HISTORY OF BUSINESS DEPRESSIO lit Otto CXightner LIBRARY UNIVERSITY OP CALIFORNIA SAN DIE9O ' , .V. : ' ' , V To one of whom it cannot be said: "0, ye of little faith!" THE HISTORY of BUSINESS DEPRESSIONS BY OTTO C. LIGHTNER A Vivid Portrayal of Periods of Economic Adversity from the Beginning of Commerce to the Present Time PUBLISHED BY THE NORTHEASTERN PRESS 119 Nassau St. NEW YORK Copyright 1922 By The Northeastern Press 119 Nassau St. New York CONTENTS Page INTRODUCTION 7 VICISSITUDES OP ANCIENT COMMERCE 13 TRADE DECLINES OF THE MIDDLE AGES 26 DEPRESSIONS OF MODERN EUROPE (From the End of the Medi- aevel Period to the Nineteenth Century) 34 FOREIGN DEPRESSIONS FROM THE BEGINNING OF THE 19TH CEN- TURY TO THE PRESENT TIME 51 DEPRESSIONS OF THE COLONIAL PERIOD 74 CRISES, PANICS AND DEPRESSIONS DEFINED 81 THE DEPRESSION OF 1785-89 91 THE DEPRESSION OF 1808-9 101 THE DEPRESSION OF 1814 105 THE DEPRESSION OF 1819-20 109 THE DEPRESSION OF 1825 121 THE DEPRESSION OF 1837-39 124 THE DEPRESSION OF 1847-48 139 THE DEPRESSION OF 1857 141 THE DEPRESSION OF 1860-61 148 THE DEPRESSION OF 1868-69 153 THE DEPRESSION OF 1873-75 160 THE DEPRESSION OF 1878 170 THE DEPRESSION OF 1884 175 THE DEPRESSION OF 1889-90 181 THE DEPRESSION OF 1893-95 186 THE DEPRESSION OF 1903 197 THE DEPRESSION OF 1907-08 200 THE DEPRESSION OF 1914 218 THE DEPRESSION OF 1920-21 223 MINOR DEPRESSIONS 237 OUR RELATIONS TO FOREIGN DEPRESSIONS 241 CAUSES OF DEPRESSIONS 246 SPECULATION, THE OUTSTANDING CAUSE OF DEPRESSIONS 278 THE LABOR QUESTION IN DEPRESSIONS-- 288 CONTENTS CONTINUED AGRICULTURE AND DEPRESSIONS 305 THE TARIFF AND DEPRESSIONS 325 DEPRESSIONS AND FOREIGN TRADE 336 THE RAILROADS IN TIMES OF DEPRESSION 348 THE MONEY QUESTION AS A FACTOR IN DEPRESSIONS 362 PIG IRON AS A BAROMETER OF BUSINESS 377 COTTON AS A BAROMETER OF BUSINESS 385 WHY COTTON is A BETTER BAROMETER THAN PIG IRON 397 INDICATIONS OF APPROACHING DEPRESSION 402 INDICATIONS POINTING TO THE END OF DEPRESSIONS 407 SUPPLY AND DEMAND 413 PROFITEERING 418 REPORT OF THE PRESIDENT'S CONFERENCE 425 CONCLUSION 436 BIBLIOGRAPHY . 447 INTRODUCTION Of our one hundred and thirty years as a nation thirty- three years have been wasted in disastrous and ruinous de- pression and perhaps an equal number have been marked by over-spending, extravagance and waste of wealth. The remainder have been years of normalcy. Depressions and trade upheavals have swayed the course of humanity in its struggles equally as much as has war. The progress of the human race is marked by periods of economic distress when want, poverty, and unemployment set the minds of men to thinking. These were periods when convictions were sharply and vigorously stated and men, by force of extremity, took their complaint to the fountain head. Great changes in government, leading to the emancipation of mankind and to the democracy which exists today were the result of movements that grew out of economic adver- sity. Were it not for the demands of commerce we should prob- ably still be in a state of feudalism. When the economic status of the people became debased to such an extent that it became unbearable, they demanded reform and a degree of prosperity, with the alternative of revolt. When bread is scarce, and his pillow a stone and his fam- ily in need, man seeks to find the cause. In times of adver- sity he studies hard to find a philosophy in life. He ponders dubiously over the promise of the Psalmist, "The Lord is my Shepherd, I shall not want." Histories relating the glories of nations that have risen to power are classic. They rise to lofty heights ; they light the paths of time. But when they come to the gloomy vales of economic decline and depression, where ten pages have been given to glory a line is sufficient to describe the distress that followed and the lessons to be drawn. Education along this line is of the utmost importance. It should be started with the young business men, or even in 8 HISTORY OF BUSINESS DEPRESSIONS the colleges from whence men go out into the trades and professions. Depressions affect our well-being and our money. (And our money is close to our hearts regrettable though this admission may be because we are horn with a degree of selfishness.) But our material prosperity goes hand in hand with our political and our spiritual arf/vance- ment and our leaders in education and business have not given this subject the thought and study it deserves. We have for our edification an abundance of literature regarding the intrigues of courtiers, the reigns of kings, the feats of statesmen and the glory of war heroes, but back of it all, in this day as in those that are past, some one must foot the bill. So a study of the economic side is equally important. Our professional men like to ask fat fees, our officials high salaries, and our workers big wages, yet little does it ever occur to them to consider who ultimately assumes the bur- den. Then, when these periods of depression come on there arise waves of discontent, bringing disruptions and serious setbacks in the progress of our lives; all because our eco- nomic affairs have not been well regulated. Men stare at each other helplessly, ignorant of the why and the where- fore, realizing too late that their troubles could have been largely avoided. It would take a thousand books to point out what powerful factors these business cycles have been in determining men's actions, to illustrate how different things are from what they might have been. Looking back, every individual can see ambitions thwarted, years of work gone for naught, the course of life halted or redirected be- cause of the unexpected ebb or flow of the business tide. After having passed through the second Galveston storm in 1915, the writer was certain that tropical hurricanes, at- tended by tidal waves, leaving ruin, desolation and death in their wake, were the worst things God ever put on earth. Others of us who lingered in the valley of the shadow in the dreaded influenza epidemic which swept the world dur- ing the great war are ready to believe that plagues are the worst of earth's calamities. But thousands will agree that HISTORY OF BUSINESS DEPRESSIONS 9 the thing which causes the greatest sum total of suffering is the series of panics and depressions that sweep over the world now and again, touching all civilization with a with- ering hand, leaving loss, misery, ruin and suicide in their wake. Aftei r a struggle of years many find their invest- ments -"jped out. Those who have saved and secured a start along the upward path find stalking them the gaunt spectre of failure. An acquaintance had invested judiciously, as investments go, his charities were many and generous, and he held a re- spected place in society and industry. The depression of 1920 brought reverses entirely through no fault of his, and the shock, being unbearable, he preferred to face a gun in his own hand rather than the future. Another friend of large means and high standing was carried to an asylum, his keen intellect and fine ability destroyed forever. Others fall from the level of comfort to poverty; still others face worry and misery and want from unemployment. These cycles not only bring their loss of accumulated wealth, but a harvest of thwarted human energy as well. They are un- forgetable periods in the lives of us all. We are erecting barriers against the storm and establish- ing posts of warning in its path, and science promises to eliminate the germs of pestilence. Likewise, then, human brains and all the resources of mankind must be mustered to solve the problem of the ever-recurring crises and de- pressions in our economic life. Some say it cannot be done ; others insist that it can. In my humble opinion, based on a close study of the question, we shall some day look back on depressions in the same spirit of tolerant pity that we now look back upon the famines of the Middle Ages. The business organism is much more complicated than the delicate machinery of a watch and is exposed to an in- finite variety of perils and accidents. But these are nearly always preceded by symptoms which do not escape the eye and ear of the business man whose judgment has been sharp- ened by scientific study as well as by experience. It has 10 HISTORY OF BUSINESS DEPRESSIONS been said that the past is the only guide by which to judge the future, and while business may not be so guided by pre- cedent as is diplomacy, yet a great many pitfalls may be avoided as we travel along the rocky road of industry if we would but heed the sign posts of preceding events. We profit from our own mistakes as a rule, so why should we not profit from the mistakes of our forebears? As a business man I can testify that I could have made and saved a great deal more money had I previously the knowledge that the research entailed in getting together these chapters has brought me. It is not only important but necessary these days for a business man to know when to act. His judgment must be keen in knowing when his opportunity presents itself and be quick to take advantage of that opportunity. Likewise, I believe we must admit, by this time, that it is equally as im- portant to know when not to act, when to lay in port until the storm passes by. In the old sailing days men used to go out when the skies were clear; now we go when the barometer and wireless tell us it is safe to go. In business we have fairly well recognized barometers, if we but heed them, and our wireless is the signals we get from the pages of history. We have a peculiar Anglo-Saxon trait that of love of precedent. It is a proverb among us that "history repeats itself." And it is notable among us that historical inci- dents have more of a hold upon our minds than any theoreti- cal arguments. No physician worthy of the name will pre- scribe without some knowledge, great or imperfect, of the history of his patient's ailment ; no worthy lawyer will ren- der an opinion on a client's case until he has a history of the case. In business, then, if we expect to diagnose and cure the ailments that have afflicted us periodically since the beginning of time, we must have before us essentially a history of what has passed. Nations will stand up against a foe; fight pestilence; master famine; overcome fire and earthquake; face catas- HISTORY OF BUSINESS DEPRESSIONS 11 trophe of all kinds with stoic calmness, and then lose their heads entirely in an industrial crisis. Then, if ever, the cowardliness of human nature will assert itself. Why is this ? This is a question that there would be many answers to, but most likely it is because of lack of leadership. Cities of all nations are dotted with statues in memory of heroes who led them in military victories, but few there are erected to the captains of industry who led them out of in- dustrial chaos. Depression is a disease of the nation, the body politic, and on many occasions in our history the use of stimulants has been required to incite the heart action. Times of depression tax the resourcefulness of men. They reveal the stuff that is in them. If in times of prosperity they have lived beyond their means and mismanaged their business, or used bad judgment in expanding, they will fail when depression strikes. It is recognized among mercantile agencies that a firm or corporation that can go through a serious depression and maintain its credit is built on a strong foundation. A great injustice lies in the fact that the innocent often suffer for the sins of the guilty. Work- ers and investors alike suffer unemployment and loss through no fault of theirs. The present age will be known in history as the age of commerce. We have accomplished much in the arts and sciences. Our inventions are beyond the dreams of former generations, and yet it cannot be said that our commerce is on an entirely scientific basis. Only in recent years have we reached anything like a scientific financial system, and even yet some of the leading countries of the world are backward in this respect. We cannot boast of science in our business until we have overcome the useless uncertainties of business depression. Men still say that trade cycles always have come and always will, but students of the question agree that it is easily possible through proper education to build a fairly even graded road-bed of commerce, cutting down 12 HISTORY OF BUSINESS DEPRESSIONS the high spots and bridging the valleys. In this there is a great field for thought and accomplishment. It is not the object of this work to be an essay or a treatise on panics, crises and depressions. There are a number of works that treat the subject from a theoretical standpoint. It is aimed to give the historical facts and incidents of pre- ceding disturbances and then let the reader theorize for himself. A few chapters are devoted to my own deductions, particularly on recent incidents, arrived at from a close study of the question in practical business life over a period of years. More space has been given