HG; 
 
 437% 
 
 IRLF 
 
 37 225 
 
GIFT OF 
 
GIFT 
 NOV 23 1914 
 
 The War and Wall Street 
 
 An Address 
 
 Delivered before the City Club 
 
 At Rochester, N. Y., Nov. 14, 1914 
 
 By W. C. Van Antwerp 
 
 
 
THE WAR AND WALL STREET. 
 
 AN ADDRESS BY W. C. VAN ANTWERP BEFORE 
 
 THE CITY CivUB 0$ ROCHESTER, N. Y., NO- 
 VEMBER 14, 1914. 
 
 MR. CHAIRMAN AND GENTLEMEN : 
 
 This audience still retains, and will always re- 
 tain a vivid impression of the opening weeks of 
 the devastating conflict in Europe which began 
 in the last days of July. The world has never 
 experienced such a shock, nor has it ever been 
 so pitifully stricken. 
 
 Although a general war in Europe had been 
 discussed again and again since the Peace of 
 Paris forty-three years ago, with recurrent ap- 
 prehensions over Afghanistan in 1884, Constan- 
 tinople in 1885, Fashoda in 1898, Morocco in 
 1911 and the Balkans in 1913, no such crisis 
 as that which we are now witnessing was seriously 
 contemplated. It was talked of as men talk of 
 the infinity of space; it surpassed imagination. 
 When it suddenly burst upon us we were unable 
 to grasp its staggering significance. Like bewil- 
 dered spectators of a monstrous confusion, we 
 were but dimly aware that a new and incompre- 
 hensible tragedy was shaking the world to its 
 base. 
 
 When the blow fell, no portion of the globe 
 outside the actual zone of war felt it more acutely 
 than Wall Street, and it is of Wall Street's part 
 
in the tragedy that I am here to speak. Let us 
 therefore select from the riot of daily occur- 
 rences the significant incidents that most directly 
 affected us through Wall Street's various chan- 
 nels, and arrange these occurrences in their re- 
 lation to each other. In this way we shall become 
 intelligently conscious as to what has happened, 
 what the premonitory symptoms were, how they 
 were received, what they have taught us, and 
 what lies ahead. Perhaps we shall learn, too, 
 how well or how ill those entrusted with large re- 
 sponsibilities in the Nation's financial center have 
 performed their tasks. 
 
 Looking back over this short but frantic inter- 
 val we find that the world's great Stock Ex- 
 changes first gave warning of the coming storm. 
 These sensitive barometers first felt and re- 
 flected the portentous significance of military 
 armament and the gradual piling up of gold in 
 the world's financial centers; $100,000,000 added 
 to the reserves of the Reichsbank, $150,000,000 
 to the Bank of Russia, $170,000,000 to the Bank 
 of France, while the price of securities all over 
 the world paused, and began to fall. This was the 
 situation during the year before the storm burst. 
 
 Historians who are to write of this epoch may 
 look upon the murder of the Austrian Archduke 
 Francis Ferdinand June 28, 1914, as the spark 
 which exploded the magazine, but the Stock Ex- 
 changes and Bourses which in a charged and 
 sullen atmosphere take their bearings by dead- 
 reckoning, had already warned us that the long- 
 smouldering jealousies, race hatreds, and distrust 
 
among nations which for many mad years had 
 found expression in the armament mania, were 
 driving Europe toward the abyss. If the inci- 
 dent at Sarajevo had not occurred, something 
 else w r ould have served the purpose. Preparation 
 for war had reached the breaking point ; it could 
 not go on and it could not stop. Peace had be- 
 come a luxury too expensive to be borne. Bank- 
 ruptcy or war was inevitable. 
 
 Through July events moved quickly. Those 
 who watched in Wall Street saw Consols easing 
 off and all international markets turning heavy. 
 Lombard Street discounts rose. "There is an 
 uncomfortable feeling prevailing here/' was the 
 message cabled to New York by a very conserva- 
 tive observer in London on July 2ist, but precisely 
 why or wherefore no man knew. Two days later, 
 July 23rd, matters grew worse. In New York 
 sterling exchange moved upward with great ra- 
 pidity; Paris bid almost frantically for gold; all 
 Europe sold heavily in the security markets; 
 British and French Government bonds fell por- 
 tentously. There were vague rumors of a censor- 
 ship of dispatches from Vienna ; an unnoticed but 
 very significant news dispatch recorded the fact 
 that Servian Government bonds had fallen four 
 per cent, in a day. Yet with all these portents of 
 evil, which clearly implied diplomatic interchanges 
 of serious purport, the business world was in- 
 credulous and unready. Not one man in a million 
 suspected what was coming; even the wisest 
 were caught off their guard; but the Stock Ex- 
 change barometer told the story, with a dumb 
 
precision that neither thinks nor judges, but 
 merely perceives. The action of these delicate, 
 highly sensitized mechanisms in the closing days 
 of July reminds one of Kant's observation on the 
 senses: "Our senses do not deceive us, not be- 
 cause they always judge correctly, but because 
 they do not judge at all." 
 
