks for export, prior to 1892, 1 7 1 ; Treasury 's stock of, heavily drawn upon by legal tenders presented for redemption, 172; heavy withdrawals of, at close of 1892, 183; Treasury borrows six millions of, from New York banks, 183; amount of, left in Treasury by Harrison Ad- ministration, 184; twenty - five millions of, borrowed by Treasury in 1893 from banks, 185; issue of Treas- ury certificates for, sus- pended, 185; redemption of notes of 1890 in, rumor of its suspension, 185; use of, for note redemption pledged by President Cleve- land, 1 86; imports of, dur- ing panic of 1893, 194, 196; becomes almost the sole medium of exchange, 196; heavy payments of, in public revenue, 203; still larger use of, in Treasury's 1893 disbursements, 204- 206; renewed fall in Treas- ury reserve of, 206, 209; amount of, needed for reserve, Carlisle's opinion on, 209; bond-issue to ob- tain, announced, 210, 211; issue of bonds for, declared legal by courts, 212; amount of, paid for loan of February, 1894, 215; withdrawals of , from Treas- ury, by bond-subscribers, 215; Treasury's use of, in regular disbursements, checked, 216; exports of, in 1894, begin again, 217; causes of, 218, 219; New York banks lend fifteen millions more to Treasury, 231; withdrawals of, for bond-issue of 1894, 231; contract for, with Bel- mont-Morgan Syndicate, 237; withdrawals of, stopped, 241; Treasury re- serve of, restored, 241; discoveries of, in South Africa, 243; export of, re- sumed, 248; withdrawals of, for loan of 1896, 251; premium bid for, 252; imports and exports of, simultaneous, 252; exports of, early in 1896, 253; heavy imports of, 253; fall and rise during 1896 in Treasury reserve, 254; government reserve of, le- gally established in 1900, 254; rapid increase in 396 Index Gold Continued world's production after 1896, 259; New York pre- mium on, during free coin- age campaign, 266; drawn from Treasury on eve of 1896 election, 266; re- turned after Bryan's de- feat, 267; large import of, after 1897 harvest, 271; flow of, into Treasury, 272; export in 1899, to pay for Philippines, 280; unseasonable shipment of, in 1901 to Europe, 307; increase in Transvaal out- put after Boer War, 313; import of, from Europe facilitated in 1906 by U. S. Treasury, 357; large amounts bought at a pre- mium in London by New York, during 1907 panic, 375; imports of, 375; loss of, by Bank of England, 375 Gold Democracy opposes Bryan in 1896 and 1900, 2 93 Gold Standard Act of 1900, 254; its provisions, 254; how its success was as- sured, 272 Goluchowski, Count Agenor, Austrian Minister of For- eign Affairs, his prediction at Vienna about the Ameri- can industrial invasion, 273; basis for it, 274 Gorman, Arthur P., United States Senator, defends the Senate's protectionist legislation of 1894, 227 Gould, Jay, his railway oper- ations in 1880, 63; his methods, 63, 64; his great power, 64; his exhibit of his security holdings, 86; his statement of 1889 re- garding railway conditions, 345 Government bonds, see Bonds of the United States. Grain trade, American (see also Agriculture, Corn, and Wheat) , its expansion after the Civil War, 3 ; increase after 1873 panic, 19; great activity of, during 1879 and 1880, 56, 59; affected by foreign competition af- ter 1885, 12 1 ; activity in, during 1891, 164; depres- sion of 1894 in, 221; checked in 1895 by speculation, 245; great prosperity of , in 1897, 271; world-wide activity of 1905 in, 314 Grant, Ulysses S., elected President of the United States in 1868, 16; his Administration and the scandals of inflation period, 18; vetoes inflation act, 20; candidate in 1880 for Republican nomination, 70 Grant & Ward, failure of, in panic of 1884, 100 Gray, Horace, Associate Justice U. S. Supreme Court, pronounces income tax of 1894 unconstitu- tional, 229 Great Northern Railway Company shares in pur- chase of Chicago, Burling- ton, and Quincy, 296 Haller, Soehle & Company, failure of, in Hamburg panic of 1907, 362 Hamburg, panic of 1907 in, 362 Hancock, Winfield S., nomi- nated for President in 1880 by the Democrats, 7 1 ; de- feated in the election, 71 Index 397 Harriman, Edward H., presi- dent Union Pacific Rail- way, fight with Morgan for control of Northern Pacific, 304; his supporters, 305; his use of Union Pacific's credit in 1901, 305; extraordinary borrowing powers granted to, 334, 335; describes his purposes of railway acquisition, 335; demands half of Equitable Life stock purchased by Ryan, 341 Harrison, Benjamin, Presi- dent of the United States, his electoral majority, 130; his views on tariff revision, 131; on public expendi- ture, 132, 133; on pensions, 132; interferes in the pen- sion extravagance, 138; his curious remarks on Windom silver plan, 140; approves enlarged use of silver in currency, 143 ; disapproves free-coinage legislation, 148; defends Silver- Purchase Act, 154; his misjudgment of the trade situation, 154156 Hayes, John L., made presi- dent of Tariff Commission of 1882, 92; his view of tariff-reduction policy, 93 Hayes, Rutherford B., Presi- dent of the United States, favors maintaining silver as a precious metal, 7; elected Governor of Ohio, 27; elected President, 27; troubles of his Administra- tion, 33 ; his disputed title, 34; vetoes Bland Silver Bill, 4 1 ; his negative in- fluence on Congress, 4 1 ; refuses renomination for Presidency, 69 ; advises re- tirement of legal tenders, 72 ; his opinion as to results of compulsory coinage, 74 Heidelbach, A. S., his esti- mate of foreign invest- ments in the United States, 218 Hepburn Act, see Railway Rate Law of 1906. Hill, Benjamin H., U. S. Sen- ator, his view of the Matthews Resolution, 38 Hill, James J., president Great Northern Railway, associated with Morgan in Northern Pacific contest, 304; remark on "indigest- ible securities, " 309; state- ment regarding railways' .needs for capital in 1906, 359 Hoarding of currency in American financial panics: in 1893, 191; in 1907, 374 Holden, E. H., chairman London City and Midland Bank, on Wall Street's borrowings of 1905 from London, 325; on "finance bills" of 1906, 328 "Holding companies," used for industrial amalgama- tions of 1901, 296; princi- ple adopted in Steel Trust, 299; Supreme Court on possible scope of the plan, 336 Holland, panic of 1907 in 3 6 3 Hooper, Samuel, U. S. Con- gressman, regards legal tenders as a temporary currency, 8 House of Representatives, see Congress. Howe, T. O., U. S. Senator, opposes Hayes Adminis- tration's policy, 43 Hughes, Charles E., counsel for legislative committee 398 Index Hughes, Charles E. Continued to investigate insurance abuses, 339 Hyde, James H., vice-presi- dent Equitable Life com- pany, withdrawal de- manded by president, 337; sells his stock to Thomas F. Ryan, 341 Idaho, Democrats of, demand free-coinage law, 179; choose Populist electors in 1892, 179 Illinois, its Congressmen vote solidly for Bland Silver Bill, 40; goes Democratic in 1890, 174; Democrats of, favor free coinage in 1892, 179 Immigration to the United States, after the Civil War, 3; increase in, after re- sumption, 61; reaches its maximum in 1882, 61; decrease of, in ensuing years, 115; increase in, during 1888, 115 "Imperialism," made an is- sue in 1900 election, 291; Bryan endorsed on issue of, 292 