to the business depressions of recent years because of their proximity to our time and their closer relationship to the present existing conditions. In the text credit is given where authors and periodicals are quoted and, as the chapters are classified according to pe- riods, it will be easy to refer to the works of the authorities given in the bibliography. To cover all the details of some of the causes of our crises would, in many instances, make books in themselves, and would be more than any mind could conveniently grasp. I have aimed to portray here only such historical facts and matter as will be useful and informative to the ordinary business man and investor of the present day, and have studiously avoided overburdening it with theory or too large an array of statistical details which are irrelevant to the subject as a whole. The money question, paper currency and bimetalism enter largely into the history of depressions, particularly those of the nineteenth century. This question can be studied by those who desire to do so from various works on the subject, some of which are given in the bibliography. Several books may also be had on the question of unemployment which touch on the subject of depression. The general question of industrial and agri- cultural economics is also covered by various authors who find occasion to review briefly some of the setbacks suffered from depressions. CHAPTER I THE VICISSITUDES OF ANCIENT COMMERCE The history of ancient countries with the rising and falling tides of their commerce can have little bearing on industry of today. Commerce of the ancient world died out and little is left of its traces to profit the modern world, with the im- portant exception, perhaps, of the old Roman Law. Yet in the precepts of antiquity we may find substance for thought and utility. In all the struggle of humanity up the steep mountain of progress commercial distress has been one of the greatest ob- stacles to survive. Thrones of kings have tottered during the numerous periods of poverty and distress which brought with them the spectre of revolution and menaced existing governments. On the other hand, the Ancient Ages have left us stories of their passing glory, peace, contentment and prosperity. Those must have been days of wealth in abundance, "when Greece held the torch of civilization and Rome, the magnificent, was built as the capital of the world empire." In the 27th and 28th chapters of Ezekiel we are told in glowing language of the prosperity of Tyre and then of its sudden ruin because of its loss of wealth. The romantic story of the decline of nations and com- merce is a history in itself. One country after another has obtained the lead and lost it. Where are the nations of history? Of the six that belonged to the ancient regime only three are of any significance now; of the nine origi- nating in the Middle Ages only three, again, remain. Will our turn come? Where is Phoenicia, Carthage, Arabia, Babylonia? Where is Chaldea, Etruria, Media, Macedonia? Where is ancient Egypt, Persia, Greece, Rome ? Where is the Venice, 'Hol- land, Spain, Portugal of the Middle Ages ? Where and why ? Theorists have a tendency to attribute the decline of na tions in various periods to the commercial spirit. Probably 14 HISTORY OF BUSINESS DEPRESSIONS they mean the wrong use of wealth, because business can be as clean and elevating as any other calling if properly con- ducted. It has been demonstrated, however, that no nation can maintain its greatness or escape decay if it becomes poisoned by frivolity and vice. In ancient times civilization scarcely touched the wild, barbarous people of Germany, Gaul and Britain, whose inhabitants lived in a state of rude poverty, while in such nations as Arabia, Egypt and Assyria, the people built splendid palaces, developed the arts and lived amidst marvels of luxury. Today conditions are practically re- versed, and who would dare say that it was not brought about by the rise and fall of commerce. Not always did these ancient nations and cities decline through conquests, as is the usual supposition. Some died without the drawing of a sword. As an instance, the State of Venice lost her supremacy through an old-fashioned panic and trade depression brought on by the discovery of a new route to India. The ignorance and suspicions of men in the early times were the greatest hindrances to the rise of commerce, as they are still in backward portions of the world. In times of depression we still see the outcropping of the distrust of our antecedents of the Stone Age when we become fright- ened and suspicious, or over-cautious, often delaying the emergence from depression to normalcy. What became of the mighty commerce of those ancient nations which rose to power and glory we know not. The cycles of trade can be traced back to biblical times, when the Good Book refers to Joseph with his seven fat years and his seven lean years. Demetrius, the silversmith, called on the Ephesians to oppose the Apostle Paul because his teachings were bringing distress to the industries which made shrines for Diana. Most writers give Greece credit for starting the coinage of money, but according to Genesis (Ch. 17) "Abraham had HISTORY OF BUSINESS DEPRESSIONS 15 flocks and herds, and silver and gold, and men-servants and maid-servants, and oxen and asses." And is it not recorded that Abimelech gave to Abraham a thousand pieces of silver, besides cattle and slaves? The Assyrians, 6000 years B. C., had made quite an ad- vance in civilization. They engaged in trade and commerce and some historians say they had banks similar to those of the present day. Disorganization, and then anarchy, came and the Persians obtained the ascendancy. Ancient Baby- lon 3000 years B. C. under a Semitic people, supposed to be the original Jewish race, grew to great importance as a commercial nation. The Babylonians are described as "greedy of gain, litigious and almost exclusively absorbed by material concerns." "It was only when the Europeans found a new path to India across the ocean, and converted the great commerce of the world from a land trade to a sea trade," says Heeren, "that the royal city on the banks of the Tigris and Euphrates began to decline. Then, deprived of its commerce, it fell a victim to the two-fold oppression of anarchy and despot- ism, and sunk to its original state a stinking morass, and a barren steppe." Following Babylon the Phoenicians developed a great commerce about 1500 B. C. Then the Heroic Age of Greece, about 1000 B. C., brought that country to commercial supremacy. Later came the great Roman Empire and domination of the world, and with it the greatest and long- est period of peace and prosperity the world has ever known. The Romans were great organizers and skilled adminis- trators. Day says: "They earned all they received by one great contribution, 'pax Romans,' Roman peace, which continued almost unbroken for centuries, and which fur- nished an opportunity for commercial development before unknown." Then under the Caesars with its corruption came decline in commerce, and the sceptre of Roman authority passed from the western world. 16 HISTORY OF BUSINESS DEPRESSIONS From the scraps that we have been able to sift from the history of China it is apparent that that ancient and inter- esting people had periods of great trade decline and depres- sion from causes that we are unable now to discover. Otherwise, how could she allow such inventions as printing and the mariner's compass to be forgotten and obliterated, once they had been discovered and used. In its day ancient Egypt at times basked in the sunshine of luxury, and in periods of depression she put armies of unemployed to work and fed them while they built the pyramids. We know that the history of ancient Egypt was marked by four declines and revivals, and at no time during this period was she conquered, so in those periods, when the records are almost entirely obliterated, there must have been widespread economic distress. With the rise and decline of commerce the center of civili- zation shifted from point to point, from Egypt to Phoenicia, from Phoenicia and Carthage to Greece and Rome and then from Constantinople to Italy and Spain, from Spain to Holland, and thence to France and England. It was the agrarian depression that marked the begin- ning of the decline of Greece and a similar agrarian depres- sion brought about the establishment of the republic in Rome. "Throughout all the ages those countries in which trade flourished were accounted happy and left glorious history for coming generations to read and follow. While those in which commerce drooped their oblivion was com- plete and only a phantom shows where they came into history and passed out again." As to ancient Greece, the poems of Homer sing mostly of her glory and we look to Aristotle for the history of her trade. In the seventh century B. C., under the archons, Greece suffered great distress. The nobles alone were in possession of the government through which they ruled trade and commerce. Great masses of the poor peasants struggled with little hope against the bad economic condi- tions. Circumstances seemed to have been particularly severe HISTORY OF BUSINESS DEPRESSIONS 17 in Attica. The soil of the country was thin and unproductive, unable to support more than a moderate population, and any increase in the number of inhabitants led inevitably to an increase of poverty. The evil might have been met by emigration, but at this date the shipping industry was depressed and the people were too poor to even seek out new homes beyond the sea. There was no capital for the devel- opment of trade except the little that could be borrowed at high rates of interest and under the most unfavorable con- ditions. The laws respecting debtors were very cruel, designed to protect the rich against the poor. The people seemed to have lost their insight into mercantile transac- tions and there was no knowledge of the cause of the growth of wealth. They were in the same state of mind in those ancient days that we have a tendency to pass through in the depressions of our times. Instead of seek- ing a way to better conditions through improved trade and greater production, they were cringing with fear, hoarding what little wealth there was and helping to squeeze tighter the grip that held them. A great mass of people that should have been producing wealth became debtors and were placed by law in a very degraded position. At this time Cypselus, a member of the great oligarchical family at Corinth, threw his lot with the masses, and by his energy and insight organized trade and agriculture and led the people out of chaos. The great depression of 594 B. C., when Solon came forward in a time of public distress and rescued the Athenians from a most serious situation, marks an epoch in the economic history of ancient times. Debt and poverty oppressed the poor citizens, and melancholy, indeed, is the picture which historians draw of the social state of Athens at that time. Among the higher classes there prevailed a spirit of selfish greed whose greatest aim seemed to be to oppress the poor and wring from them their last farthing. So terrible was the depression that Solon perceived great dangers. People were ready to do anything to better their 18 HISTORY OF BUSINESS DEPRESSIONS condition, and powerful neighbors were getting ready to take advantage of the situation to attack Athens. Solon by birth belonged to the aristocracy, but his fortunes had thrown him among merchants and there he gained knowl- edge of the causes, as well as the needed remedies for the distress. Solon averted the impending crisis. "His first measure was the famous Seisachtheia. Every citizen who had been sold into slavery, at home or abroad, was restored to liberty; all debts secured upon the person or landed property of the debtors were cancelled, and for the future no one was allowed to lend money on the security of the debtor's person. Some authorities, as for instance Andre- tion (Fourth Century B. C.), are of the opinion that the Seisachtheia was no more than a moderation of the rate of interest, but the majority assert that it was a cancelling of all contracts alike, and with this view Solon's words agree." Solon's words are: "In the day of vengeance, dark Earth, mightest mother of the gods of Olympus, will be my surest witness of this, from whom I removed pillars planted in many places, and whom I freed from her bonds. Many citizens, who had been sold into slavery under the law against it, I brought back to Athens, their home; some of them spoke Attic no longer, their speech being changed in their many wanderings. Others who had learned the habits of slaves at home, and trembled before a master, I made to be free men. All this I accomplished by authority, uniting force with justice, and I fulfilled my promise." From this it is clear that by some means debtor- slaves were restored to liberty, and