 The Statist of London said on July 25th, two 
 days after Austria's ultimatum to Servia and but 
 three days before Austria's declaration of war, 
 "We do not think that there is any reason for 
 exaggerated fears ;" and, again, "We do not seri- 
 ously believe that there is danger;" and, again, 
 "We feel persuaded that the Great Powers are, 
 without exception, intent upon maintaining peace," 
 and that "the whole influence of Europe will be 
 used to prevent any unwise action." On the same 
 day The Economist, of London, similarly incredu- 
 lous, asked "Where would the money come from 
 with which to carry on a war ?" Two days later, 
 July 27th, with all the Continental stock markets 
 suffering a devastating panic, a cable dispatch 
 from Lombard Street to New York, written by 
 an authority famous for his accuracy in such mat- 
 ters, said "The best financial opinions here be- 
 lieve, or rather hope, that the European scare 
 has been overdone." The European banks, even 
 on that grim day, made no advance in their offi- 
 cial discount rates, a step which they would have 
 been quick to take had they looked upon war as 
 imminent. There could be no more striking evi- 
 dence than this of Europe's unreadiness, and 
 especially of that of London and the Bank of 
 
England, where, after making allowance for the 
 necessity for calm counsels, the Bank must in- 
 fallibly have taken cognizance of the impending 
 disaster had its Governors, or the Government of 
 the Empire, but dimly foreseen it. Yet on that 
 day $12,000,000 in gold went out from New York 
 to London at rates which expressed the fear of 
 shippers and insurers that a hostile fleet might 
 intercept it on the ocean, while prices of securi- 
 ties again crashed all over the world, and Ameri- 
 can wheat rose seven cents a bushel. On the 
 next day, July 28th, Austria declared war on 
 Servia. Hostilities began at once; from that 
 time forward titanic forces of death and destruc- 
 tion were unloosed. 
 
 In ten days following Austria's declaratioa of 
 war $45,000,000 of American gold went out. All 
 Europe demanded, instantly, all its credit bal- 
 ances, while simultaneously ceasing to pay its own 
 debts through a resort to the moratorium. New 
 York thus became the only market for gold in 
 the world, and the lack of protection by concen- 
 tration which makes our store an easy prey to 
 other nations in times of peace, became a source 
 of peril when to that difficulty was added the 
 emergency of war. 
 
 Another difficulty even more grave confronted 
 our bankers in this crisis, one that has not yet 
 been solved and one that will not be solved in 
 this generation. I refer to that inherent weak- 
 ness in the financial position of the United States 
 with reference to other nations as represented by 
 our stupendous debt to Europe. Although we 
 
 5 
 
have normally an apparent credit balance in trade 
 of over $500,000,000 annually, we have in fact 
 other annual international debts of at least twice 
 that amount, so that our boasted trade balance 
 not only is wiped out, but a balance accumulates 
 against us which might compel us to export at 
 least $500,000,000 in gold to pay our debts each 
 year. This debt grows out of items which are 
 not included in the trade balances. I was in- 
 formed recently by Sir George Paish, who is now 
 visiting this country in his capacity as assistant 
 to the Chancellor of the Exchequer, and who is a 
 recognized authority on large matters of inter- 
 national economics, that the net debt of the 
 United States to Europe amounts to about $600,- 
 000,000 a year. Of this staggering total $300,- 
 000,000 arises from interest and dividends on 
 American securities, $200,000,000 from the heavy 
 expenditures of our tourists, and the balance 
 from imports, freights paid to foreign vessels, 
 premiums paid for foreign fire and marine insur- 
 ance, incomes paid to the estates of our expatri- 
 ated American men and women, and many similar 
 items. Thus the tables are entirely turned against 
 us, and instead of an annual trade balance of 
 $500,000,000, we have an annual net debt of 
 $600,000,000. 
 
 It is well understood that Sir George Paish 
 came over here to collect or to arrange for the 
 collection of a part of this debt. We had always 
 known that we owed it, but Europe had never 
 exercised its power to collect it, finding it more 
 profitable to buy our good securities than to with- 
 
 6 
 
draw our gold. Like spendthrifts, we as a 
 nation had thus continued to pile up our obliga- 
 tions with careless indifference to consequences. 
 When, therefore, Sir George had explained that 
 Europe could no longer buy our securities and 
 that a drain upon our gold reserves was inev- 
 itable, a gentleman who had listened to him 
 stated the case exactly when he said, "The 
 sheriff, with a writ, is on the door-step." 
 
 Confronted with the difficulty of meeting an 
 immediate and inevitable drain of gold the 
 anxieties of Wall Street bankers may be bet- 
 ter imagined than described. All other dif- 
 ficulties, for the moment, became relatively 
 insignificant. At the very outset of war 
 sight exchange on London, normally $4.86 and 
 almost never higher than $4.89, rose to 
 $5.00, then to $6.00, and finally to $7.00, a 
 rate never before witnessed. That persons 
 could be found, hat in hand, begging for the 
 privilege of paying $7.00 for $4.86 shows how 
 completely our machinery of exchange had 
 broken down. We were not only heavily in debt, 
 but the normal vehicles of commerce were 
 stricken with a palsy and insurance on gold in 
 transit was almost unobtainable. With all the 
 energy, all the money, all the credit of the five 
 richest nations in Europe, numbering over three 
 hundred millions of people, suddenly devoted not 
 to production, but to destruction, not to saving, 
 but to wasting, we alone among the nations be- 
 gan to pay as best we could, and paid in gold, 
 while nobody paid us. The wonder is not that 
 
 7 
 
we had difficulty in paying, but that we paid at 
 all. And yet since the war began we have paid 
 or arranged to pay $180,000,000, and in the cal- 
 endar year to date more than $300,000,000 a 
 store of gold exceeding the entire holdings of the 
 Bank of England. No other nation in the world 
 would have done it ; no other could have done it. 
 