Import trade of U. S., enor- mous increase of, during inflation period, 18, 19; stimulated in 1881 by home speculation, 84; effect on public revenue, 87; heavy increase in, after 1886, 113; reasons for increase in, 119-121; character of increase in, 1 2 1 ; sudden decrease in, after 1893 panic, 205; violent enlargement of, in 1895, 245; contraction of, in 1896, 253 Income tax of 1894, Con- gressional ideas regarding, 227; Supreme Court dis- cusses, 228, 229; pro- nounced unconstitutional, 229; its probable yield over-estimated, 229 India, deficient cotton crop of 1879 in, 57; silver im- k ports of, decrease after 1877, 78; increase in wheat exports from, 122; effect of suspension of silver coin- age in, 200; crop failure in, during 1896, 265 Indiana, its Congressmen vote solidly for Bland Silver Bill, 40; Democratic Convention of 1878 op- poses resumption, 42; Re- publican Convention in, opposes financial agitation, 43 Ingalls, J. J., U. S. Senator, opposes Hayes Adminis- tration's policy, 43 Insurance scandal of 1905, see Life Insurance. Internal revenue, taxes re- duced by Act of 1883, 03-96; increase in receipts from, after 1886, 113; enlarged in 1888 by active home consumption, 123; total abolition of, sug- gested by Republican Con- vention, 129 Interstate Commerce Com- mission, report on railway bankruptcies of 1893, 276; Harriman's testimony of 1907 before, 335; its report on Union Pacific's railway purchases, 335; authorized by law of 1906 to fix rates, 352 "Invasion, the American, 273 Iowa, its Congressmen vote solidly for Bland Silver Index 399 Iowa Continued Bill, 40; Democratic Con- vention in, during 1878 opposes resumption, 42 ; carried easily by Republi- cans in 1879, 68; Demo- crats of, favor free coinage in 1892, 179 Iron, depression in market for, after resumption, 51; violent advance in, during I ^79> 57'' speculation in, during 1880, 60, 61; over- production of, in 1882, 87; large consumption of, after 1885, 115, 120; rise in price of, 115; active market for, in 1895, 242; rise in price of, between 1897 and 1900, 261; depression in trade during 1897, 268; rapid advance in price during 1899, 289; decline of 1900 in, 290; advance between 1904 and 1906, 316; un- precedented world's out- put in 1906, 324; severe de- pression in, after 1907 panic, 377 Japan, begins war with Rus- sia, 320 ; raises loans in Eng- land and United States, 321; victories over Russia, 322; cost of war, 322; ex- cited speculation in, after the peace, 325; financial misgivings of 1906 over, 326; outbreak of panic in, during 1907, 361 Johnson, Andrew, President of the United States, pro- poses to repudiate interest on the government debt, 17; his proposition con- . demned by Congress, 1 7 Johnson, John G., admission regarding Northern Securi- ties combination, 336; ar- gument for company before U. S. Supreme Court, 348 Jones, John P., U. S. Senator, believes that Silver-Pur- chase Act would raise price of silver, 151 Jordan, C. N., U. S. Treas- urer, his plans for circulat- ing Treasury silver, no Kaffir gold mines, discovery of, 243 ; speculative craze in London over, 244 Kansas, its Congressmen vote solidly for Bland Silver Bill, 40 ; goes Democratic in 1882, 92; Democrats of, demand free coinage, 179; chooses Populist electors in 1892, 181 Kansas Pacific Railway, its dishonest amalgamation with the Union Pacific, 63, Kelley, W. D., U. S. Con- gressman, his opinion on contraction of the legal tenders, 12; on protection, 13 ; opposes Hayes Admin- istration's policy, 43 Knickerbocker Trust Com- pany of New York, run of 1907 on, 366; suspension of, 370; results on other trust companies, 370, 371 Knights of Labor, their strikes in 1886 and 1888, 116; apply for injunction against bond-issue of 1894, 211 Knox, John J., Comptroller U. S. Currency, approves government bond deposits, 33 ; disapproves interest payment on interior bank deposits, 189 Knox, P. C., Attorney-Gen- eral of U.S., attacks North- ern Securities merger, 347; 4oo Index Knox, P. C. Continued his argument in court, 347 ; wins suit, 349; speech in Senate on Railway Rate Bill, 353 Koch, Dr., President Bank of Germany, report on German speculative mania of 1905,325 Krxiger, Paul, President Transvaal Republic, de- clares war on England, 280 Labor, high cost of, in 1906, 3 J 9 Labor troubles (see also Strikes), in 1877, 34; in 1886, 116; their influence on the politics of 1886 and 1888, 1 17; in 1894, 219, 220 Land, speculation of 1904 and 1905 in, 317 Landis, K. M., Judge U. S. District Court, imposes $29,240,000 fine on Stand- ard Oil Company, 350, 351 Legal tenders, amount of, outstanding at the close of Civil War, 7 ; purpose of their founders, 8; regarded as a temporary currency, 8; their effect on prices, 9; McCulloch proposes con- traction of, 10 ; Congress promises contraction of, ii ; contest over bill to contract, 1113; contrac- tion of, begun, n; act of 1866 ineffectual, 13; con- traction power revoked, 15; plan to pay part of government debt in, 16; redemption in coin prom- ised by Congress, 17; in- crease in issues ot, 17; effect of the inflation policy of, 18; Supreme Court de- clares them constitutional, ao ; Congress votes new issues of, in 1874, 20; Grant vetoes bill, 20; act to resume specie payments on, passed, 2 1 ; made per- petually redeemable in coin, 23 ; Sherman on ques- tion of reissue, 28, 50; Eland's threat regarding, 38; Western conventions demand their substitution for bank notes, 42 ; Sher- man's opinion as to proper reserve against, 45; clear- ing-houses agree to accept equally with gold, 46; cus- toms dues made payable in, 47; bank holdings of, in 1879, 48; amount in circulation fixed by Con- gress, 49; their reissue made compulsory, 50 ; pre- sented at Treasury for re- demption, in 1879, 53; gold paid to the Treasury for, 58 ; Hayes advises their retirement, 72; Sherman believes them a safe cur- rency, ^72; their ready cir- culation, 75; supply of, in New York banks, runs short, 8 1 ; dangers to Treas- ury reserve against, 103; absorption of, in small denominations, 105; Treas- ury substitutes silver cer- tificates for, in outside circulation, 108; payments in, to the government in- crease in 1886, in; pro- visions of, applied to the notes of 1890, 147, 149; enormous increase of, in circulation, 155, 159; gold exchanged for, in 1891, 164; gold reserve against, legal authority for, 166, 167 ; displace gold in public revenue, 168; in New York bank reserves, 168; in Index 401 Legal tenders Continued clearing-house exchanges, 169; in payments by Treas- ury, 170; amount re- deemed in gold up to 1891, 172; presented in 1892 for redemption in gold, 172, 182; in 1893, 183; used to obtain bank gold by Secre- tary Foster, 183; by Secre- tary Carlisle, 184, 185; rumors of silver redemp- tion for, 185; Cleveland pledges redemption of, in gold, 186; hoarding of, in panic of 1893, 190, 196; premium on, 194; return of, to circulation, 200; use of, by bond-subscribers of 1894, to obtain gold, 215; exchanged by Treas- ury for gold, 231; pre- mium on, for bond-sub- scription purposes, 252 Leroy-Beaulieu, Paul, on world's increasing gold out- put and gold reserves in bank, 260; on the exhaus- tion of world's capital in 1906, 329; prediction of coming reaction, 330 Ley land Steamship Line, bought by American Ship- ping Trust, 302; its chair- man's comment on pur- chase, 303 Life insurance companies, their use by Wall Street promoters in 1901, 336; their enormous resources, 336; Equitable Life scan- dal. 337. 