lands burdened with debt were relieved of the incumbrance. At the same time Solon made a change in the coinage, introducing into Attica the standard known as the Euboeic in place of the old Attic or Aeginetan. From the remedies applied by Solon, it is easy to see that the cultivating peasantry of Athens had succumbed before the difficulties of this economic revolu- tion. "Even under the natural economy, which may have existed in the time of Hesiod, the farmer's lot was hard; HISTORY OF BUSINESS DEPRESSIONS 19 but the pressure of the demand of moneyed men rendered it intolerable. Solon's celebrated legislation was intended to relieve the poor citizens, and it was directed against the money-lenders. It cancelled existing debts, and in all probability may have appealed to the common sense of justice. If a large amount had been paid as interest there was no grave injustice in striking off the principal the money-lenders may have already received 100 per cent, on what they advanced while it was now made impossible for them to lend on the security of the citizen's person." It is a mark in history that the law enacted at that time by Solon has been re-enacted almost exactly by different nations on up to modern times in periods of economic depression. Pericles, in endeavoring to find profitable employment for the people, deliberately turned their energies to unpro- ductive public works. But he took the wrong course. While this public work temporarily relieved the existing depression, it only augmented it in later years. "The magnificent buildings which were reared under his direction absorbed the wealth of the city, without developing any natural resources or trading facilities in return. The treasure was exhausted once for all, and there was no means of replacing it, such as arises with capital employed in industry or trade it was locked up in forms that are artistically superb, but economically worthless." Thus the expenditure of enormous wealth in erecting great public buildings of marvelous beauty had the same effect on the economic conditions of the country as the over- building of railroads rh'rl in Europe and America in the Nineteenth Century. When money became scarce and eco- nomic distress prevailed it was then that kings started on expeditions against their neighbors to gain new wealth by war. This replenished the treasury in case of victory and occupied the minds of the populace. The kings had noth- ing to do; when poverty reigned the people became un- manageable and their thrones were shaken. Under such 20 HISTORY OF BUSINESS DEPRESSIONS conditions there would be trouble anyhow and by going to war there was half a chance. In ancient Greece bankers were called "table merchants" because they carried on their operations at a table and ex- ercised the functions of money changers or testers. Alex- ander was not only a conqueror but a traveler and colonizer. He believed in trade, and wherever he ruled the trade of Greece followed. In one instance, at least, we are possessed of the direct cause of decline and that is the Island of Crete, which for a considerable period had an extensive commerce and thriv- ing cities, but it too fell into decay. No doubt because of commercial corruption, since a proverb for centuries after- ward asserted "Cretains were always liars." When we make a hasty survey of the Roman Empire to find the symptoms of decay there is brought to light as the outstanding feature industrial stagnation and commercial ruin. The year 33 A. D. was full of events in the ancient world. It marked two disturbances as the outgrowth of the mob spirit. The first was in the remote province of Judea, where one Christus was tried before Pontius Pilate, was crucified, dead and buried. The other event was the great Roman panic which shook the empire from end to end. The consternation accompanying the latter died down and it was soon forgotten, but the murmurings of the former swept down the centuries until, bursting into flames, it enveloped the world. A description of the panic reads like one of our own times : The important firm of Seuthes & Son, of Alexandria, was facing difficulties because of the loss of three richly laden spice ships in a Red Sea storm, followed by a fall in the value of ostrich feathers and ivory. About the same time the great house of Malchus & Co., of Tyre, with branches at Antioch and Ephesus, suddenly became bank- rupt as a result of a strike among their Phoenician work- men and the embezzlements of a f reedman manager. These failures affected the Roman banking house, Quintus Max- HISTORY OF BUSINESS DEPRESSIONS 21 imus and Lucius Vibo. A run commenced on their bank and spread to other banking houses that were said to be involved, particularly the Brothers Pittius. The Via Sacra was the Wall Street of Rome, and this thoroughfare was teeming with excited merchants. These two firms looked to other bankers for aid, the same as is done in modern days, but unfortunately at this time an outbreak had occurred among the semi-civilized people of North Gaul, where a great deal of Roman capital had been invested, and a moratorium had been declared by the government on ac- count of the disturbed conditions. Other bankers, fearing the suspended conditions, refused to aid the first two houses and this augmented the crisis. Money was tight for another reason: agriculture had been on a decline for some years and Tiberius had pro- claimed that one-third of every senator's fortune must be invested in lands within the province of Italy in order to recoup their agricultural production. Publius Spinther, a wealthy nobleman, was at that time obliged to raise money to comply with the order and had called upon his bank, Balbus Ollius, for 30,000,000 sesterces, which he had deposited with them. This firm immediately closed their doors and entered bankruptcy before the prae- tor. The panic was fast spreading throughout all the prov- ince of Rome and the civilized world. News came of the failure of the great Corinthian bank, Leucippus' Sons, fol- lowed within a few days by a strong banking house in Car- thage. By this time all the surviving banks on the Via Sacra had suspended payment to the depositors. Two banks in Lyons next were obliged to suspend ; likewise, another in Byzantium. From all provincial towns creditors ran to bankers and debtors with cries of keen distress only to be met with an answer of failure or bankruptcy. The legal rate of interest in Rome was then 12 per cent and this rose beyond bounds. The praetor's court was filled with creditors demanding the auctioning of the debtors' property and slaves ; valuable villas were sold for trifles, and 22 HISTORY OF BUSINESS DEPRESSIONS many men who were reputed to be rich and of large fortune were reduced to pauperism. This condition existed not only in Rome, but throughout the empire. Gracchus, the praetor, who saw the calamity threatening the very foundation of all the commerce and industry of the empire, dispatched a message to the emperor, Tiberius, in his villa at Capri. The merchants waited breathlessly for four days until the courier returned. The Senate assem- bled quickly while a vast throng, slaves and millionaires, elbow to elbow, waited in the forum outside for tidings of the emperor's action. The letter was read to the Senate, then to the forum as a breath of relief swept over the wait- ing multitude. Tiberius was a wise ruler and solved the problem with his usual good sense. He suspended temporarily the processes of debt and distributed 100,000,000 sesterces from the im- perial treasury to the solvent bankers to be loaned to needy debtors without interest for three years. Following this action the panic in Alexandria, Carthage and Corinth quieted. And so, under conditions very similar to those existing in the Twentieth Century, business of the Roman Empire re- sumed its normal aspect and the Via Sacra went its normal way, the same as Wall Street has done on many an occasion after a storm has passed. How similar was the business of the world in that year of the crucifixion of Christ to that of the present time ! Rome under Tiberius had probably reached the highest state of civilization that it had known until the dawn of the Nineteenth Century. Some time later its decay set in, re- sulting from just such panics which were not wisely stopped and allowed to run their course of ruin. Then followed medieval times with its feudalism. The world was centu- ries getting back to the height of Roman civilization, no doubt because of the disorganized state of its commerce. The Romans detested labor and trade. Yet they were gluttonous for wealth. They wanted to obtain it, however, HISTORY OF BUSINESS DEPRESSIONS 23 from the labor of slaves and from conquest rather than from business. Juvenal wrote, "With us the most reverend majesty is that of Riches, even though Foul Lucre ! Thou dwellest in no tem- ple, and we have not reared altars to Coin, as we have for the worship of Peace and Faith, Victory, Virtue and Con- cord." The Romans in times of scarcity offered bounties to en- courage grain importations so that there would be no dis- tress on the part of the people. Apparently, they were the first to use the system of drawing on the reserves of the past and the credit of the future to alleviate present distress. As told by Suet : "Once at the time of a great failure of crops, when it was difficult to provide relief, Augustus or- dered expulsion from the city of slaves who were exposed for sale, of schools of fencing-masters, and all foreign residents, except physicians and teachers, and, above all, of domestic slaves, so that at last the supply of corn became cheaper. The landowners of Rome, in the heigh-day of her insolent adolescence, had denounced both the commerce and the arts as the business of slaves or freedmen." During the palmy days of the Roman Republic, known as her "Golden Age," the cultivation of the soil and the pur- suits of industry were regarded as honorable and dignified. It was then that Cincinnatus left the plow to answer his country's call. This age also gave Cato, Scipio and others of her great statesmen who appreciated the value of com- merce and industry to the country. In times of depression the Romans built the great roads (to give employment to the people) which spread over the continent of Europe and India, and the people of modern civilization still ride over those Roman roads. The decline of Rome is an interesting study in economics. It started when foreign grain undersold the Italian product and these barbarians were forced to join the rabble of the cities. When Rome no longer produced she became pauperized, because her commerce was nil, trade was degrading, and when there were no more countries to conquer to bring her 24 HISTORY OF BUSINESS DEPRESSIONS wealth there was nothing but decline ahead. As the years went by great armies of unemployed slaves surged over the land ; particularly in the reign of Nero they became threat- ening and dangerous. All writers agree that had Rome rec- ognized the honor of trade and commerce and established in- dustries, giving employment to the people, she may to this day have been the center of the world's civilization. The general impression that Rome fell because of sinful indulgence is to some extent erroneous. In studying her economic history it will be found that a decline of her com- merce had set in, which undermined her financial stability. This was due to many causes, principally the drain of pre- cious metals to the East, depriving the empire of much needed currency. Thus when she was called upon to defend the onslaught of the disorganized barbarian invaders which under proper economic conditions would have been no match for her, she fell easy prey to them. It is said that wiser capitalists unable to induce the authorities to take steps to remedy the depression tied their money in a napkin and buried it against the day of abject distress that was sure to come. An authority says: "If a credit system had been evolved to take the place of metallic currency, Rome might not have been embarrassed by the shortage of metal, but un- fortunately nothing of the kind was done. Another cause of bad conditions was the unprofitable investment by the gov- ernment of much of the capital of the ancient world. A comparatively large share of the surplus wealth of the an- cient world flowed to the imperial city in the form of taxes and tribute. Part of this was spent on the army, the navy, the roads, the improvement of harbors, and other public works which increased the prosperity of the empire. A large part of the money, however, was spent on temples, monuments, public baths, and the like, and another portion purchased grain, which was given free to all Roman citizens who wished it. All such investments were very much like burying the capital of the empire, as far as business was concerned. The grain doles were especially bad, as they served to keep thousands of able-bodied men in