 For energy displayed and real service in the 
 cause of safety and relief in the face of por- 
 tentous difficulties, our bankers in this emergency 
 achieved their greatest success. Yet this was 
 but one of their troubles. Without precedents 
 to guide them, with the new Bank Act not 
 yet in practical operation, they saw ordinary 
 standards of value disappear in loans aggre- 
 gating $2,000,000,000; they were confronted 
 with widely fluctuating prices of raw materials, 
 famine in many lines of manufacturing essen- 
 tials such as wool, dye-stuffs and ferro man- 
 ganese; an utter breakdown in the movement of 
 cotton; cancellations of enormous amounts of 
 projected extensions and shutting down of 
 factories. 
 
 Across the water they saw the Bank of Eng- 
 land's official rate of discount advanced from 
 3% to 10%, with a run on that institution which 
 resulted in a loss in gold of $52,500,000 in the 
 first week of the disturbance. They saw the 
 Bank's ratio of reserve fall from the extraordi- 
 narily low figure of 40% to the paralyzing figure 
 of 14%%. They saw the British Treasury di- 
 rectly issuing its own paper money for the first 
 time in modern history, and a moratorium, never 
 
 8 
 
resorted to in modern times. They realized, in a 
 word, that a world given over to destruction was 
 living on expedients, and that the British Empire 
 had come as near as it will ever come to putting 
 up the shutters. In a week Europe's prosperity 
 was turned into ruin, its opulence into insolvency. 
 
 At any time of crisis, our bankers labor under 
 handicaps to which bankers abroad are not sub- 
 jected. Other countries are enabled by the 
 agency of their centralized banking systems to 
 sustain business and supply credit under all cir- 
 cumstances. They have a giant's strength and 
 they use it like a giant, knowing that the country 
 and the government stand firmly behind them. 
 Thus the British ministry sustained the shock 
 to credit in this emergency by pledging the credit 
 of the government behind each factor in the trade 
 system, its guarantee of premoratorium bills 
 alone amounting to $500,000,000. Postmora- 
 torium bills have also been freely guaranteed, 
 and arrangements have been made by which the 
 government and the banks will assume a part 
 of the risk upon Stock Exchange loans. Ger- 
 many, in a different way, but none the less 
 effectively, has opened credit offices throughout 
 the Empire, and total authorizations on this 
 account approximate $375,000,000. 
 
 In the United States we are quite differently 
 situated. In a crisis there is no centralization of 
 power, no organization of resources. Each bank 
 must, in a large sense, stand on its own feet. 
 Knowing that his individual action can have but 
 trifling effect on a country-wide crisis, the aver- 
 
age American banker feels, and with good reason, 
 that the best he can do is to take care of his own 
 institution. Industrially as well as financially 
 there is no cohesion. 
 
 Notwithstanding these handicaps our bankers 
 went bravely ahead in the effort to safeguard 
 public confidence, private credit, and American 
 commerce. That the Government at Washing- 
 ton contributed handsomely to these efforts goes 
 without saying. Co-operation between bankers 
 and Government found expression in the creation 
 of an emergency currency under the Aldrich- 
 Vreeland Act, while special legislation by Con- 
 gress established as a basis for currency ware- 
 house receipts for cotton, tobacco and other com- 
 modities. The Treasury created a Bureau of 
 War Risk Insurance, and the banks themselves 
 issued Clearing House certificates which enabled 
 them to meet immediate needs. The telephone 
 and telegraph through many anxious days and 
 nights were used to bring about some measure 
 of concerted action by bankers in all the large 
 cities. 
 
 Next to the credit of the Government comes 
 that of New York City. The war had scarce 
 begun when maturing city warrants in London 
 and Paris necessitated the provision of a gold 
 loan of $100,000,000 to the City of New York, 
 $82,000,000 of which was used to meet the City's 
 foreign borrowings. The best thought of our 
 bankers immediately concentrated on this prob- 
 lem, which at the most critical stage of our dif- 
 ficulties was brought to a successful conclusion. 
 
 10 
 
Every bank and trust company in the city, with 
 one single exception, came forward with its 
 share of the subscription. It was a great achieve- 
 ment. That difficulty met, our bankers next 
 turned their attention to the creation of a pool 
 of $100,000,000 to meet pressing mercantile 
 obligations abroad, and to providing New York's 
 share of the $135,000,000 pool to relieve the 
 cotton situation. 
 
 That there were heavy drains on bank reserves 
 goes without saying, and yet there was the obvi- 
 ous necessity of diminishing those reserves still 
 further by advancing them freely to needy bor- 
 rowers. The first instinct of every one at a time 
 like this is to hoard, but no man can say that any 
 bank in New York did so, nor did aught else to 
 strengthen itself at the expense of the com- 
 munity. Bankers are dealers in credit; restrict- 
 ing it through hoarding means discredit. The 
 fact that reserves of the Clearing House banks 
 in New York City were $50,000,000 below their 
 legal requirements throughout the early stages 
 of the war, shows that our bankers, while recog- 
 nizing the perils involved, were keenly conscious 
 of the fact that their ultimate treasure is not 
 kept for display, but must be employed when 
 necessity demands. I have yet to hear on 
 this score of any just complaint from worthy 
 borrowers. 
 