33 8 ; investiga- tion of, by New York legislature, 338, 339, 340; abuses in management of, 339; reform law for, 340, 34i Lincoln, Abraham, President of the United States, de- , clares the legal tenders to be a temporary currency, 8 Lincoln Trust Company, run of depositors on, in 1907, T 37o,37i Loan certificates, Clearing- house (see also Clearing- house), issued in 1884, 100; in 1890, 158; in 1893, 192, 194; in 1907. 373J relative magnitude of is- sues, 373 Loans of the U. S. govern- ment, see Bonds of U. S. government. Loans of foreign govern- ments: of England, for Transvaal War, 282; of Japan, for Manchurian War, 320; of Russia, 321 London, panic of 1890 in, 163; "Kaffir boom" of 1895 in, 243; "Venezuela scare" in, 251; drafts on, bought by frightened New York bankers in 1896, 266; its bankers caught in Northern Pacific corner, 306; heavy issues of new securities in, during 1904, 323; money crisis of 1906 in, 358; sends gold to Egypt during 1907 panic, 361; gold bought in, by New York during 1907, 375 Louisville and Nashville Rail- way, its large earnings in the resumption period, 65 Maine, Democratic Conven- tions of, in 1879, declare for free coinage, 66; Re- publican majority in, in- creased, 68 Marine Bank, failure of, in 1884, 100 Massachusetts, carried by Democratic party in 1882, 92; in 1890, 174 402 Index Matthews, Stanley, U. S. Senator, his resolution de- claring government bonds payable in silver, 38; his remark on foreign cus- tomers of the United States, 39; Sherman's pe- culiar letter to, 42 Matthews resolution, pro- posed, 38; curious debate on, 39; sustained by many Republicans, 40; has no effect on administrative action, 41 McClellan, George B., Demo- cratic nominee for Presi- dent in 1864, 1 6 McCulloch, Hugh, appointed Secretary of the Treasury by Lincoln, 10; his views on currency contraction, 10 ; declares the contrac- tion law of 1 866 ineffective, 12; his opinion as to the necessary conditions for resumption, 13, 28; his unfavorable view of con- ditions in resumption year, 51; reappointed Secretary of Treasury by Arthur, 103; his pessimistic view of the silver question, 103 McCurdy, R. A., president Mutual Life Insurance Company, his remarkable testimony about policy- holders and dividends, 339 McKinley, William, U. S. Congressman and Presi- dent of the United States, proposes tariff bill of 1890, 134; his record on free- silver coinage, 263; nomi- nated President in 1896, 263; adopts gold standard issue, 264; elected Presi- dent, 266; opposed by anti-imperialists in 1900, 292; re-elected President, 293; his probable atti- tude towards offending corporations, 342; assassi- nated in 1901 at Buffalo, 342 McKinley Tariff Law, see Tariff. McPherson, John R., U. S. Senator, asserts gold re- demption * under Silver- Purchase Act, 151 Mercantile National Bank of New York, its troubles precipitate crisis in 1907, 365 Metropolitan Bank, embar- rassment of, in 1884, 100 Metropolitan Street Railway of New York, forces share- holders into a tricky lease, 334! goes into bankruptcy in panic of 1907, 365 Mexico, loans to, by Ameri- can investors, 258 Michigan, Republican victory of 1879 in, 68; Republi- cans hold, in 1 88 1, 90; carried by Democrats in 1882, 92; in 1890, 174; Democrats of, favor free coinage in 1892, 179; rea- son for vote against Bryan in 1896, 266 Mills Tariff Bill, see Tariff. Milwaukee Bank, failure of, in 1893, 194 Mining market, of Nevada and California, in 1874, 36; of London, in 1895, 244 Minnesota, its Congressmen vote solidly for Bland Silver Bill, 40; Republican Convention of 1888 in, hints at tariff reduction, 131; reason for vote against Bryan in 1896, 266 Missouri Pacific Railway, Gould's influence on, 63; strike on, in 1886, 116 403 Money market, of London, high rates in, during 1866, 15; during 1878, 30; of New York, advance in, during 1879, 58; ex- cessively high rates, during panic of 1884, 100; un- settled in 1887 by interior land speculation, 115; ex- cessive advance in rates on, in 1890, 158; disturbances in, early in 1893, 185, 186; Eanic in, 191, 192; Wall treet rate goes in 1896 to 125 per cent., 266; fall in rates after election, 267 ; call rate at 186 per cent, in Boer War panic, 282; high rates caused in 1905 by German speculation, 325; squeeze of 1905 at New York, 327; Wall Street rate at 125 per cent., 328; very severe strain of 1906 on, in New York, 357; in Europe, 358; crisis on, during panic of 1907, 372; currency goes to a pre- mium, 375 Morgan, J. Pierpont, plans billion-dollar Steel Trust, 297; negotiates with Car- negie, 298; organizes Ship- ping Trust, 302; contest for control of Northern Pacific, 304; interview on "undigested securities," 308; defends enormously capitalized corporations 334; induces banks to lend on Stock Exchange during 1907 panic, 372 Morgan, J. P., & Co., con- tract with U. S. govern- ment in 1895, 236 Morse, Charles W., his ex- ploits in "chain banking, " 365 Morton, Levi P., Vice-Pre- sident of the United States, his opinion on tariff re- vision, 131 Morton, O. P., U. S. Senator, blames McCulloch plan for financial troubles of 1866, 15 ' ' Muck-raking, " President Roosevelt on, 340 Napoleonic wars, influence of, on European industry, 2 National Banks, see Banks of U.S. National Cordage Company, failure of, in 1893, 188 Navy, U. S., appropriations for, recommended by Re- publican Convention, 129; urged by President Har- rison, 132; reduced by Congress of 1892, 176 Nebeker, E. H., U. S. Treas- urer, his correct explana- tion of the gold outflow after 1890, 159, 162 Nebraska, carried by Demo- crats in 1890, 174; corn- crop failure of 1894 in, 221 Nevada, rich silver discover- ies in, during 1873, 36; carried by Populists in 1892, 181 New England, its Congress- men vote solidly against the Bland Silver Bill, 40 New England Cotton Yarn Company, troubles of, in 1903, 310 New Jersey, carried by Re- publicans in 1 88 1, 90 New York Central Railroad, shares of, bought by Union Pacific in 1906, 356 New York City, protest of merchants against gold accumulations in the na- tional Treasury, 1866, 14; 404 Index New York City Continued Sub-Treasury at, ad- mitted to Clearing-house membership, 46, 47; condi- tion of banks in, during resumption year, 48, 58; its grain trade checked by 1879 wheat corner, 60; financiering of its ele- vated railways, 63;' its Clearing-house excludes silver, 76-79; exclusion rule rescinded, 80; stock panic in, during 1884, 99, 100; during 1890, 158; during 1893, 188; predic- tion that it is displacing London in financial su- premacy, 283; enormous building operations of 1905 in, 318; bank runs in, during panics of 1873, 1884, 1893, and 1907, 366 New York City banks, see Banks. New York State, party con- ventions of, during 1878, favor resumption, 44; Re- publican victory in, 44; party conventions of, dur- ing 1879, approve resump- tion, 67; sweeping Re- publican victory in, 68; Republican Convention of 1882 in, approves veto of River and Harbor Bill, 91 ; Democrats elect gover- nor