idleness at the expense of those who were working." HISTORY OF BUSINESS DEPRESSIONS 25 In those times men who held public office were expected to contribute to the maintenance and support of the city. As prosperity declined and maintenance became increasingly difficult the offices became undesirable. Then for once in history the vorld beheld the spectacle of men fleeing the country rather than hold public office. Woeful, indeed, are times of depression ! So it was not wealth and luxury that destroyed Rome and other great nations, but it was the uncorrected evils which grew up with wealth and unchecked inclinations. Suppose our boom periods were allowed to run in this country un- retarded, who cannot imagine but that it would lead event- ually to national ruin? In that respect depressions are a blessing. Those of our history may have acted as a restrain- ing hand against national disruption. CHAPTER II TRADE DECLINES OF THE MIDDLE AGES The writer on economics is always at a disadvantage. He must necessarily preclude that majestic portrayal of politi- cal events by which he might add the flourish of beauty. In my subject, particularly, I am brought to dwell only upon the palls of gloom that hung like darkened clouds over the unfortunate years of history. A detailed recitation of the commercial difficulties im- posed upon the Middle Ages would be of little profit here. Business methods in those days were so absolutely different from those of today that scarcely any lesson could be drawn from them. Undoubtedly the chief causes of their commer- cial setbacks were famine, plagues and war, which swept in- termittently over all countries. The severity and suffering brought on by these times reduced great numbers of poor to willing slaves, retarded civilization and filled the world with beggars. In this chapter we review ten centuries of time wherein a race of barbarians, whose origin is lost in antiquity, overran the proud sovereignty of ancient civilization, prostituted the fair fields of Rome, and set the world back a thousand years. Only in spots is there a beam of sunlight that comes scintil- lating through the clouds of these centuries of darkness. In this span of time a short period of economic prosperity was an extreme exception rather than the rule. In writing an economic history of that period one would have to touch only the extremely few high spots in describing the short periods of peace and plenty. The reign of Charlemange in the Eighth Century was one of these. This good king was so- licitous for the well-being of his people. He led them out of a long depression, reformed the coinage of money, establish- ed commercial enterprises and sought to enrich his kingdom by trade and commerce. The great plague of 542 A. D. ravaged the Western world. It carried off a third of the population and "was not the least HISTORY OF BUSINESS DEPRESSIONS 27 of the causes of that general decay which is found in the later years of Justinian's reign. It swept away tax-payers, brought commerce to a standstill." The longest depression on record was when the Hun and Scythian barbarians overran the western provinces of the Roman Empire. The confusion which followed so great a revolution lasted for several centuries. The towns were deserted, the country was left uncultivated and the western provinces of Europe, which had enjoyed a considerable de- gree of opulence under the Roman Empire, sank into the lowest state of poverty and barbarism. During the contin- uance of these confusions the chiefs and principal leaders ac- quired, or usurped to themselves the greater part of the land. The next longest depression lasted through the hundred years of religious wars, which kept industrial progress at a standstill while humanity bled for the sake of a creed. Me- diaeval times passed with little commerce carried on. The lack of powerful governments caused the people to organize into local towns, each making its own trade tariffs and regu- lations and existing largely to itself. Trading was crude and meager until the decay of feudalism and the dawn of the modern world. The rise and decline of commerce is noted in the case of various cities which were centers of the world's finance and trade in the Middle Ages, such as Venice, Genoa, Bruges, Antwerp and Amsterdam. "It was not without justice that the ninth, tenth, and elev- enth centuries have been called 'the Dark Ages/ Liter- ature and art sank back to the level from which Charles the Great had for a time raised them ; history has once more to be reconstructed from the scantiest materials. Architecture was stagnant, save in the single department of castle-build- ingthe one development that these centuries produced." It may be said that there was no such thing as a steady flow of commerce. Commercial relations between the tribes of Central Europe were spasmodic and the domestic trade itself was constantly interrupted by tribal wars. It was a period of intense gloom and depression, and the economic outlook 28 HISTORY OF BUSINESS DEPRESSIONS was blacker than at any time since the descent of the bar- barians upon Imperial Rome. In the Eleventh Century wealth was scarcer in Europe than it had been since the fourth century. Conditions were fered a decline because her wealth had been drained through the purchase of luxuries from the Orient. Conditions were so bad in Western Europe that a scandalous traffic was carried on in supplying the slave market of the Saracens with Christian women. In England it was very common to export lower classes of people to other countries as slaves. All the Western world was in this state of degradation and poverty. The decline of this period affords one of the most interesting studies in the depths to which the human race can fall. "Not to be killed," says Stendhal, "and to have a good sheepskin coat in winter, was, for many people in the tenth century, the height of felicity." Describing regions in Italy in the Thirteenth Century, for- merly parts of the Roman Empire, Hallam says, "Among the uninhabitable plains travellers were struck with the ruins of innumerable castles and villages. So melancholy and ap- parently irresistible a decline of culture among the popu- lation through physical causes, which seems to have grad- ually overspread a large portion of Italy, has not been ex- perienced in any other part of Europe." In these times it was the common religion as well as law that every commodity had a just and equitable price, and for one to charge more than this price incurred the displeasure of God and merited the punishment of man. Mediaeval history is filled with examples of penalties inflicted upon tradesmen, looked down upon in those days, who attempted to raise prices or profiteer. Christians who were fortunate enough to have it were expected to loan money without in- terest. Interest was sinful and condemned by the Church. In times of money stringency during these centuries pogroms would start against the Jews who were found to have the specie largely corralled. Jews in those days were mostly HISTORY OF BUSINESS DEPRESSIONS 29 pawnbrokers, although some took the more dignified name of goldsmiths. They were money lenders and the people borrowed from them. Then, in time of crop failure or dis- tress the Jews would be found to have both money and prop- erty. It was during these periods of depression that the Jews were banished from nearly every European country at one time or another. Edward I took all the money away from the Jews and drove every one of them from England. As politics was in the hands of religion in those centuries, so was commerce, and to persecution and intolerance of religion may be ascribed the decline of a number of great commercial nations. The Crusades were in an extraordinary phenomenon in the economic progress of the world. Popula- tion was pressing upon the means of subsistence and a cingle crop failure precipitated the migratory movement among impoverished people whose condition was one of untold misery. It is easily imagined how the minds of these people could be fired by the preachings of religious leaders and the tales of travelers who brought stories of rich spoils awaiting the sword of the conqueror. "There can be little doubt but what some were sincerely animated by a desire to wrest the Holy Land from the Infidels, but undoubtedly the great army of crusaders were homeless itinerants who had nothing to lose and all to gain. These idlers were quickly willing to fight for immediate bread and the promise of future reward. But the movement of these great armies from West to East and back again re- vived the industries of the nations through which they passed, created new and broadened ideas of the world's af- fairs, put money into circulation, and started a new system of trade and commerce." The Crusades had not only a religious aspect, but were a source of great commercial riches for the Venetians, who had risen to commercial supremacy, and as they built the fleets that carried the Crusaders they incidentally took the opportunity to open up new trading posts in the Moham- medan countries, thus profiting at the expense of their 30 HISTORY OF BUSINESS DEPRESSIONS fellow Christians. The Crusades brought the East and West together and stimulated business, but after their fail- ure and the return of the Christains to Europe commerce declined rapidly. Oman says that the trade of Constanti- nople fell off one-third to one-half. England, Germany and the northern countries of Europe claimed that their trade was injured and depressed because a large portion of their wealth was taken by the Church of Rome. Pope Innocent II called England his inexhaustible fountain of riches. Economic stringency is what brought the revolt against the church. The Hanseatic League, composed of towns and cities of northern Germany, was the outgrowth of trade conditions. When depression swept over them it set the tradespeople to thinking, and they devised means of forming a league so that trade might be stimulated by trading among them- selves. The Hanseatic League became so powerful that in times of business failure its members insisted, and backed up their demands by force, "that they should be paid in full before any other debtors were considered, and they further required that such bankrupt should be banished from the city with his entire family." Through the influence of the Hanseas the city of Bruges became the business center of Europe. In the Fourteenth Century the financial crisis occurring in England under Edward III was so severe that the king could not pay his personal obligations to his Italian bankers, who then had the upper hand financially after the Jews had been driven out of England through the activity of the Roman Church. Money was so scarce that the Italians were violently attacked. For a time they were expelled from London and nearly ruined. One of the most peculiar trade depressions in history came about at the time of the Reformation, which changed not only the religion but the commerce of the greater part of northern Europe. In those times fishing was the lead- ing industry, and the Catholic church with its many fast HISTORY OF BUSINESS DEPRESSIONS 31 days had been the best friend to the herring industry, upon which the Hanseatic League was originally founded. When the followers of Martin Luther displaced Catholicism the demand for herrings became almost nil, bringing chaos and distress in this important industry, affecting all branches of the trade. The states of Italy which arose from the ruins of ancient Rome again made headway. Venice, Genoa and Florence waxed powerful until reverses came with the closing of the markets of northern Europe because of religious wars and tariff barriers. Bankruptcy became frequent and the woolen manufacturers of Florence, who employed 30,000 men at one time, dropped to 971. The people, thrown out of employment by disrupted commerce, declined into poverty and indolence. In the history of Venice many instances are found of the rise and fall of trade. A quarrel with Pope Pius II, with the consequent excommunication, caused the merchants of Venice to be prosecuted throughout Europe and their mer- chandise confiscated wherever found. But this did not dim her prestige for long, and she quickly recovered her trade. Again when Vasco da Gama discovered the passage to India by rounding the Cape of Good Hope, returning to Portugal with a rich cargo, consternation and panic reigned in Venice and caused her traders many sleepless nights. It sounded their doom, because the heavy dues exacted by sultans and rulers, through whose countries the Venetians had to pass on their way to the Orient, made the cost too great to compete with the sea-borne commerce of the Portuguese. So the commerce, and with it the prosperity, of Venice de- clined, and she gradually passed out as a power in the world. The Venetians are said to have carried on their trade and kept their commerce prosperous even amid the vicissitudes