 It is an axiom in the scientific management of 
 gold reserves that they are to be protected, not 
 by forbidding the payment of debts already in- 
 curred, but by the prevention of new ones. If 
 
 ii 
 
credit has its advantages, it has also at times 
 its disadvantages, and to minimize these disad- 
 vantages by preventing fresh mercantile liabili- 
 ties at a time of alarm, calls for great delicacy, 
 judgment and tact, especially when to a formid- 
 able foreign drain is added a domestic drain. At 
 such a time everybody wants to borrow at once, 
 and the demand comes just when bankers like it 
 least. If the demand is satisfied reserves are 
 depleted; if it is not satisfied there is alarm and 
 panic. In the emergency through which we have 
 just passed I need hardly assure you that bold 
 and courageous banking has been seen at its 
 best in our financial center. There has been un- 
 selfish patriotism, a quick grasp of expedients, 
 and a firm front in the face of danger. With 
 bankruptcy threatening the country's industries, 
 with no sure and certain ground upon which to 
 stand, with conditions infinitely worse than any 
 heretofore encountered, there was no panic. We 
 had, to be sure, closed some of the avenues 
 through which panics find expression. In those 
 that remained open there was no sign of alarm, 
 because with one accord the Government, the 
 newspapers, and the private citizen for the first 
 time in our history showed a firm confidence in 
 the men at the helm. The narrow little Wall 
 Street of fiction, the Wall Street of the dema- 
 gogue, no longer exists. In its place is the real 
 Wall Street, a broad highway from ocean to 
 ocean, meeting the needs and serving the pur- 
 poses of a continent. 
 
 12 
 
THE STOCK EXCHANGE. 
 
 One of the very first things that happened 
 when the war burst was the paralysis of the 
 world's Stock Exchanges. The Bourses at To- 
 ronto and Madrid closed July 28th; those at 
 Vienna, Budapest, Brussels, Antwerp, Berlin and 
 Rome on July 29th; St. Petersburg, Montreal 
 and all South American centers July 3Oth. The 
 Paris Bourse, gorged with huge masses of un- 
 salable Balkan loans and Russian industrials in 
 addition to their own new Government loan, was 
 so deluged by sales that a market no longer 
 existed. Accordingly the Coulisse and later the 
 Bourse itself was closed, thus throwing all the 
 world's sales of securities on the Exchanges of 
 London and New York. For the first time in its 
 history the London Exchange, unable to with- 
 stand such a torrent of liquidation, closed its 
 doors at 9:00 A. M., July 3ist, after the announce- 
 ment of several failures. The Stock Exchange 
 in New York alone remained open. 
 
 When the Governors of our great Exchange 
 gathered together on that eventful morning they 
 were burdened with responsibilities of the ut- 
 most gravity. While aware that it would be a 
 splendid achievement to continue business alone 
 among the great security markets of the world, 
 they realized none the less that the over-night 
 accumulation of selling orders from every quar- 
 ter of the world would impose upon brokers, in- 
 vestors, speculators and bankers a strain that 
 
 13 
 
could not be borne. Everybody wanted to sell 
 in New York because there was no other place to 
 sell. Over-night orders revealed a frantic state 
 of mind, and this was especially true of cables. 
 There was no price limit. "Sell at the market/' 
 was the word, and utter demoralization the pros- 
 pect. Europe alone owns $6,000,000,000 of our 
 securities. Even if one-fifth or one-tenth of 
 these holdings were unloaded on New York with 
 such suddenness, we could not have absorbed 
 them, nor could we have found a way to pay for 
 them in the circumstances that then prevailed. 
 Literally standing to be shot at, with the cer- 
 tainty of a panic unparalleled in its consequences 
 to American business and industry, the Gov- 
 ernors decided, at fifteen minutes before ten, 
 to close the Exchange. Their action calls for 
 nothing but praise; its importance to the whole 
 community is beyond discussion. 
 
 The Stock Exchange is not a fair-weather in- 
 stitution. It has survived many panics and it 
 has grown in strength through all our American 
 vicissitudes. Its Governors decided to close, not 
 to protect its members, but to protect the Ameri- 
 can public from a frightful assault on collateral 
 values and a destructive drain on all forms of 
 credit. No group of business men in America 
 suffered more from this action than the members 
 of the exchange; their business came to an end 
 while their expenses, always heavy, continued, 
 all this following a long period of dullness and di- 
 minished profits in the security markets. Yet 
 
they did their duty as good citizens, regardless of 
 the sacrifices involved. 
 
 Just as familiarity breeds contempt and indif- 
 ference, so it sometimes happens that facilities 
 and conveniences with which we are most fa- 
 miliar in our great avenues of trade are not ap- 
 preciated until they are interrupted or lost. Those 
 who without study of the Stock Exchange have 
 come to speak of it as a gambling arena cannot 
 fail to have been impressed with the fact that 
 something more than a gambling place disap- 
 peared when its doors were closed. What actual- 
 ly disappeared was the standard American index 
 of trade and credit ; what was closed was a great 
 market place whose primary function had been 
 the distribution of American securities, which 
 make possible American enterprise. We found 
 it inconvenient, to be sure, to have our securities 
 poured back upon us by foreigners, but that fact 
 must not obscure the greater consideration that 
 it was through these same Stock Exchange facili- 
 ties that foreign capital was enabled to invest in 
 those securities. 
 
 Persons who had never before understood the 
 primary importance of the Stock Exchange were 
 quick to realize that a frozen credit market had 
 resulted from its closing. Banks, courts, and 
 legislatures had long accustomed themselves to a 
 free and unrestricted market for securities as the 
 one test of values. When the Stock Exchange 
 closed its doors there was no longer a guide upon 
 which to base values that had heretofore appeared 
 
in loans secured by collateral, and this introduced 
 into our perplexities another difficulty. Here 
 again the action of the Wall Street banks calls 
 for the highest praise. With the market closed 
 for an indefinite period these banks were forced 
 to carry an immense burden of loans on Stock 
 Exchange collateral ordinarily fluid beyond all 
 other forms of collateral, but now frozen solid. 
 All their secondary reserves became, as it were, 
 unmarketable investments, and "intrinsic val- 
 ues" whatever that may mean, came by force 
 of circumstances to take the place of market val- 
 ues. It was a state of affairs quite beyond prece- 
 dent, but the banks faced it as they faced all their 
 other difficulties. So far as I am aware, not a 
 single loan was pressed for payment, and where 
 collateral seemed to demand re-enforcement, the 
 request was couched in terms of suggestion, quite 
 without peremptory demand, while rates of inter- 
 est charged on these loans were gradually re- 
 duced. 
 