in, during 1882, 91; legislature investigates life- insurance companies, 338- 340; passes insurance re- form law, 340, 341 Northern Pacific Railway, reorganized in 1896 after bankruptcy, 278; joins Great Northern in buying the Chicago, Burlington, and Quincy, 296; Union Pacific tries to buy control of, in 1901, 304; its stock cornered, 306; sells at $1000 per snare, 306; cor- ner relieved, 307 Northern Securities merger, effect of, 333; admission of its counsel regarding its possible results, 336; suit to dissolve, begun by Roosevelt Administration, 347 ; argument of attorney- general regarding its mono- polistic tendencies 347', U. S. Circuit Court decides for dissolution, 347; Su- preme Court decides against company on ap- peal, 348; dissolution of, 349 Notes, United States, see Legal tenders. Notes of national banks, see Bank notes. Notes of railway companies, issued in tight-money period of 1907, 359; amount put out, 360 Ohio, elects Hayes Gover- nor in 1875, 27; its Con- gressmen vote solidly for Bland Silver Bill, 40; Dem- ocratic Convention of 1878 denounces Resumption Act, 42; action of Republi- can Conventions in, 43 ; carried by the Republi- cans, 44; party conven- tions in, during 1879, 65, 66; carried by Republi- cans, 68; Republicans hold, in 1880 and 1881, 90; Democrats carry, in 1882, 91; one reason for its vote against Bryan in 1896,266 Oil, brought to market by the pipe line, 57; large ex- ports of, in 1879, 57; ad- Index 405 Oil Continued vance in price of, during 1895, 242 Oregon Short Line Railway, used by Union Pacific to buy Northern Pacific stock, 305 Overend, Gurney & Co., failure of, in 1866, 14 Panic of 1866, in London, 14; its influence on the American markets, 15 Panic of 1873 in New York, events which led up to, 18; good and bad results of, 18, 19 Panic of 1884 in New York, its cause, 98; its character, 98; its peculiar incidents, 99 ; protective measures adopted in, 100 Panic of 1890 in London, 157; how allayed, 158; its influence on New York, 158 Panic of 1893 in the United States, outbreak of, 188; corporation failures in, 1 88; effect of, on interior institutions, 189, 190, 193; on the city banks, 190 194; on the currency, 195; on foreign exchange, 193, 196; on Congress, 197; on trade, 201; on the Treas- ury, 203 Panic of 1907, predicted nearly two years before, 3 2 9> 33: in Egypt, 360, 361; in Japan, 361, 362; in Hamburg, 362; in Chili, 362, 363; belief that an- other crisis could not oc- cur at New York, 363; reasons for recurrence in I 97 > 363; twenty-year in- terval in recurrence of, 364; early signs of, at New York, 365; breaks out in run on trust com- panies, 366; strikes the Stock Exchange, 372; spreads throughout the country, 373, 374; phases f i 3751 allayed by import of gold, 376; resemblance to 1873 panic, 377; im- mediate after-effects of, 3?6, 377! sequel in 1908, 37.8 Panics, minor: "Northern Pacific," in May, 1901, 306; "rich men's panic" of 1903^311 Paris Exposition of 1889, its alleged influence on Ameri- can gold exports, 1 60 Pattison, Robert E., elected Governor of Pennsylvania in 1882, 92; in 1890, 173 Pennsylvania, Democratic Convention in, during 1879, its equivocal stand on the currency, 66 ; carried by the Democrats in 1882, 92; in 1890, 173 Pensions, Garfield declares in 1872 that maximum ex- penditure for, has been reached, 89; enormous in- crease in appropriations for, during 1882, 89; Re- publican Convention of 1888 advises increase in, 129; President H arrison suggests enlargement of, 132; political inducement for, 134; extravagant ap- propriations of 1890 for, 136; President Harrison alarmed at increase in, 138 ; heavy increase in appro- priations for, by 52d Con- gress, 176 Philadelphia, its banks issue loan certificates in 1893, 192 406 Index Philadelphia and Reading Railway Company, its failure in 1893, 188; its reckless financiering, 218; reorganization of, in 1896, 2 77 Philippine Islands, purchased from Spain after war of 1898, 280; made an issue in 1900 election, 291 Pittsburg, railway riots at, in 1877, 34; its banks issue loan certificates in 1893, 192 Platforms, party: of Demo- crats in 1868, declares for repudiation, 16; of Repub- licans in 1876, ignores Re- sumption Law, 27; of Western Democrats in 1878, favor free coinage and denounce Resumption Law, 42; of Western Re- publicans in 1878, oppose financial agitation, 43; of Democrats in 1879, declare for silver, 66; of Republi- cans, uphold specie pay- ments, 67; of 1880, ignore silver, 69; of third party in 1888, based on labor ques- tion, 117; of 1886 and 1888, make an issue of trust question, 118; of Democrats in 1888, 128; of Republicans, 129, 139; of Republicans in 1892, 177; of Democrats, 178; of Western and Southern Democrats, favor free coin- age, 179; of Populists, 1 80; of Democrats, in 1896, 263; of Republicans, in 1896, 264 Populist party, organized in 1892, 1 80; its radical plat- form, 180; its popular vote for President, 181; its showing in Congress and in the Electoral College, 1 8 1 ; fuses with Democrats in 1896 election, 262; di- vided on Bryan nomina- tion of 1900, 292; plat- forms of two factions, 2 92 , 293 Price, Hiram, U. S. Congress- man, his skepticism over resumption, 12 Prices of commodities (see also Cotton, Dry-goods, Iron, Silver, Stock market, Wheat), high level of, dur- ing war inflation, p, 10; obstacles presented by, to resumption, 13; fall in, after panic of 1873, 19; decline in, early in 1879, 51, 52; violent advance of, later in the year, 53 , 56-60 ; continued strength in, dur- ing 1880, 61; high level of, in 1882, 85; reaction in, 86; renewed advances in, dur- ing 1887 and 1889, 115; during 1890, 154-156; de- cline in, during 1893, 200; recovery in, during 1895, 242; low record of half a century in, reached during 1897, 260; general rise in, between 1897 and 1899, 260; violently rapid ad- vance in, after 1904, 315; manipulated in 1906 by Trusts, 333; fall in, after 1907 panic, 378, 379 Promoters, their activity during 1899 in American industry, 287; reckless pro- jects of, during 1901, 302; caught in a trap by falling market, 308; the "un- digested securities " epi- sode of 1903, 309 "Prosperity League, " its sin- gular campaign of 1908. 