of war. Their great commercial leader, Doge Mocenigo, on his death bed, with the senators gathered around him, urged that the commerce of the nation be continued, saying, "But I beseech you, avoid as you would fire seizing what 32 HISTORY OF BUSINESS DEPRESSIONS belongs to others and engaging in unjust wars, for in such wars God will not support princes." Depressions were brought about in these times by the policy of prohibiting exports of bullion to other countries. Rulers needed a greater supply of ready money and were eager to listen to the argument of merchants that large exports and small imports created a balance of trade favor- able to the nation. When the country found itself with a. trade balance against it, instead of taking means to in- crease their exports to offset their trade balance they brought on great distress by prohibiting exports of bullion to pay such trade balance to other countries. Invariably this further depressed commerce. At the end of the Middle Ages Holland and Spain were the leading commercial countries of the western world. In the Fifteenth Century we find a depression brought on by conditions similar to those we have today. It was the time of the Guilds. Day, in his "History of Commerce," says: "(1) The privilege of monopoly was abused by limiting entrance to the Guild in various ways, so that production was restricted and prices were raised to the detriment of merchant and consumer. Laborers suffered, also, by the lessened demand for their services. (2) Guilds came into frequent conflict over the question as to which had the right to exercise a particular branch of trade or manu- facture: these quarrels were similar to those arising be- tween trade unions at the present time. Manufacturers suffered from the separation of allied trades, and time and money, which ought to have gone into the business, were wasted in long lawsuits. (3) The full members of the guilds, the masters, tried to keep the laborers (apprentices and journeymen) in an inferior position, and granted pro- motion by favor rather than by merit; laborers lost the incentive to good work and were tempted to idleness and disorder. (4) The masters tried to preserve equality among themselves. Any master who was sufficiently enterprising to attempt to extend his business by intro- HISTORY OF BUSINESS DEPRESSIONS 33 ducing improvements or by employing more men was pulled back to the general level. (5) Technical improvements were prevented also by the regulations which were adopted originally to secure good quality of the product, but which hardened into a routine prescribing the details of every process of manufacture. (6) After all the restrictions consumers did not get good quality even when they paid high prices. They could not punish the producers of poor goods by withdrawing their custom, and scamped work, adulteration, and fraud were common." In the last century of the Middle Ages banking developed into the methods generally used in the present day. About this time the doctrine that it was sinful to take interest lost its force because economic leaders convinced the clergy that money secured through loans could be put to good use and thus encourage legitimate development. In those days bankers were called goldsmiths. Antwerp was then the leading bourse in the world. There gathered Italian Hanseatics, Portuguese, Spanish, English and German traders dealing in commodities from all over the world. Antwerp being the financial center had loaned money to royal debtors who lost in wars and became in- solvent. The panic and depression following brought the decline of Antwerp and the center of the financial world went to London, where it remained for almost five centuries, passing to New York during the recent World War. That trade cycles involving terrific depression must have swept over the world in the Middle Ages is apparent from the fact that there are lapses in the pages of history in which the records of commerce are entirely submerged and lost. There must have been at times such destitution and disorganization that no accounts were left of what trans- pired. The thread is often broken, and when the ends are caught again we find civilization moving in a different direc- tion, taking with it the trade supremacy that formerly had been elsewhere. CHAPTER III DEPRESSIONS OF MODERN EUROPE (FROM THE END OF THE MEDIAEVAL PERIOD TO THE NINETEENTH CENTURY) Passing from the Middle Ages to modern times, we ap- proach the age that witnessed the growing importance of the industrial and commercial classes. In former centuries laborers, no matter of what breeding or state of intelligence, were slaves. Whatever circumstances, whether the for- tunes of war or the tides of trade, brought them to the state of labor they automatically became slaves. The close of the mediaeval period found man struggling upward to a state of freedom. Trade and commerce, which had been con- sidered degrading and had been engaged in by the lower ele- ments of mankind, was now becoming dignified, and of growing importance. The old days "when might was right" were giving way to a time when peaceful service to human- ity met its just rewards. The world emerged from feudal- ism because of the demands of commerce for a stronger cen- tral government to ward off the evil effects of trade declines and local depressions. Modern ages begin with the discovery of America by Co- lumbus at the close of the fifteenth century. We then enter the Renaissance, denoting the revival of taste and skill and an awakening of broader intelligence. Great riches from the new world had encouraged thrift- lessness in Spain. As fast as she received cargoes of pre- cious metals she sent them out of the country, importing luxuries instead of teaching her own people to work and produce. It is said that many times before fleets arrived with a new cargo of gold and silver trade was stagnant and depressed because the previous cargo had been quickly spent for imported goods. The wealth of the new world enriched every nation except the one that imported it. The Spanish Inquisition in the 16th century sought to restrict personal HISTORY OF BUSINESS DEPRESSIONS 35 initiative and this led to "universal stagnation of the coun- try," affecting alike agriculture and trade. In 1515 the population of Spain was estimated at about twelve million people, but under the disastrous rule of Philip II it declined to less than six million, the cause being attributed to bad economic conditions after the banishment of the Protestants. From the world's richest country she became a bankrupt na- tion. Gold, instead of proving a permanent blessing to Spain, enriched her more vigorous neighbors to the north. The year 1548 records a distressing depression in Eng- land, attributed to the absorption of the small farms by larger land owners who had turned their farms into pas- tures for sheep. Gibbon tells of a petition presented to the king in 1536 complaining "of the new use to which land is put, which hath not only been begun by divers gentlemen, but also by divers and many merchant adventurers, cloth- makers, goldsmiths, butchers, tanners, and other artificers, and unreasonable covetous persons which doth encroach daily many farms, more than they can occupy, in tilth of corn ten, twelve, fourteen, or sixteen farms in one man's hands at once. ... In time past there hath been in every farm a good house kept, and in some of them three, four, five, or six plows kept and daily occupied to the great comfort and relief of your subjects, poor and rich. But now, by reason of so many farms engrossed in one man's hands which cannot till them, the plows be decayed, and the farmhouses and other dwellings, so that when there was in a town twenty or thirty dwelling-houses they be now de- cayed, plows and all the people clean gone," and the churches down, and no more parishioners in many parishes.' Sir Thomas More speaks of the increase of pasturage in Eng- land, "by which sheep may be said to devour men and to un- people towns as well as small villages." Another writer says: "The highways and villages were covered, in consequence, with forlorn and outcast families, now reduced to beggary, who had been the occupiers of com- fortable holdings, and thousands of dispossessed tenants 36 HISTORY OF BUSINESS DEPRESSIONS made their way to London, clamoring in the midst of their starving children at the doors of the courts of law for re- dress which they could not obtain." "The complaints are found voiced in ballads, such as the following : "The towns go down, the land decays, Great men maketh now-a-days A sheep-cote in the church." In the year 1552 a commission was appointed during the rule of Edward VI to "go over the oft-trodden ground and glean the last spoils which could be gathered from the churches. Vestments, copes, plate, even the coins in the poor-boxes were taken from the churches in the City of London." This was the final resort in extortion of money from a country in the last stages of industrial depression. All historians refer to the years 1557 and 1562 as years of stagnant business in the world when the financial and commercial credit of all Europe was shaken to its founda- tions. A severe financial crisis occurred in 1563, when the famous Fugger family, said to have been worth at one time forty million dollars in our money, failed. This family was the richest family in Germany and financed not only a great deal of the business of South Germany, but loaned to the pope, emperor, and kings of Europe. The bankruptcy of this firm involved widespread disaster, "for as time went on they carried on their business less and less on the money contributed by members, and more and more on their credit. All classes in the community nobles, burghers, peasants whose savings did not exceed ten florins, even servants deposited their money at interest with the financiers, and were involved in their fall." Spain suffered a violent business reaction beginning in 1594, when her population again began to decline on account .of large emigration to her colonies. This decrease was sig- nificant because it depopulated the cities where her industry *Quoted by Gibbon. HISTORY OF BUSINESS DEPRESSIONS 37 had been built up, this industry going into the hands of com- mercial interests of other countries. Another reason given for the decline was the Inquisition under which a million Meriscoes and thousands of Jews were exiled under eccles- iastical dictation. The decay of vigor in the Spanish politi- cal organization brought with it beggary and vagrancy until it became a national curse. The depression was so terrific and prolonged that Spain never fully recovered from it. Following the decline of Spain, Portugal rose to great promi- nence and was a factor in the world's affairs for some years. The German states experienced a decline in their com- merce in the sixteenth century. It grew out of religious and civil wars and threw their trade in the North to the Baltic States and in the South to Italy. In the Sixteenth Century arose the mercantile period. Previous to that events moved slowly and depressions were more on the order of trade declines, being gradual and aris- ing many times, though not always, from political causes. The famous tulip craze centered around the years 1630 to 1635, an incident unique in the annals of commerce. It is known in history as the "tulip-mania." "The tulip was a rare flower which had been introduced into western Europe from Turkey and grown in the horticultural collection of Counselor Herwart of Augsburg. The plants were seen by the collector's neighbors who desired some of their own. The blooms became their pride and others were infected with the desire to possess them. Before long the single little flower had turned everything topsy-turvy, the public had caught the fever and started speculating in tulips. All Europe became involved and the flower gradually found its way at first into the gardens of wealthy people and later to all classes. Holland was the center of the tulip trade, and in that country, as well as most others, it became the requisite of society to possess a collection of tulips. But the speculative side was probably the most romantic. The state of the people's mind was such that they wanted excite- ment and speculation. We read of a trader of Harlem who 38 HISTORY OF BUSINESS DEPRESSIONS gave half his fortune for a single bulb. A book of one thousand pages written on the tulip at the time describes another bulb for which 2,500 florins was paid. The demand for tulips, particularly rare specimens, had increased so that they were quoted daily on the stock exchange of Am- sterdam and speculation was rife, not alone in the individual tulips but in the stock of the companies importing the bulbs from Constantinople." A variety called the "Viceroy" was sold for 2,500 guilders ; another, "Semper Augustus," for 4,600 guilders. They were bought and sold even without being in existence, only with