 Meantime, with the same courage and prompt- 
 ness which led to the closing of the Exchange, its 
 members have so strengthened their bank loans 
 and so reduced them that no difficulty, I fancy, 
 need be apprehended on that score. They have 
 voluntarily accomplished the liquidation of more 
 than $100,000,000 of unfilled contracts without 
 adding to their borrowings at the banks, and 
 they have cleared the situation of one of its great- 
 est dangers by maintaining, as the official mini- 
 mum, the level of prices recorded on their last day 
 of business. They have kept in close working 
 
 16 
 
contact at all times with the banks, the authori- 
 ties at Washington, and the Stock Exchange in 
 London all this with a view to aiding the restor- 
 ation of confidence and credit. Through the 
 various Committees organized for the purpose 
 more than $100,000,000 bonds have changed 
 hands, and more than 250,000 shares of stock. 
 Indeed it might be said that the Exchange has 
 not actually closed its doors at any time. At least 
 it has provided a means for necessitous selling to 
 some extent, and for investment purchases at a 
 fixed level of prices. 
 
 Because of the progress that has been made, 
 a natural demand has arisen that the Exchange 
 reopen. Now in so far as the Stock Ex- 
 change and its members are concerned; there is 
 no reason why business should not be resumed. 
 They have cleared up their balances and strength- 
 ened their loans to an extent which has put them 
 in readiness. But the same reason that led them 
 to close has thus far impelled them to remain 
 closed, namely, the greatest good for the greatest 
 number. 
 
 The purpose of the Stock Exchange is to facili- 
 tate the exchange of securities and thereby assist 
 in the creation of new enterprises. At present 
 there are no new enterprises, and there can be 
 none until credit facilities are restored. To re- 
 open the Stock Exchange until tolerably normal 
 conditions prevail in the credit market would 
 force necessitous selling upon investors. This 
 would result in abnormal prices which are un- 
 economic, unethical and unjust as a basis of set- 
 
 17 
 
tlement. It was to prevent the enforcement of 
 contracts upon such a basis that moratoria were 
 established throughout the world. The New 
 York Stock Exchange is a part, but only a part, 
 of the financial machine. One part of a machine 
 cannot maintain its functions when all other parts 
 are stilled. Any such attempt would mean that 
 large numbers of innocent investors, wholly un- 
 related to the war, would suffer hardships. What 
 has been of vastly greater importance in these 
 opening months of the war has been the resump- 
 tion of an international exchange not of securi- 
 ties, but of commodities which are needed to 
 maintain human life. This also is a matter of 
 credit, and until such ample credit facilities are 
 restored as will insure a free market for food- 
 stuffs and supplies, the Stock Exchange should 
 not, by a resumption of its activities, hamper or 
 restrict that movement. These are reasons why 
 the Stock Exchange has not reopened. 
 
 Another reason lies in the fact that Europe is 
 a large holder of American securities, and to re- 
 open our Stock Exchange prematurely, when all 
 the others are closed, would merely invite a re- 
 sumption of that concentrated pressure on New 
 York which we brought to an end by closing our 
 doors. Sir George Paish has stated recently that 
 he does not believe London will be a heavy seller 
 of our securities. In making that statement he 
 wished, no doubt, to reassure us, and I hope he 
 has stated the case correctly. France will cer- 
 tainly sell heavily. In any case Europe will not 
 be paid for those securities in gold, and measures 
 
 18 
 
looking to other forms of payment are now un- 
 der way. It must be borne in mind that where 
 payments are due abroad, we must pay them 
 promptly, but where payment is due on this 
 side, as in the case of securities sold here by for- 
 eigners, the creditor receives his money here, 
 and the question of when and how to convert it 
 into foreign funds, becomes, in a crisis like this, 
 a matter of arrangement between the parties in 
 interest. 
 
 Meantime improvement continues in many 
 directions. There are record-breaking exports 
 of foodstuffs and of various supplies of manu- 
 factured articles; cotton is slowly beginning to 
 find a market, money is accumulating and the 
 resources of the banks will be greatly augmented 
 by the operation of the new Bank Act. There is 
 a marked reduction in loans and a reviving de- 
 mand for old and seasoned investments. In the 
 long run imports and exports will bring about 
 offsets, and trade will go on as before. The 
 British moratorium has already ended; that of 
 France has been modified, and the moratoria 
 of other countries are expiring each week. 
 Affairs in this country are moving in an orderly 
 way toward recovery. The banks in the central 
 cities have restored their legal reserves, and fears 
 of a financial crisis have disappeared. But one 
 serious difficulty remains, having a vital bearing 
 on the entire investment situation. I refer to the 
 plight of the railways, which to a large extent 
 affects the banks, the Stock Exchange, and the 
 entire credit position. 
 
 19 
 
THE RAILWAY SITUATION. 
 
 We are agreed, I am sure, that for the sake 
 of the general welfare of the United States, it 
 is necessary that railway revenues must be at 
 all times sufficient to meet expenses of operation, 
 including liberal wages, adequate repairs, re- 
 newals and taxes, and that there must be a fair 
 return to investors, with a safeguard in the shape 
 of marginal surplus. We may have our own 
 opinions as to the selfishness of railway employes, 
 the rapacity of railway creditors, and the mis- 
 takes of railway managers, but we are agreed 
 that the railways must earn a living wage. That 
 much conceded, let us see whether our American 
 railway properties, as measured by those of other 
 nations, are themselves of such high standard as 
 to merit this fair compensation for services ren- 
 dered. 
 