378 Index 407 Protection, see Tariff. Public Credit Act of 1869, 17 Public lands, enormous sales of, in 1888, 115 Railway Rate Law of 1906, passage urged by Presi- dent Roosevelt, 351; passed in Congress, 352; overwhelming majority for, 352; terms of and penal- ties prescribed by, 352; constitutional arguments regarding, 353; theory that it caused the panic of 1 90 7 , 3.53 Railways of the United States, their expansion after the Civil War, 2; shares in, sold by London in 1879, 52; speculation in securities of, during 1880, 61,62; systems of, built up, 62, 63 ; reckless financiering of, in 1880, 62-64; enor- mous earnings of, 65; pro- fits of, affected by 1881 crop failure, 84; construc- tion of, in 1882, decreases, 87; financial embarrass- ment among, in 1884, 98; construction of, reaches its maximum in 1887, 115; labor troubles on, during 1886 and 1888, 116; pres- idents of, give their word of honor to maintain rates, 119; Populist Convention declares for government ownership of, 180; failures among, in 1893, 188, 194, 218; bad financiering of, 218, 219; decreased earn- ings of, in 1894, 219; labor uprising on, 220; their traffic blockaded by strik- ers at Chicago, 220; finan- cial wreck of, left by the 1893 panic, 276; condition in 1895 of bankrupt pro- perties, 276; reorganiza- tion of, 277; earnings of, in 1900, 279; issues of new securities after 1898, 290; enormous purchase of stock of, in 1901, 295; the "Burlington deal," 296; purchase of, through colla- teral trust bonds, 296, contest over Northern Pa- cific in 1901, 304; mil- lionaire speculation of 1905 in, 327; combination into four great systems, 333; Harriman's combinations f> 33S' Interstate Com- merce Commission on, 335; application of Anti-Trust Law of 1890 to, 344346; rate discrimination charged by Roosevelt Administra- tion, 350; legislation of 1906 regarding, 352 ; feeling as to new law, 352, 353; enormous borrowing plans of, in 1906, 359; bonds fail to find a market, 359; very large issue of tempo- rary notes, 360; decline in traffic after 1907 panic, 3.77 Railways, foreign, influence of their extension on world's wheat product, 4, 122 ; active construction of, before 1878, in Russia, 4; in Austria, 5; extension prior to 1888, in India, 122; in Argentine Republic, 122 Republican party, opposes repudiation issue in 1868, 1 6; wins the Presidential election, 16; defeated in the Congressional elections of 1874, 20; its condition after the panic, 20; unani- mous vote of its Congress- 408 Index Republican party Continued men for Resumption Act, 2 1 ; ignores the Act in its platform of 1876, 27; its minority in the House of 1877, 34; its failure to support the Hayes Ad- ministration in Congress, 40; its platforms of 1878 favor the Adminstration, 43; its victory in 1879, 68; its platform of 1880, 69; disputes over Presidential nominations, 70 ; elects Garfield President, 72; -op- poses tariff revision in 1882 , 88; its Congressmen pass River and Harbor Bill over Arthur's veto, 90; de- feated in the 1882 elec- tions, 91, 92; in Presiden- tial election of 1884, 102; its platform of 1888, 129; elects Harrison President, 130; its attitude on the tariff, 131; on silver 138, 139; its division on high- tariff legislation in 1889, 141, 142, 148; its severe defeat in 1890 elections, 173, 174; ignores Silver- Purchase Act in its con- vention of 1892, 177; de- feated in the Presidential election, 181 ; favors repeal of Silver-Purchase Law, 197; carries repeal in the Senate, 199; regains con- trol of Congress, 249; nom- inates McKinley in 1896, 263; changes issue from tariff to currency, 264; carries election, 266; raises duties in 1897, 269; its victory of 1904, 311; of 1908, 379 Resumption of specie pay- ments, planned by Hugh McCulloch, 10 ; pledged by Congress in 1865, n; Sherman predicts that it will come automatically, 12; obstacles to, pointed out by McCulloch, 13; promised again by Con- gress, 17; the promise broken, 17, 18; Resump- tion Act passed, 1875, 21; its provisions, 21, 23, 24, 172; difficulties in the way of, 25, 26; trade conditions favorable to, 26; prepara- tions for, 29-33; Con- gressional opposition to, 34, 35, 39', repeal of law proposed, 35; attack on, supported by many Re- publicans, 40; repeal act fails in Congress, 41; Ad- ministration's policy of, denounced by opposition State conventions, 42; en- dorsed by Eastern Re- publican conventions, 43; by Eastern Democratic conventions, 44; Sherman's final arrangements for, 44 46; gold held for purposes of, 45; specie payments re- sumed, 47; problem of maintaining, 48-51; limi- tations of the law for, 50; effect of, on the markets, 52; precarious outlook of, in 1879, 53; satisfactory outcome of, 56 Revenue, public, see Cus- toms revenue, Internal revenue, and Surplus revenue. River and harbor expendi- ture, heavy increase in, during 1882, 89; bill for, vetoed by President Ar- thur, 90; passed over veto, 90; effect of, on 1882 elections, 91; Republiqan Convention of 1888 re- Index 409 Riverand Harbor Continued commends, 129; President Harrison approves, 132; dangers of, 133 ; increase of, in 1892, 176 Roosevelt, Theodore, Presi- dent of the United States, his Presidential plurality in 1904, 311; his remarks on "muck-raking," 340; his political antecedents, 342 ; succeeds to Presidency on McKinley's death, 342; his first declaration of pol- icy, 342, 343; warning re- garding corporations, 343; invokes Anti-Trust Law against railway combina- tions, 344; announces suit against Standard Oil Com- pany, 350; urges Railway Rate Law of 1906, 351; effects of his activity against corporations, 353; the argument that his policies caused the panic of 1907, 353. 354; popular support of, 353 Rothschilds, expect gold ex- ports from U. S. in 1879, 52 ; contract of, with Treas- ury in 1895, 236 Rozenraad, Cornelis, on trade of 1906 and strain on world's money market, 324 Russell, William E., elected Governor of Massachusetts in 1890, 173 Russia, extension of its rail- way system, before 1878, 4; crop failure of 1879 in, 55; crops of 1891 in, failure of, 164; takes wheat mar- ket of 1895 away from U. S., 246; crop failure of 1897 in, 270; war with Japan, 320; raises war loans in Paris, 320, 321; jts outstanding loans, 320 Ryan, Thomas F., buys Equitable Life control from James H. Hyde, 341; quarrel with Harri- man, 341 San Francisco, earthquake of 1906 at, financial effect, 3 2 9 Scruff, Jacob H., prediction of 1906 regarding coming Eanic, 329 urz, Carl, opposes Mc- Kinley on imperialism is- sue, 292 Securities, issue by industrial companies, in boom of 1901,285; by railways, 290; forced sales of new in- dustrials in, 1903, 308; very large issues of 1906 in Europe, 323 Seigniorage on silver coinage, bill of 1894 to coin, 230 Senate, U. S., see Congress. Seymour, Horatio, Demo- cratic nominee for Presi- dent in 1868, 16; rejects repudiation platform, 16 Shaw, Leslie M., Secretary U. S. Treasury, action of 1906 to assist New York banks, 357 Shepard, Edward M., op- poses McKinley in 1900 on imperialism issue, 292 Sherman, John, Congressman and Secretary of the Treas- ury, his opposition to McCulloch contra ct ion plan, 12; his belief in automatic resumption, 12; his judgment that money supply of 1866 was not excessive, 13; defers to public opinion on the legal tenders, 15; draws up Re- sumption Act, 3 1 ; defines 4io Index Sherman, John Continued powers of the Act, 24, 29; appointed Secretary of the Treasury, 27; his faults as legislator, 27, 28; his con- flicting public utterances, 28; his good qualities as administrator, 29; declares government bonds pay- able in gold, 29, 39; his skill in negotiation, 29-31; his relations with the banks, 32,33; assures bond- subscribers that bonds will be paid in gold, 39; his timid treatment of Bland Bill, 41, 42; his curious letter to Stanley Matthews, 42 ; does not approve veto of Bland Bill, 42 ; his view of proper amount of Treas- ury gold reserve, 45, 166; his final arrangement for resumption, 46, 47; his untenable theory regarding redeemed legal tenders, 50; his uneasiness over Treas- ury's situation in 1879, 53; orders use of gold in ordinary Treasury pay- ments, 59; his remarks on the grain harvest and prosperity, 67; his candi- dacy for Presidential nom- ination, 70; reasons for its failure, 