reference to the rise and fall of their hypothetical value. An estate in one case had to be sold to meet the deficits of a spec- ulator. The cities of Amsterdam, Harlem, Utrecht, Alk- maer, Leyden, Rotterdam, Woerden, Hoorn, Enkhuisen, Medemblyk, became so speculation-crazed that, by the year 1634, not only every leading merchant, but nearly every citizen, was engaged in the trade. Self ridge gives the following description of the craze: "Stock jobbers made the most of the mania. Few kept their heads and fewer kept aloof from the mania. At first and it was at this immediate period that the disease reached its virulent form everyone had infinite confidence in the values and the speculators gained. The market broadened, and, as is so often prayed for nowadays by Capel Court and Wall Street, the public came in. Everyone seemed to be making profits from tulips, and no one dreamed that prices could fall. People of all grades converted their property into cash and invested in the flowers. Houses and lands were offered for sale at ruinous rates or assigned in pay- ment of purchases made at the tulip market. Foreigners became smitten with the frenzy, and money from abroad poured into Holland. As a result living became more ex- pensive and altered, and in a short space of time almost all conditions of life had to be readjusted because this mania for tulips had turned all the people's heads. The fever of speculation was superseded by an equally intense fever of HISTORY OF BUSINESS DEPRESSIONS 39 pessimism. The whole country was involved, and it became imperative that something be done to prevent general bank- ruptcy. Public meetings were held everywhere. The Gov- ernment was appealed to. But even governments fail in the impossible, as well as in matters which require only fair judgment and unselfishness. The Government did the usual thing. They discussed the matter for three months and then concluded they could not solve the problems, and thus the whole matter rested. Those who had tulips must lose, and lose they did, and this applied to nearly everyone. Hol- land suffered fearfully. Her people, many of them at least, had to begin the accumulation of savings or of fortunes all over again, and for years the commerce of the nation lan- guished." The mania resulted in calamity when the public finally be- came aware of the gigantic folly of the whole thing. The sharper speculators repudiated their contracts which had been made for future delivery and the bottom fell out of the tulip market. Many who had counted themselves rich in tulips found themselves in poverty so far as money was con- cerned. In one town alone during these three years there was invested in hypothetical tulips more than 10,000,000 guilders. London and Paris had followed Amsterdam in the craze but with a lesser frenzy. Their losses were great but were individual instead of universal. In 1640 Charles I upon ascending the throne of England found an empty treasury and proceeded to seize the bullion deposited by the merchants in the Tower of London, then used for the safekeeping of money. This act created great public distress. In 1662 Sir William Petty, discussing land rents, said: "The medium of seven years, or rather of so many years as makes up the cycle, within which Dearths and Plenties make their revolution, doth give the ordinary rent of the Land in Corn." When Colbert became minister of finance in France in 1661, he found business languishing and the country im- 40 HISTORY OF BUSINESS DEPRESSIONS poverished. England, Holland and Spain filled the country with their goods and were enriched by her trade. He saw that his first duty was to get France out of the depression, so he proceeded to increase production at home by stopping largely the importation of foreign manufactures and prohib- iting the exportation of gold and silver coin. Under his ad- ministration France began to prosper. In 1672 Charles II of England found his coffers bare and his credit exhausted. He gave a violent shock to business by a proclamation "refusing payment out of the exchequer of money advanced, and sequestrating 1,328,526 to his own use. The money, although lent by the goldsmiths to the king, was the property of some 10,000 depositors and its loss spread ruin and suffering throughout London." The same year, when the French army advanced on Utrecht, a run started on the Bank of Amsterdam, then the largest in the world, but the bank met all demands and weathered the storm. The business depression which shook Holland in 1791 resulted in the failure of the Bank of Amsterdam after an enviable career of 182 years, and marked the decline of that nation's supremacy in commerce. Holland was the center of stock-jobbing and speculation in the seventeenth century, and naturally she felt reactions from disturbances at a distance. It was the chief aim of Napoleon to shake the economic structure of his enemies, particularly England, and he used every means to break the Bank of England. It would be useless to go into details regarding the various business setbacks due to war and invasion, because that would entail a recital of political history rather than the subject we have at hand. In the Seventeenth Century some economists actually thought that people should be allowed to die in the street. This was in the days of the English "Poor Laws" enacted to alleviate pauperism, and which some claimed accelerated it. In those days vagrancy did not imply distress, but pros- perity. The vagrant laborer was one of high skill who made HISTORY OF BUSINESS DEPRESSIONS 41 good wages, but was constantly wandering in search of still higher wages. In the early centuries of modern times trade was severely depressed from time to time by religious disturbances. "During the reign of Henry VIII, the property of the Cath- olic Church was confiscated, which, in connection with the enclosures, threw large numbers of people out of employ- ment and created great distress among the laboring classes. The monasteries held large tracts of land, gave support and employment to multitudes of people, and at the same time were the only bodies who looked after the poor, and assumed the burden of distributing public charities. The confisca- tion of the property of the guilds was another act of Henry VIII which dealt a severe blow to the industrial masses. The lands confiscated were handed over to a set of court fa- vorites and retainers." "Again (in France) , in 1685, Louis XIV revoked the Edict of Nantes and opened a war of persecution against the Pro- testants. It is estimated that five hundred thousand Pro- testants fled and sought refuge in Germany and other Protestant countries. This was one of the severest blows ever inflicted upon the industries of France, as the Hugue- nots were largely artisans and manufacturers who were placing France among the manufacturing nations of the world, and laying a foundation for that industrial career which has always contributed so greatly to the wealth and prosperity of a country. It is estimated that England re- ceived about fifty thousand of these people. Charles I and James II issued edicts which permitted them to become nat- uralized citizens of England. Those coming from Nor- mandy and Brittany settled largely in the suburbs of Lon- don, others in Coventry, Sandwich, Southampton, Winchel- sea, Dover and Wadsworth. They engaged in making silk, linen, paper, clocks, glass, locks, surgical instruments, and many other articles requiring a high order of skill and artistic taste." 42 HISTORY OF BUSINESS DEPRESSIONS In 1696 the goldsmiths organized a run on the bank of England which was competing with them and strongly threatening to put them out of business. In that year busi- ness was in a terrible condition. Coinage had become so de- based that a law had been enacted requiring recoinage, and during this period business languished miserably. The first instance of what we today call "runs" on banks was when the Dutch fleet entered the Thames. When their guns were heard consternation reigned in London. Every- one who had any money had deposited it with the gold- smiths, the bankers of those times. This money was known to have been lent to the government, which at the moment seemed to offer no security; "each man then hastened to his banker in the hopes of being in time to save some rem- nants of his fortune." Describing conditions in France in 1689 La Bruyere wrote, "Certain savage-looking beings, male and female, are seen in the country, black, livid and sunburnt, and belonging to the soil which they dig and grub with invincible stubborn- ness. They seem capable of articulation, and, when they stand erect, they display human lineaments. They are, in fact, men. They retire at night into their dens where they live on black bread, water and roots. They spare other hu- man beings the trouble of sowing, ploughing and harvesting, and thus should not be in want of the bread they have plant- ed." During the years following people died in herds from actual poverty. Taine estimated that by 1715, in twenty-five years, one-third of the population, six million people, had died of starvation. At the end of the Seventeenth Century the Darien scheme was inaugurated by William Patterson, a Scotchman, who raised a large sum of money to colonize the Isthmus of Darien, now called the Isthmus of Panama, and its failure had the most serious effect on Scotland, impoverishing that country for the time. It brought also a period of financial disturbances in England, which disheartened the business people of that country. Patterson claimed that his business HISTORY OF BUSINESS DEPRESSIONS 43 was wrecked and the panic brought on by his commercial enemies who were jealous and envious of his company. This has a familiar sound today. It was during this period that the Bank of England first functioned to allay the distress of depression. In those days there were long periods of prosperity the same as now, and they all ended in a crash. There were no oil wells then to take the money of the gulli- ble, but it is recorded that one company was formed in Eng- land for the purpose of importing jackasses from Spain in order to breed a more hardy mule in England, one writer remarking "as if there were not enough jackasses in London already." The various depressions that affected European countries in the Eighteenth Century were more or less of a local char- acter, mostly confined to one particular country because commercial operations were not linked by international banking credit and cable connections as at present. The nearest approach to a general crisis came in 1720 when all Europe was struck with the speculative mania, as evi- denced by the South Sea Bubble in England and the Mis- sissippi Bubble in France. This year marked the most famous financial crash in the history of the world. It was a double-barreled explosion. The first, in England, by the bursting of the South Sea Bubble and the second, in France, by the pricking of the Mississippi Bubble. In England more than two hundred other companies, formed along similar lines, followed in the wake of the South Sea Bubble. The company had undertaken the preposterous promise of paying the national debt through a monopoly of the whale fisheries and certain trading privileges in India. For a while it prospered, but in 1719 its capital was raised to 12,- 000,000 pounds and turned into a speculative enterprise. On the strength of its concessions it sold stock to the people, making the most extravagant and exaggerated promises. According to Andreadea money was invested in schemes that "stamped the minds of those who entertained them with what may be truly termed a commercial lunacy." One 44 HISTORY OF BUSINESS DEPRESSIONS project was for the discovery of perpetual motion, another for building of hospitals for illegitimate children, another for making silver out of lead, another to make salt water fresh, and, finally, the most remarkable of all was a project to found a company "for carrying on an undertaking of great advantage, which shall in due time be revealed." This promoter secured 2,000 guineas in a single morning and made off with it. The bursting of the bubble caused an extraordinary in- dustrial upheaval. The speculation approached insanity. Speculation at that time was on more nearly a gambling basis than even at present. The buyer of these stocks simply bet that there were bigger fools than he, and very little trading was done except on the arbitrary basis that the shares should pay dividends to justify the rise in prices. In promoting the South Sea Company the promoters employed the same strategy that the modern stock hawker employs. They promised gold, which they claimed to be on their land, and made various other wild statements. Their shares were first sold at a small price, then suddenly the price was raised and raised again. People who profited went wild with speculative fever, and when the stock had come to several hundred times its original price