 The first thing we discover is that it costs seven 
 mills, on the average, to haul a ton of freight a 
 mile in America, whereas in England it costs 2.33 
 cents, in France 1.41 cents, and in Germany 1.42 
 cents. Next we find that the average daily com- 
 pensation paid to railway employes in the United 
 States is $2.23, while in England it is $1.35, in 
 France 88 cents, and in Germany 81 cents. We 
 find that in the United States, 1,071,086 tons are 
 hauled annually per mile of line, while in France 
 the total is but 496,939, and in Germany 827,- 
 400; and that while the average stock and bond 
 debt per mile of railways in the United States 
 
 20 
 
is $60,000, that of England is $265,000, of 
 France $137,000, and of Germany $109,000. 
 Finally we learn that whereas in 1902 the rail- 
 ways of this country paid $54,465,000 in taxes, 
 this amount representing 8.35 per cent, of their 
 income, in 1914 they paid $142,150,000, repre- 
 senting 16.69 P er cent - of the* 1 " income, this being 
 a higher tax levy than that paid by any other 
 form of private property in America devoted to 
 a public use. 
 
 From these considerations we are enabled to 
 state, first, that our railway service costs less 
 than that of any other country; second, that our 
 railways excel all others in the compensation paid 
 employes; third, that American railways do more 
 work per mile of line than any others; fourth, 
 that they are capitalized on a far lower level than 
 any others; and fifth, that they pay more than 
 a fair share in taxes. If therefore any form of 
 private property is entitled to earn a fair return 
 on its invested capital, our American railways 
 are preeminently in that class. It seems to me 
 we should be proud of them. 
 
 While our railroads do more work for less 
 money than any in the world, and while they are 
 better equipped for the economical handling of 
 long-distance freight in large bulk, they are far 
 behind the European standards as to double-track, 
 abolition of grade-crossings, and station facilities 
 for passengers and freight. These things cost 
 money; and even if no new construction takes 
 place, capital requirements for this development 
 work alone, year after year, will be enormous. 
 
 21 
 
Railroads in other countries have spent freely 
 in this direction, which explains the difference 
 between their capitalization and ours. In Amer- 
 ica the outstanding stock and debt of the rail- 
 ways, as we have seen, averages about $60,000 
 to the mile; in England it is $265,000. The only 
 way we can raise the money to do the necessary 
 work, and so bring our railroads up to the stan- 
 dards demanded, is by the sale of securities, just 
 as they have done in England and elsewhere. But 
 neither the rate of return actually received on 
 the par value of American railroad bonds and 
 stocks today, nor the security which can be 
 offered in future, will make it easy to raise this 
 needed capital. 
 
 These were the conclusions of the Hadley Com- 
 mission of 1911 by all odds the most intelligent 
 commission that has ever considered the railroad 
 problem. Today conditions have changed greatly 
 for the worse. The outstanding issues of Amer- 
 ican railway securities, about $20,000,000,000 in 
 all, issued before Government and State regula- 
 tion became the fashion, claim our first attention. 
 These securities were purchased in good faith 
 by investors at home and abroad ; scarcely a single 
 one of our people can escape a share of the burden 
 that must result if their value is to become per- 
 manently impaired. The depositor in a savings 
 bank will suffer, because the bank's investments 
 are bottomed on railway securities ; the holder of 
 an insurance policy will suffer for the same rea- 
 son; our colleges and universities, our hospitals 
 and charitable institutions, our trust funds, our 
 
 22 
 
endowments, and our army of 4,000,000 private 
 investors, each contributes a link to the chain of 
 universal distress which must result from the 
 plight of the railways. This is not because the 
 underlying first mortgages of the older systems 
 are in danger of default, but because the property 
 thus mortgaged must inevitably deteriorate from 
 year to year unless new money is constantly put 
 back into it. 
 
 It was the understanding, implied if not ex- 
 pressed when these investments were placed in 
 the hands of the public, that they would continue 
 on a paying basis, and that the properties behind 
 them would be maintained at a high state of 
 efficiency. It never occurred to purchasers or 
 sellers that the time would ever come in America 
 when necessary replacements would not be made, 
 or when necessary net revenues would be inter- 
 fered with. To the extent that these implied 
 promises have not been kept, holders of Amer- 
 ican railway securities have been betrayed. 
 
 Railways are no different from any other form 
 of property devoted to public purposes. The mill, 
 the factory, the steamship, and even the govern- 
 ment, has to face the problem of maintaining 
 net income sooner or later, but with this dif- 
 ference: governments may proceed with ex- 
 penditures of all kinds through taxation, and 
 privately owned industrial enterprises may raise 
 prices or retrench by reducing output; but the 
 railroads must continue to run on schedule time, 
 must maintain wage agreements, must go ahead 
 with the changes and improvements demanded 
 
 23 
 
by forty-eight States and the Federal Govern- 
 ment, and may not increase their rates although 
 pressed between the millstones of sluggish 
 revenue and diminished credit on the one side, 
 and political hostility and excessive regulation on 
 the other. The mill owner has a diversity of out- 
 put; if one proves unprofitable he may drop it 
 and turn to others ; but the railroad has only one 
 thing to sell that is, transportation. 
 