70; declares the legal tenders a safe cur- rency, 72; his changing views on silver, 73, 74; his pessimism in 1880, 74; his expedient to cir- culate the silver dollars, 81, 82; his opinion regard- ing the silver Senators, 141; alleges that Silver- Purchase Act was neces- sary to prevent free coin- age, 147, 148; frames com- promise Silver- Purchase Bill, 149; his mistaken predictions regarding re- venue and legal tenders, 152; introduces bill to re- peal Silver-Purchase Act, 1 74 ; denies right of Treas- ury to use gold reserve for ordinary payments, 205; his unfounded asser- tion that deficit was wholly caused by Wilson Tariff, 222; his introduction of Anti-Trust Law of 1890, 344 ; his view of its applica- tion, 344. See also Pre- face. Shipping Trust, organized in i po i, 302; alarm of Eng- land over purchase of steamship lines, 302 ; com- ment on its extravagant purchases, 303; English- men get control of it, 303 ; use of life insurance funds to finance, 339 Shiras, George, Associate Jus- tice U. S. Supreme Court, his vote on the income- tax decision, 229 Silver, question of, prior to 1865, 6; increase in Ameri- can production of, 7 ; Presi- dent Hayes favors main- taining, as precious metal, 7 ; free coinage of, voted by House of Representatives, in 1 8 7 7 , 3 5 ; its demonetiza- tion, 35; Bonanza discov- eries of, in Nevada, 36, 37; debate on bill for free coinage of, 37, 38; govern- ment bonds declared pay- able in, by Congress, 38, 39; Western conventions demand free coinage of, 42 ; not favored in national conventions of 1880, 69; opinions of Hayes and Sherman on, 73 ; dollars not Index 411 Silver Continued a popular form of money, 75; rejected by interior trade, 75; large use of, in payment of public re- venue, 76 ; New York Clear- ing-house rejects, 76, 77; reasons for rejection of, 78, 79; increase in produc- tion of, 78; price of, rises in 1878, then falls, 78; decreased shipments to Orient, 78; used for interior remittances, 81 ; exchanged for certificates, 82; gold paid for, 82; trouble with, renewed, 96; Folger's opin- ion as to dangers of, 96; effect of compulsory coin- age of, after 1881, 97; ac- cumulates in Treasury, 97; revenue payments made in, 97; Acton suggests forced use of, in Clearing- house payments, 98; effect of coinage of, on national finances, as regarded by McCulloch, 103; by Cleve- land, 103; fractional coin pledged with the banks in 1885 for gold, 104, 105; Cleveland Administra- tion's plans to circulate, 105-107; certificates for, issued in small denomina- tions, 1 08; takes the place of bank notes in circula- tion, 1 1 1 ; Treasury surplus of, decreases after 1886, 112; question of, not a political issue in 1888, 138, 139; advocates of, in Con- gress, 141; their power over legislation, 141, 147; Secretary Windom 's plan for, 142145; increased production of, after 1890, 146; legislation for, in 1890, 147-149; temporary advance in price of, 1 53 ; renewed decline in, 154; gold paid to Treasury for, in 1891, 164; free coinage of, voted in 1882 by Senate, 174; blockaded in House, 1 74 ; party declara- tions on, in 1892, 177-180; rumor of its intended use to redeem legal tenders, 185, 186; heavy decline in, on suspension of Indian free coinage, 200; Con- gress votes to coin "seig- niorage" of, 230; Presi- dent vetoes bill, 230; Dem- ocratic party declares for free coinage of, in 1896, 263 ; in 1900, 291 Silver- Purchase Law of 1890, proposed by Secre- tary Windom, 139; politi- cal origin of, 141, 148; confusion of ideas regard- ing, 142-145; modified by Congress, 147; altered in conference committee, 149; Congressional opinion on, 150; fails to keep up price or silver, 153, 154; Presi- dent Harrison defends, 1 54 ; Secretary Windom de- fends, 154; its influence on currency in 1890, 155, 159; party declarations regarding, in 1892, 177, 178; Cleveland Administra- tion proposes repeal of, 184, 197; its provisions tested, 185, 1 86; Republi- cans favor repeal of, 197; struggle over bill to repeal, 197-199; Congress repeals, 199; effect of repeal of, on markets, 199, 200 Simmons, T. Edward, speech to Clearing-house on trust company reserves, 369 Sinking fund against U. S. 412 Index Sinking Fund Continued public debt, annual re- quirement for, 125, 137; payments on, abandoned by Harrison Administra- tion, 137 South Africa, see Transvaal. South Carolina, Democratic Convention of 1892 de- nounces Cleveland, 179; demands free coinage, 179 Spain, United States de- clares war on, 279; how money for conflict raised, 279 ; payment of indemnity to, 280 Spaulding, E. G., U. S. Congressman, regards the, legal tenders as a tempo- rary currency, 8 Specie payments, see Legal tenders and Resumption. Speculation, of 1879 and 1880, 6 1 ; of 1890, 153, 155; of 1895, 244; of 1901, 294, 300; of 1905, in Europe and America, 325, 326; various forms of, in 1906, 332; not checked by Railway Rate Law, 354; in Union Pacific stock, during 1906, 357; weakened by with- drawal of foreign capital, 358; collapse of, in 1907, 360; resumed in 1908 on New York Stock Ex- change, 379 Spooner, John C., Senate speech of 1906 on Railway Rate Bill, 353 Standard Oil, capitalists iden- tified with, their part in Northern Pacific corner, 305 ; suit against company by Roosevelt Administra- tion, 350; jury finds against, 350; $29,240,000 fine imposed on, 351; judg- ment and fine set aside by higher court, 351 Steel trade, combinations in, during 1899, 287; artificial maintenance of prices in, after 1907 panic, 378, 379 Steel Trust, organized by J. P. Morgan in 1901, 297; its constituent companies, 298; scheme for floating its securities, 299; initial price of its stock, 300; reduces its dividends, 310; value on market cut in two, 310; tries to turn $200,000,000 stock into bonds, 334; life insurance funds used for financing, 339; op- poses reduction of steel prices after panic of 1907, 378, 379J reduces prices in 1908, 379 Stevens, Thaddeus, U. S. Congressman, his opinion on contraction of the legal tenders, 12 Stock Exchange, New York, excitement on, during 1884, 100; arranges for silver speculation in 1890, 153; closing of, during panic of 1893, discussed, 194; manipulation of new steel shares of 1901 on, 299; unprecedented trading on, 301; declares holiday to give a rest to brokers, 301; technical insolvency in, during Northern Pa- cific panic, 307; Rus- sia lists its bonds on, 321; enormous sums raised abroad for speculation of 1906 on, 356; panic of 1907 on, 372; appeal to banks for relief, 372 Stock market, of 1879, 61; of 1880, 61; used by Jay Gould, 63, 64; demoraliza- Index Stock-market Continued tion in, during 1884 at New York, 100; of 1890, at New York, speculation in silver, 153; influenced by the paper money infla- tion, 155; of 1890, at London, 156, 157; at New York, breaks during 1896 campaign, 266; rise and reaction after Bryan de- feat, 267; prices of new industrial snares of 1899 on, 288; excited specula- tion of 1901 in, 295, 300; collapse in, during North- ern Pacific corner, 306; millionaire speculation of 1905 on, 327; in 1906, 356; forced liquidation on, in March and August, 1907, 360; crisis of October on, 372; speculation resumed on, in 1908, 379 Strikes, of railway em- ployees in 1886, 116; of laborers, for an eight-hour