promoters hastily sold out and the scheme collapsed. Some writers claim the plan of the South Sea Company was feasible and would have made good if the speculative spirit had not entered into it, but it was more profitable to sell stock than to earn divi- dends. It was calculated that the value of all stock issued in the mushroom companies was 500,000,000 pounds sterling. The South Sea Company itself started the panic by launch- ing a campaign to put its competitors out of business, in- stituting legal proceedings against all companies that they claimed were illegally issuing stock. In slaying its rivals the company struck a blow at itself which pulled them all down together. A cry of rage arose against the Govern- ment, it being blamed for having fostered the South Sea scheme. Old families were ruined and new ones enriched. HISTORY OF BUSINESS DEPRESSIONS 45 The principal damage was done by the business depression which followed, together with attempted readjustments of the financial system. The Bank of England itself would have been ruined had its own proposals been accepted in an endeavor to save the South Sea Company. During the run on the Bank of England ruin was staved off by payments in light sixpences and shillings and by en- gaging men to fill up the line, draw money and redeposit it at another window. This slowed up the run until a holiday permitted legal closing, after which the alarm subsided. In an investigation that followed in the House of Commons, it was found that the Chancellor of the Exchequer and several members of Parliament were involved, and these latter were expelled from the House. The government did much to al- leviate the existing distress, and unanimously passed a reso- lution to the effect that "nothing could tend more to the es- tablishment of public credit than to prevent the infamous practice of stock-jobbing." Following this speculation and the failure of the South Sea Bubble, Sir John Barnard spon- sored an act in Parliament against stock-jobbing and specu- lation. This is the first effort on record to curb the evil of speculation. For a century and a half the old building that housed the South Sea Company on Threadneedle Street, London, known as "the Bubble," stood as a melancholy land- mark of what has been termed "the Folly of the Ages." Robert Walpole became first Lord of the Treasury in 1721 and his wise statesmanship averted national disaster. He settled the South Sea affairs, made treaties of peace with other European countries, extended the colonization scheme, and a period of quiet and prosperity followed. With the South Sea Bubble in England and the Missis- sippi Company in France, coming at the same time, Europe experienced a surfeit of speculative disaster. The Missis- sippi Bubble was similar in plan to its English neighbor, also uniting with its commercial projects an attempt to finance the government. A Scotchman, John Law, was the pro- moter. The Company of the West, known as the Mississippi 46 HISTORY OF BUSINESS DEPRESSIONS Company, was organized in 1720 to develop the resources of French holdings in Louisiana and Canada. The ambitious schemes of Louis XIV had burdened France and were such an incubus on the industry of the country that the entire revenue was needed to meet the in- terest. Law offered to "accept at par all the government securities then afloat, although their market value was but 50 per cent. As an equivalent the bank was to be declared a state bank, and its notes were to pass as current money. Shares in the state bank were secured upon the produce of the gold mines in Louisiana, the direction of which was to be controlled by a Mississippi company. Although gold had not as yet been found in that region and its geological structure proves that gold never will be found there shares in the company were eagerly sought. Money poured into the bank treasury, and Law was enabled to declare a divi- dend of 40 per cent. A dividend of 100 per cent was as easy as that of 5 per cent when paid in a paper currency, the amount of which was limited only by the means of printing. Government proclamations of the most mischievous as well as absurd character were issued, in order to meet the diffi- culties of the moment." *"Extravagant ideas were formed of the possibilities of Law's system, and the roads to Paris were blocked by people hurrying there to speculate in shares. Two of the ablest scholars in France deplored the madness at one interview, and at the next found themselves bidding against each other. Coachmen, cooks, and waiters became millionaires by lucky speculation; tradespeople in the street where the exchange was established made fortunes by letting out their stalls and chairs. The price of stock rose until it frightened even the promoter of the system, who interfered in the hope of check- ing speculation, but who found soon that he was unable to check either the rise or the fall of the stock." The shares of the Mississippi Company advanced to thirty-six times their normal par value. Legitimate busi- ness enterprises suffered by the community gamble in these stocks. *Day's "History of Commerce." HISTORY OF BUSINESS DEPRESSIONS 47 The crash which quickly followed was especially serious, as the whole currency consisted now of discredited notes issued by the company. Ruin was widespread, and credit received a blow which made the promotion of legitimate en- terprises difficult for a long time thereafter. The investors became so desperate that the decree of Oc- tober 5, 1720, forbade speculative operators on the public streets of Paris, and the speculators were driven into ob- scure corners of the city. Despair spread throughout the kingdom. A few were made rich, but thousands were im- poverished. Insurrection was imminent, and with great difficulty prevented. The result of an investigation insti- tuted by the Regent proved that nothing but worthless paper remained to represent deposits of 2,000,000,000 livres. Law left the country to escape the wrath of his victims. The ex- perience of the French people in this fiat money enterprise, although it entailed great suffering and hardship on those who were victimized, served to furnish the world a lesson in high finance that has never been forgotten. Law's sys- tem was not so bad, perhaps, if he had been allowed to work it out in an orderly way. Many features of our Federal Re- serve System are the same as embodied in Law's original plan. That Law believed in the scheme he promoted is more than probable. He died destitute at Venice. Nor was the Regent enriched. The political consequences of this disaster were as detrimental to France as were the commercial results. In our time we refer to "Black Friday" as of the year 1869, but the original "Black Friday" came to pass the 6th day of December, 1745, when a panic spread through Eng- land based on a rumor of French invasion. A run started to withdraw specie from the Bank of England. The con- fusion was so great that all the business houses closed. But the merchants met and agreed to accept bank notes, passing a resolution urging all citizens and merchants to adopt the notes. This declaration was signed in the course of a single day by 1,140 merchants and fundholders. 48 HISTORY OF BUSINESS DEPRESSIONS England experienced another crisis in 1763 which spread to the Continent. The Seven Years War had given rise to much speculation and when peace came the day of reckoning was at hand. This brought with it the ruin of merchants and speculators as well. The failure of a firm of brokers in Amsterdam carried with it eighteen important Dutch houses and many merchants in Hamburg. The shock was so great that for some time business was transacted for cash only. In 1772 another commercial crisis passed over England, starting when a member of the banking firm of Heale de- faulted, causing the ruin of creditor merchants. The num- ber of failures that year reached 525, the greatest since the memorable year 1720. Writers of the period say it was a return of the South Sea year, the losses reaching 10,000,- 000. During the depression which followed a series of vig- orous measures were put into effect to alleviate dangers of the kind in the future. During this crisis the mismanage- ment of the affairs of the East India Company was an im- portant factor in the depression. Adam Smith, in "The Wealth of Nations," describes the conditions thus : "Their debts, instead of being reduced, were augmented by an ar- rear to the treasury in the payment of the 400,000, by an- other to the custom house for duties unpaid, by a large debt to the bank for money borrowed, and by a fourth for bills drawn upon them from India, and wantonly accepted, to the amount of upwards of 1,200,000. The distress which these accumulated claims brought upon them obliged them not only to reduce all at once their dividend to 6 per cent, but to throw themselves upon the mercy of the government, and to supplicate, first, a release from the further payment of the stipulated four hundred thousand pounds a year; and, secondly, a loan of fourteen hundred thousand, to save them from immediate bankruptcy." Another alarming crisis occurred in 1783, following the treaty of peace with the American States. That year, fol- lowing the surrender of Cornwallis to General Washington and the British fleet to the Admiral of France, British con- HISTORY OF BUSINESS DEPRESSIONS 49 sols fell to 631/4, the lowest on record. The coming of peace had brought about a wide extension of international trade. New markets were developed very rapidly and extravagant transactions were indulged in. All of this produced a strain on the gold reserves and finances of the country and the crisis followed. A very brief review of the conditions which prevailed in France immediately preceding, and which culminated in the French Revolution in 1789, will serve to show how difficult industrial progress had been. "All the privileges, property and political rights had become vested in the clergy, the nobles and the king. They enjoyed immunities, favors, pen- sions and preferments, while the mass of the population bore the burden of taxation. The privileged classes num- bered about 270,000 persons, 140,000 nobles, 130,000 clergy. There were 25,000 to 30,000 noble families, 3,000 monks, 2,500 monasteries, 37,000 nuns, 1,500 convents, and 60,000 curates and vicars in the churches and chapels." The privi- leged classes owned one-half of the kingdom. Taine's description of the economic condition of the people is vividly drawn:" Examine administrative correspondence for the last thirty years preceding the Revolution. Count- less statements reveal excessive suffering, even when not terminating in fury. Life to a man of the lower class, to an artisan, or workman, subsisting on the labor of his own hands, is evidently precarious, he obtains simply enough to keep him from starvation and he does not always get that. Here, in four districts, 'the inhabitants live only on buck- wheat,' and for five years, the apple crop having failed, they drink only water. There, in a country of vineyards, 'the vine-dressers each year are reduced, for the most part, to begging their bread during the dull season.' ... In a remote canton the peasants cut the grain still green and dry it in the oven, because they are too hungry to wait." "Many farms remain uncultivated, and, what is worse, many are deserted. According to the best observers, 'one- quarter of the soil is absolutely lying waste. . . . Hun- dreds and hundreds of arpents of heath and moor form ex- tensive deserts.' . . . This is not sterility but decadence. 