 In the rate case just argued at Washington it 
 was shown that the return on railway capital 
 employed today is 3.99% ; yet renewals of notes 
 of roads enjoying the high credit of the New 
 York Central and the Lake Shore today cost 7%. 
 The greater the fall in net income the higher the 
 rate of interest demanded by lenders of capital. 
 There is no escape from this double-barreled as- 
 sassination of railway credit. Investors and 
 speculators will not buy railway securities today 
 because they must take risks which never can be 
 accurately forecast at any time, and which are 
 now out of all proportion to the probable gain. 
 Can we wonder at their attitude? Is there any 
 investor in this room who will today put his money 
 into junior issues of railway bonds or new issues 
 of capital stock? If you were a banker would 
 you lend the money of your depositors to rail- 
 ways in America in face of their returns today? 
 No; and there will be no return of normal in- 
 vestment demand while present conditions 
 prevail. 
 
 What are these conditions? Stated briefly, 
 last year's gross earnings fell short of those of 
 
 24 
 
the preceding year by $79,479,672. This is bad 
 enough; but, notwithstanding the utmost efforts 
 at economy, expenses actually increased in the 
 year by $31,434,374, which, added to the loss 
 of $79,479,672 in gross, reduced the net by the 
 prodigious sum of $110,914,046. Nor is this all. 
 The earnings as I have given them do not in- 
 clude deduction of taxes. Taxes in the fiscal 
 year 1914 exceeded those of 1913 by over $13,- 
 000,000, making a total loss of more than $124,- 
 000,000 for the year ; and all this at a time when 
 large increases in net were imperatively needed. 
 
 I am giving you in rough outline a picture of 
 coming disaster. You yourselves can fill in the 
 background and the perspective. You can tell 
 as well as I, how much further traffic will be re- 
 duced by reason of a diminished purchasing 
 power at home and abroad, and to what extent 
 enhanced pressure is to fall upon the world's 
 depleted supply of capital growing out of the 
 war. You may judge for yourselves how impos- 
 sible it will be for the United States to buy back 
 from Europe even one-fifth or one-tenth of the 
 American railway securities now owned abroad, 
 which securities, wholly apart from the war itself, 
 have fallen to low estate in the estimation of 
 foreign investors. 
 
 Significant as these matters are in their 
 application to our railways, they are but details. 
 Overshadowing all else is the fact that $578,- 
 000,000 of American railway bonds are now 
 in default because of the inability of the com- 
 panies to earn the interest agreed upon ; and that 
 
 25 
 
the funded debt, notes, and bills payable matur- 
 ing during the calendar year 1915 by all com- 
 panies, amount to the staggering total of $817,- 
 465,970 none of which takes into account the 
 mass of new financing made necessary each year 
 by simple replacements and deterioration. Where 
 is this money to come from? It will not suffice 
 to say that the situation is one of difficulty; it is 
 one of the utmost gravity. 
 
 Railways are fixtures; we are so accustomed 
 to them that we have come to regard them as a 
 part of our life, like sunshine and rain. We ex- 
 pect at their hands regularity, promptness, care- 
 fulness and safety as to passengers and freight. 
 We look to them to suppress strikes, to build new 
 terminals, bridges and extensions, to abolish 
 grade crossings and to find a way to compass all 
 these ends without complaint. We depend upon 
 them so absolutely that we could not possibly get 
 on without them even for a brief time. Yet we 
 permit the efficiency of these 350,000 miles of im- 
 proved national highways to be impaired, and 
 the billions of invested capital depreciated, 
 through our failure to insist upon a maintenance 
 of that mainstay of the country's prosperity which 
 is represented by railway credit. Last year alone 
 42 of the 48 States introduced 1,495 separate 
 bills affecting railways, 99 per cent, punitive and 
 restrictive, and i per cent, constructive and help- 
 ful; while continuously since 1910 the Eastern 
 railways have petitioned the Interstate Commerce 
 Commission for a meagre increase in rates, with- 
 out success. 
 
 26 
 
Railway managers will no longer submit to 
 raids on their properties under the thin veneer of 
 State regulation. Henceforth they will fight 
 back. At last week's election in Missouri, a hot- 
 bed of anti-corporation sentiment, the railroads 
 boldly went before the people under the referen- 
 dum asking that the Full Crew Law of 1912 be 
 annulled. It took courage thus to beard the lion 
 in a State that has long reeked with anti-corpora- 
 tion influence, and nothing was more unlikely 
 than a victory. But the railroads won in a walk, 
 and they always will win if they fight in the open 
 for a worthy cause with clean hands. The Full 
 Crew Law thus defeated by an awakened public 
 conscience in Missouri, is also one of the orna- 
 ments of the statute books of our own State of 
 New York. It does not belong there and it 
 should be stricken off. It is not a Full Crew 
 Law ; it is an Extra Crew Law, neither more nor 
 less than a waste of capital designed to placate 
 the Labor Unions. The more labor receives from 
 the railroads the less it gives. The output in 
 transportation units that is, passenger miles and 
 ton miles, has actually decreased in ten years 
 despite continuous grants to labor. Labor's ma- 
 chinery and tools have been improved, there has 
 been constantly increasing managerial initiative, 
 wages have been steadily increased, yet the dol- 
 lar paid railway labor today is actually less pro- 
 ductive than it was ten years ago. 
 