day, 116; their influence on politics in 1888, 117; of coal-miners and rail- way employees, in 1894, 220; why escaped, in 1906, 3i9 Sugar, import duty on, its great productiveness, 134; removed by McKinley Tariff Act, 134; revenue from, in 1889, 134; in 1892, 134; in 1895, 226; partly restored by Senate's Tariff Bill of 1894, 225, 226 Sumner, Charles, U. S. Sena- tor, regards the legal ten- ders as a temporary cur- rency, 8 Supreme Court of the United States, declares the Legal- Tender Act constitutional, 20; declares rents and municipal bonds exempt from income-tax, 228-; de- clares income-tax of 1894 unconstitutional, 229; questions counsel regard- ing Northern Securities merger, 336; applies Anti- Trust Law of 1890 to railways in 1897, 345, 346; decides Northern Securi- ties suit against the rail- ways, 348; different po- sitions of the justices, 348 Surplus revenue of U. S. government, in 1882, cause of, 87; its political aspects, 88; continues large after tariff of 1883, 95; applied to bond redemptions, 109, in, 112, 125, 126; heavy increase in, after 1886, 113; causes of increase in, 114; absorbs one fourth of the circulating medium, 123 ; deposited in 1888 with the banks, 124; becomes a menace to trade, 126; the precedent of 1836, 127; made a political issue in 1888, 128, 129; Democratic plan to reduce, 128; Re- publican plan, 129, 130, 132, 134, 135; disappear- ance of, in 1891, 137 Syndicates, bankers', formed in 1895 to protect Treas- ury reserve, 235; organ- ized in 1896 to guard market against election crisis, 266; used in railway reorganizations, 277, 278; employment for industrial amalgamations, 286; form- ed in 1901 to float Steel Trust snares, 299; profit of 200 per cent, distributed, 300; forced sale of securi- ties in 1903 by, 308 414 Index Taft, William H., elected President in 1908, 379 Tanner, James A., Com- missioner of Pensions, his remark about the surplus, 137; induced to resign office, 138 Tariff, import, suggested as a help to resumption, 13; Arthur Administration urges reduction in, 88; elections of 1882 declare for revision of, 92; plan for reduction in, 93; Congress opposes reduction of, 93 ; evils of wholesale changes in, 94 ; alterations in, have often preceded financial disturbance, 94; law of 1883, its character, 95; its effect on revenue, 95, 96; large receipts under, 113; bill of 1887, passed by House and killed by Sen- ate, 125; reform of, de- manded by Democratic party in 1888, 129; Re- publicans demand increase in rates of, 129; Republican policy regarding, 131, 132; McKinley Bill passed, 134; rates under, 134; reduction , in yield of, 135; relations of, to silver legislation of 1890, 141, 142, 148, 151; bills to reduce, pass House of Representatives in 1892, 175; defeated in Senate, 175; contest over, in 1892 elections, 177; action on, by Congress of 1894, neces- sary, 222; mistakes in plans for, by Congress, 224, 225; erroneous estimates on, 225-227; conflict over, between House and Senate, 225, 226; President Cleve- land refuses to sign bill, 337; failure of, to produce sufficient revenue, 227; failure of Republicans in 1896 to make campaign is- sue of, 263; Dingley act raises duties in 1897, 269; failure to remove deficit, 269; its relation to subse- quent trade recovery, 270 Tariff commission of 1882, its protectionist member- ship, 92; recommends lower duties, 93 ; its plan altered by Congress, 93 Teller, Henry M., U. S. Sena- tor, declares that free- coinage bill could not have passed in 1890, 148 Tilden, Samuel J., claim that he was elected President in 1876, 34; his plurality on the popular vote, 71 Trade, American, expansion after the Civil War, 2, 3; depression in 1877, 34; un- favorable outlook for, at resumption, 51; great re- covery in, 57; its good condition during 1880, 60, 83; reaction in, after 1881, 84, 85, 96,97; depression in, during 1884, 98; renewed activity of , after 1885, 114, 115; in 1890, 154, 158; stagnation of, after panic of 1893, 201; its dis- couraging condition in 1896, 262; its brief re- covery after election, 267; returning depression, 268; revival in 1898, 272; great prosperity of 1901 in, 285; reaction of 1900 in, 290; depression in 1903, 308; extreme depression in, after 1907 panic, 377, 378; wages and prices reduced, 378, 379; illusions of 1908 m, 378 Trade, foreign, see Export trade and Import trade Transvaal, gold discoveries in, 243 ; large gold produc- tion in, after 1897, 260; declares war on England, 280; shuts off gold exports, 281; shrinkage in gold production during war, 313; resumption in 1905 of full output, 313 Treasury, U. S., granted power to contract the legal tenders, 9, n; accumula- tion of gold in, opposed by business men, 14; con- traction powers of, re- voked, 15, 16; reissues retired legal tenders in 1873, 20; powers under Resumption Act, 23-26; its relation to the banks in 1 8 7 8, 3 3 ; its gold fund at re- sumption, 45; its resump- tion arrangements with the banks, 45, 46; admitted to New York Clearing-house, 47; outlook for its reserve fund, 48 ; protective powers denied it, 49-51 ; gold with- drawn from, 53 ; rise in its gold reserve, 59; pays out gold on ordinary disburse- ments, 59; large silver payments made to, 76; in- crease of silver surplus of, 77; its relations with the New York Clearing-house regarding silver, 76-78, 80; circulates its silver cur- rency, 81-83; silver again accumulates in, 96, 97; begins to pay silver at New York Clearing-house, 103; borrows gold from New York banks in 1885, 104, 105; substitutes silver certificates for small legal tenders in the circulation, 105, 1 06; for national bank notes, 1 10, 1 1 1 ; buys bonds with its surplus, 1 1 1 ; circu- lates the silver certificates, in, 112; trade conditions of 1888 favorable to ; 123; enormous increase in its surplus, 123; deposits sur- plus with the banks, 124; its wholesale redemption of bonds at a premium, 125, 126; its experience in 1837, 128; effects of laws of 1890 on, 137; rapid fall in its surplus, 137; abandons pur- chases for the sinking- fund, 137; monthly de- ficits of, begin in 1891, 138; effect of Silver- Pur- chase Act on, 151; throws enormous sums of money into circulation, 155, 159; heavy gold disbursements by, in 1890 and 1891, 162; fall in its gold reserve, 163 ; receives gold in exchange for legal tenders, 164; its precarious situation in 1892, 1 66; its gold reserve, how established and pre- scribed 1 66, 167; gold pay- ments to, in revenue, de- crease, 1 68, 169; ceases to use gold in its own dis- bursements, 170; legal ten- ders presented to, for re- demption, 172, 173; dan- gerous condition of, in 1893, 182, 1 84, -prepares for a bond-issue, 183; borrows gold from New York banks, 183-185; suspends issue of gold certificates, 185; ru- mors as to its redemption plans, 185, 1 86; effect of panic on, 203 ; large gold receipts by, 203 ; pays out its gold reserve in ordinary disbursements, 204; its Index Treasury Continued, right to. do so questioned, 205 ; its general surplus impaired, 206, 207, 209; Carlisle's plans of relief for, 208, 209; bond-issues for, during 1894,210-214; humiliating position of, 214; gold receipts by, for bonds, 215; gold with- drawn from, by bond- subscribers, 215; move- ment of its reserve, 