 So long as the Interstate Commerce Commis- 
 sion concerned itself with public safety and the 
 public right to equal treatment for all, it did its 
 
 27 
 
work well. It performed a real public service, 
 for example, when it insisted upon uniform 
 methods of accounting. It was sustained by the 
 sound judgment of public opinion when in 1910 
 it held that the railways had failed to make out 
 a case for higher rates. But when this Commis- 
 sion of seven laymen, political appointees, under- 
 took to assume full jurisdiction over rates on the 
 interstate traffic of 350,000 miles of complex and 
 wholly different systems and neighborhoods, 
 supervising the capital expenditures of the com- 
 panies and controlling their security issues and 
 equipment, even to statistics of fuel consumption, 
 firing, locomotive tests and car movements, as 
 revealed by the questions put at last year's hear- 
 ing, it went too far and attempted too much. No 
 commission on earth could perform that task 
 efficiently. Mr. Brandeis himself could not do it. 
 If in small affairs the railroads are violating the 
 law every day it is because they have to. How can 
 a railway run its trains from State to State with 
 48 legislative hoppers grinding out new laws all 
 the time, ranging from 9- foot sheets to ash-pans, 
 and not violate a law here and there? You and 
 I and the citizens of all the States are responsible 
 for this. We put the men in office who make 
 these laws; we who sit by without protest while 
 railway credit the biggest and most important 
 thing in America next to agriculture is sand- 
 bagged by the politicians. Credit is a power 
 which may grow, said Bagehot, but which can- 
 not be constructed. Break up the great and firm 
 system of credit under which American railways 
 
have made this country rich and prosperous, and 
 you will never see that credit return in your 
 generation. 
 
 Mr. Brandeis and his colleagues contend that 
 the conditions arising from the war in themselves 
 make an increase in freight rates at this time 
 too burdensome to be borne; the business of the 
 country, they say, cannot afford to pay it, and 
 criticism is directed at the roads for not first 
 reducing their dividends. The answer to this is 
 that very many of the largest shippers in the 
 country are themselves strongly in favor of an 
 increase in rates; but even if that were not the 
 case, is there nothing more to this issue than the 
 interests of shippers? The important thing is 
 not what will happen to shippers, but what will 
 happen to the whole public if railway credit is 
 further impaired, if railway facilities fall behind 
 the needs of the country, and if foreign owners, 
 in disgust at our confiscatory policy, unload their 
 securities on the New York market. Will it not 
 cost the public vastly more to face a disaster to 
 railway credit than to provide the roads with the 
 means to prevent such disaster? 
 
 Gentlemen, this war will pass. So also will 
 the problems arising from it; but the business 
 of transportation will remain the weakest point 
 in our armor. It has become the fashion, and a 
 very good fashion it is, to be an optimist and 
 to face the future with confidence. But in facing 
 the future we must also face the facts. The plain 
 truth is that we are confronting a crisis. The 
 time has come to cease flattering ourselves with 
 
 29 
 
delusions about prosperity, or exports to South 
 America, or any other source on which we may 
 base the hope of a prosperous millennium. 
 What is the use of painting rosy pictures of our 
 foreign commerce while throttling our domestic 
 commerce ? Bankers in New York can meet, and 
 always have met successfully, the ordinary diffi- 
 culties that are a part of the Nation's life and 
 growth. They have built up a credit system which, 
 when we consider the difficulties involved, is a 
 monument to their patience and skill; they have 
 created a market for our securities in foreign 
 countries not exceeded by any other nation; they 
 have shown at all times a cordial, desire to serve 
 the public good in every quarter of the land. But 
 with all their power, skill and resources they 
 cannot prevent a disaster which will shake 
 the solid bed-rock of the Nation itself, unless we 
 adopt at once a new policy of fair play for the 
 railroads. 
 
 What is the remedy? The five per cent, in- 
 crease in freight rates asked by the Eastern roads 
 may be dismissed as negligible. Even if granted 
 in full it will not net the railways in Eastern 
 territory more than $45,000,000, while the needs 
 of these identical properties for refunding and 
 other imperatively necessary improvements in the 
 coming year are $150,000,000. I do not mini- 
 mize the importance of the moral effect that will 
 ensue if the Commission establishes the prin- 
 ciple of fair play through increased revenues, but 
 the application of that principle will not of itself 
 
suffice to restore railway credit. The Eastern 
 roads alone have lost $100,000,000 in net revenues 
 since their application last year for an increase 
 in rates. If the railway problem is to be solved 
 at all, it cannot be solved in this way, and we 
 must therefore look farther. 
 
 First, there must be no increase in taxation. 
 
 Second, Federal regulation superimposed on 
 State regulation must cease. Constitutionally, 
 Congress has paramount authority over interstate 
 commerce, and by its action can abrogate any 
 previous action of the States which may prove 
 inconsistent therewith. 
 
 Third, the railways must be given a Federal 
 charter and placed under the jurisdiction of an 
 authority in which business men, railway men 
 and public-spirited citizens predominate to the 
 exclusion of politicians. This form of administra- 
 tion, in its system and method, might well be 
 modelled on the general plan of the Federal Re- 
 serve Act, dividing the railroads into geographical 
 districts, governed by Boards. 
 
 Failing some such transfer of authority the 
 railways will be justified in saying to the Gov- 
 ernment, "You have placed our properties in 
 inefficient hands and you have subjected us to 
 vexatious and hazardous difficulties. The States 
 and the Government have taken over our prop- 
 erties in fact and are administering them in fact. 
 Under these conditions our credit has become im- 
 paired, and we have no means of conducting the 
 transportation industry to meet the public de- 
 mand. We therefore ask that you take over our 
 
 '31 
 
properties in law, and reimburse their owners to 
 the full extent of their value." 
 
 Gentlemen, the railways of America are today 
 praying for relief literally on their knees. With- 
 out relief they will be on their backs, and when 
 they are on their backs there will be more trouble 
 in this country than you and I care to contemplate. 
 The only relief that will prove effective is relief 
 from the whole disastrous system of dual con- 
 trol, relief from politicians and prosecuting at- 
 torneys, and above all else, relief from the 
 tyranny of prejudice. 
 
 32 
 
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