216; temporary increase in re- venues of, in 1894, 230; deficit begins again, 230; gold borrowed for, from banks, 231; second loan negotiated, 23 1 ; collapse of its gold reserve, 232; syndicate of 1895 under- takes to protect, 236, 237; gold reserve of, restored, 241; renewed outflow of gold from, 248; final loan of, 250; increase of gold in, 253; provisions of 1900 to protect gold reserve of, 254; rapid increase of gold reserve in 1897 an d 1898, 272; assists New York banks to procure foreign gold, 357; deposits public funds with banks in panic of 1907, 371; abortive at- tempt to relieve panic through bond issues, 376 Treasury, Secretaries of, Hugh McCulloch (1865- 69, 1884-85), 10, 103; John Sherman (1877-81), 2 7 ; Charles J . Folger ( 1 88 1 - | 82), 88; Daniel Manning (1885-87), no; Charles S. Fairchild (1887-89), 123; William Windom (1889- 91), 140; Charles Foster (1891-93), 169; John G. Carlisle (1893-97), 185; Leslie M. Shaw (1902- i97), 357; George B. Cortelyou (1907-1909), 371 Trust companies, their use by life insurance com- panies in 1903 to evade the law, 338; enormous insurance deposits in, 338; run of depositors on, in 1907, 366; nature of their business, 367; reasons for imperfect law regarding, 367; their entry into gen* eral deposit banking, 367, 368; great increase in num- ber and resources, after 1899, 368; their inadequate reserves, 368; New York Clearing-house insists on larger cash holdings by, 369; trust companies re- fuse to yield, 369; danger- ous position created by rupture with banks, 369; unprecedented duration of run of 1907 on, 370, 371, 372; failures of, 372; how run of depositors was checked, 372 Trusts, industrial, their sud- den appearance in the United States, 118; magni- tude of their operations, 118; denounced in the political platforms, 118; influenced by trade com- petition, 118, 1 19; -move- ment of incorporation re- sumed, 286; methods of organizing.in booms of 1899 and 1901, 286; smaller combinations a m a 1 g a - mated into larger combina- tions, 287 ; enormous in- corporations during 1899, 288; the billion-dollar steel amalgamation , 297; the s h i p p ing combination, 302; financial troubles of 417 T rusts Continued 1903 in, 309; influence of, on prices in 1906, 333; economic apology for, 333 " Underwritings, " see Syn- dicates. "Undigested securities," 308 Union Pacific Railway, Gould's influence on, 63; dishonest amalgamation of, with the Kansas Pacific, 63, 64; reorganized in 1897, 277; refused parti- cipation in Burlington and Quincy purchase, 304; uses its credit to buy Northern Pacific stock, 305 ; its enor- mous purchases of other railway shares, 335, 356; how purchase-money was obtained, 356; dividend increased to 10 per cent., 357; violent speculation of 1906 in stock of, 357 United States Steel Corpora- tion, see Steel Trust. Valparaiso, speculation of 1905 in, 326; earthquake of 1906, 329 Vanderbilt, William H., his prediction of high prices in 1882, 86 "Venezuela message " of 1 89 5 , 2S 1 Vest, George G..U.S. Sena- tor, speech on Anti-Trust Bill of 1890, 344 Veto of Inflation Bill, by President Grant, 20; of 3^ per cent. Refunding Bill, by President Hayes, 32; of Bland Silver-Coinage Bill, by President Hayes, 41; of River and Harbor Bill, by President Arthur, 90; of Seigniorage Bill. 7 by President Cleveland, 230 Von Mauthner, manager Aus- trian bond syndicate of 1892., describes Austrian gold operations, 1 6 1 Voorhees, Daniel W., U. S. Senator, denounces foreign bond investors, 39; his indifference to Treasury's situation in 1894, 210; notified by Carlisle of bond- issue, 210 Wabash railway system, Jay Gould's influence on, 63 Wages, great rise of 1906 and 1907 in, 319 Wallace, W. A..U. S. Senator, opposes Hayes Administra- tion's policy, 43 War, Civil, in United States, 2; between United States and Spain, 279; between England and Transvaal Republic, 280; cost of, 282 ; between Russia and Japan, 320 Warner, A. J., Cleveland's letter to, on silver, 103 Weaver, James B., third- party candidate for Presi- dent in 1880 and 1892, 181 ; his vote in 1892, 181 Western Union Telegraph Company, Gould's opera- tions with, in 1880, 63 Westinghouse Electric Com- pany goes into bank- ruptcy m panic of 1907, 365 Wheat, its high price in 1867, 3 ; increase in European production of, 4; world's crops in 1875 and 1878, 5; decline in price of, ; failure of crop of 1879, in England, 54, 55; on the European continent, 55; 4i8 Index Wheat Continued large crop of, in U. S., 56; enormous exports of, from U. S. in 1879, 56; pro- fitable harvest of, in 1880, 59; wild speculation in, 60; deficient crop of, in 1 88 1 ,84; high price of, 84; large foreign pro- duction of, in 1882, 86; fall in price of, 86; world's heavy crop of, in 1884, 101 ; low prices for, 102; corner in, during 1888, 115; great depression in, during 1885, 117; large exports of, from India and Argentina, 122; world's short supply of, in 1889 and 1890, 156; failure of Argentine crop of, 157; failure of European crop of, in 1891, 163, 164; enor- mous American crop of, 163; large exports of, 164; rise in price of, during 1891, 165; crop of, underesti- mated by U. S. govern- ment, 165; world's enor- mous production of, in 1894, 221; extreme decline in price of , 2 2 2 ; speculation in, during 1895, 245; bad effect of speculation in, 246; large crop of, in 1897, 253; -doubted in 1904 whether the U. S. can re- main a large exporter, a6i ; its low price of 1896, 262, 264; failure of Indian crop, 265; sudden rise in price, 265; political effect, 266; failure of 1897 crops in Europe, 270; large Ameri- can crop and high prices, 271; heavy export of, in 1897, 271; the Leiter corner of 1898 in, 280; great world's crop in 1906, 3*4 White Star Line, bought by Shipping Trust in 1902, 302 Wilson Tariff Act, see Tariff. Windom, William, Secretary of U. S. Treasury, under Garfield, 140; under Harri- sion, 140; his limitations as a financier, 140; pro- EDSCS the ^ Silver- Purchase aw, 142; his motives, 141, 142 ; nature of his plan, 142, 143; his confused views on currency questions, 144- 145, 146; ."defends Silver- Purchase Law, 154 Wisconsin, its Congressmen vote solidly for Bland Sil- ver Bill, 40; carried by Republicans in 1880 and 1881, 90 Witte, Sergius, Russian fi- nance minister in 1904, predicts financial collapse of Japan, 32 1 A Selection from the Catalogue of G. F. PUTNAM'S SONS application Business Competition and the Law Some Everyday Trade Conditions Affected by the Anti-Trust Law By Gilbert H. Montague Since the organization of the Federal Trade Commission, Mr. Montague has appeared as counsel for various interests in the Commission's investigations into the gasoline industry, the petroleum industry, the newsprint industry, Amer- ican export trade, and industrial reor- ganizations and consolidations. He has acted as counsel in cases of unfair com- petition which the Commission has prosecuted. The more popular aspects of this branch and its bearing upon everyday competition Mr. Montague discusses in his book. G. P. Putnam's Sons New York London By Arthur Twining Hadley (Proident of Yak Univenity) Economics An Account of the Relations between Private Property and Public Welfare. 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