50 HISTORY OF BUSINESS DEPRESSIONS The regime invented by Louis XIV has produced its effect; the soil for a century past is reverting back to a wild state. . . . In the second place, cultivation, when it does take place, is carried on according to mediaeval modes." "Peasants and laborers were compelled to work on roads and bridges without pay. The small farmer was under the absolute control of the nobles and subjected to the most ar- bitrary exactions and species of robbery. He must grind his corn at the lord's mill and press his grapes at the lord's wine press, and pay whatever sum was exacted. Louis engaged in corrupt schemes of impoverishing the people and filling the public treasury. The shipment of grain was prohibited from one province into another, while he lowered the price and bought up the surplus, and when the scarcity thus brought about enhanced prices he sold at a profit. He laid tribute on the business and industrial classes by granting licenses and selling to individuals the sole right to engage in a particular calling or trade. Class hatred became in- tense and a spirit of unrest and jealousy pervaded the whole nation. The nobles looked upon the trading, industrial and laboring classes with contempt. The king treated them 'only as a sponge to be squeezed/ ' This was the condition under which 26,000,000 people existed in 1789 and was the scene of economic depression that brought on the terrible and bloody French Revolu- tion. In 1795 England experienced another severe depression. The country passed quickly from abundance to scarcity, scarcity to famine, and famine to bankruptcy. The Bank of England suspended cash payments. The disorders in busi- ness were severe. The harvest in 1792 was very bad, as were most of the harvests between 1789 and 1802, the price of corn had risen 13s, and in addition to the agricultural dis- tress, a serious economic crisis occurred. The year 1797 marked a period of crisis in Ireland which coincided with the fall in exchange unfavorable to Ireland and an increase in issues of the Bank of Ireland. These events bring us to the nineteenth century. CHAPTER IV. FOREIGN DEPRESSIONS FROM THE BEGINNING OF THE 19TH CENTURY TO THE PRESENT TIME The beginning of the Nineteenth Century found Europe warring and in need of the products of the new republic that had sprung up across the seas, giving America an op- portunity to gain a foothold among nations without inter- ference and to wax prosperous economically at the expense of the Old World. The economic situation in France in 1805 was extremely bad and the victory of Austerlitz was all that saved the financial structure of the Empire. It is said that the financial crisis absorbed the thoughts of Napoleon on the battlefield as much as the fighting itself. "The liquidation which followed the crisis of 1805 caused coin to pile up in the Bank of France to such an extent that the bank was obliged to invest a part in the obligations of the receivers generally and to reduce interest to 2 and 3 per cent. Commerce began to expand again after 1808, and the discounts of the Bank of France reached in that year 142,000,000 francs and in 1810, 187,000,000 francs." The business depression of 1808 affected all the western world. Following trouble in North America it spread to English institutions in Lancashire. That country held American investments to a large extent. From there it spread over England, Ireland and on to the Continent. When the trouble started in America, London houses attempted to help conditions here because it would not do to let their American creditors fail. But they were soon forced to turn their attention to the home situation, and it was several years before matters had worked themselves out and con- ditions returned to normal. At the height of French power, from 1806 to 1815, under the Berlin decree of Napoleon 52 HISTORY OF BUSINESS DEPRESSIONS prices on commodities rose very high in England and there was a tendency to unprecedented speculation. While the French decree did not shut off English commerce, there was fear that it would have this effect. Some writers claim that the depression following the Napoleonic Wars started in 1815, but from the best author- ities it is found there was an over-lap of several years of good times, due to the large amount of inflated money still in circulation. This lasted until about 1819. Alison is authority for the statement that : "Yet the years from 1815 to 1819, though checkered with suffering from these causes, and from two bad harvests in 1816 and 1818, were upon the whole prosperous." The depression came on at its worst in 1819 when, with a comparatively small amount of gold on hand, specie payment was resumed under the gold standard, and this not only caused a sudden and great con- traction in the volume of currency, but it reduced every- thing from inflated and fictitious valuations to a gold basis. The country banks of England increased under the stimulus of speculation from 270 in 1797 to 600 in 1808, and 721 in 1810. The Bank of England, in the meantime, increased its discounts from 9,100,000 in 1804 to 16,400,000 in 1809 and 21,400,000 in 1810. The circulation of the Bank of England rose from 16,400,000 in 1801 to 24,200,000 in 1810, but the increase was trifling up to 1809, and was the consequence rather than the cause of the great increase in prices due to speculation. The quick recovery of France from the most terrible industrial depressions usually connected with her wars has been indeed a marvel. After Waterloo she was obliged to issue 500,000,000 francs, resulting in a disastrous fall of her securities and values in general. "The metallic reserve of the Bank of France fell from 117,000,000 francs on July 1, 1818, to 37,000,000 francs on October 29th. The bank shortened the term of commercial discounts to forty-five days, and in 1819 was flooded again with idle capital." HISTORY OF BUSINESS DEPRESSIONS 53 America began to feel the effects of the Napoleonic Wars about 1818, and this lasted through 1819 and 1820, but France felt the effects previous to this time, although the disturbance reached its height in Europe in 1820. The long stretch covering the Napoleonic Wars in Europe helped the United States to get on her feet economically, while England was having her own troubles. The Bank of Eng- land suspended cash payment on its own notes when the war broke out and it was not for twenty years, or until 1819, that it was again resumed. During all that time England was on a paper credit basis, and yet she carried on some of the greatest wars and commercial projects of her history. Let us compare existing conditions of 1920-21 with those following the Napoleonic wars, a little over one hundred years ago. Osgood's description of that period follows: "The Battle of Waterloo, in 1815, brought peace to Eng- land, and with it a great business depression which plunged thousands of people into misery. With her great navy England had been able to give her merchant ships better protection on the seas than any other nation, and so her goods had little competition from her European rivals in many markets. Now that peace was declared, France and Holland were selling their wares in competition with the English. The English factories had made up more stuff than they could sell under peace conditions, and they were obliged partially to close down ; but at the very time when they were discharging their workers, soldiers and sailors were coming home by the thousand, looking for employ- ment. For every job there were two applicants. Wages fell with a crash. The farmers were in much the same predicament as the manufacturers; they had brought more land than ever before under cultivation just at the time that the factory people in England had less money than ever to buy. One fanner competed with another for what business there was, and prices fell. Those who had bought or rented land at war prices found that they could not make the interest on their investment or pay their rent; those who had mortgaged their land were sold out. Much of the land that was reclaimed had to be allowed to return to 54 HISTORY OF BUSINESS DEPRESSIONS its wild state. At the same time farmers who held their land were driven to farming in a more careful way than ever before. To produce with the least possible expense means efficiency in farming, and this the hard times taught to those who survived the depression. "The effect of the Napoleonic wars on the industrial and commercial life of the German States and Prussia was most ruinous. Lying between France, Austria and the Russian frontier, they became the battle-ground during this great struggle for the contending hosts of Napoleon, Russia and Austria. Through the continental policy of Napoleon their markets were open to the competition of French goods, while they were compelled to pay tribute to the support of French armies and subjected to the most oppressive and burdensome taxation." In the early part of the Nineteenth Century it was said , that Switzerland was the barometer which indicated the state of business in Europe. Switzerland was a neutral, never at war, although affected by the wars which raged around her. Because of her position conditions within her borders reflected the general commercial atmosphere of Europe as a whole. "Lyons was the chief manufacturing city in France, be- ing the centre of the silk trade, and possessing a valuable traffic with England, America, Germany, Belgium, Russia, Turkey, and Spain. The operatives suffered from the vicissitudes peculiar to their trade, and held the reputation of being turbulent and disaffected in times of depression, when they have frequently risen against the authorities." Recovering from this stagnation, a boom started, lasting several years, until, following this period of intense specula- tion and wide inflation, the inevitable crash came, leading to the depression of 1825. "In October, 1824, the coin and bullion at the Bank of England amounted to eleven and three-quarter millions; in August it barely reached three and three-quarter millions sterling. These figures tell their own tale. At the beginning of December several banks failed, panic reigned, the Bank of England was almost drained of its gold. The story is told that the credit of HISTORY OF BUSINESS DEPRESSIONS 55 the country was saved only by the accidental discovery at the last moment of a box containing one-pound notes to the amount of upwards of half a million sterling ; but although such a box was undoubtedly so discovered, the tide of the panic had, it seems, been stemmed by that time. The Bank of England, by the wise freedom with which it discounted bills and paid out money, exhausted the terror of the public." Previous to the crisis of 1825 money could be borrowed from English banks at 2 per cent. At that time there was a proverb current in the financial world that "John Bull can stand many things but he cannot stand 2 pel cent." When the price of money remains at a low level for any considerable period people will turn to risky invest- ments if no good ones offer themselves, and a crisis is the necessary result of such experiments. This low rate of interest is what brought about the crisis of this year, par- ticularly encouraging speculation in South American enter- prises. This began following the South American Revolu- tion, which threw off the yoke of Spain and left several countries open to free trade with England. Some writers estimate that 150,000,000 pounds were invested in Latin America, and when it was evident that they would not begin to pay the collapse came. The Bank of England realized its mistake at the last minute and raised its dis- count rate to 5 per cent. But the bank reserves con- tinued to decline until December 31st, 1825, when they reached only 1,260,895 pounds, which led to unheard of confusion. The scarcity of coin was such that business was almost at a standstill. Sixty financial companies went down. The London bank failed. General distress in- increased by the failure of thirty-six country banks and numerous important commercial firms throughout Great Britain. The stringency in gold was due to "the immense loans contracted by the governments of Europe and Latin America and the fever of speculation in domestic and foreign companies, which drained England of her specie. Besides, considerable financing was necessary to establish 56 HISTORY OF BUSINESS DEPRESSIONS the new States in Europe that had been carved out of the French Empire. All of this seriously lowered the stock of gold in London. It was estimated that 150,000,000 of British money, including that invested in government loans, had been sunk in Mexico and South America alone. Domestic activities were marked by extensive building of canals and turnpikes. Besides, there were six hundred and twenty-four domestic stock companies organized in the two years preceding, with a nominal capital of 372,173,100. Demands for so much capital caused a sharp increase in the value of money and the prices of commodities, and manufacturers were forced to borrow money at the in- creased rates to carry on their ordinary operations. The reserves of the Bank of England became depleted with the large loans; foreign exchange turned against her; rates of interest went higher, and business broke under the load. From June 11, 1838, to June, 1839, there were 306 failures in London, and 781 in the provinces. The condition of woolen manufacturers in England in 1826 was described by an English manufacturer who wrote to his brother in America: "If you were in this country you would scarcely hear the sound of a woolen-shuttle in all the neighborhood; and, take all Saddleworth through, you will not find one shuttle out of forty going. It is in- deed one of the greatest convulsions the mercantile world has ever known, and, since the date of the South Sea trouble, probably has not had a parellel." From 1836 to 1839 depression again stalked through Europe. England experienced a crisis in 1836, which may have been the forerunner of our trouble of 1837. On top of her own difficulties England was particularly affected by our panic because of her large investments in this country. In that year France felt the flurry less, and the Bank of France was able to lend aid to the Bank of Eng- land, as well as to the United States and to Belgium. The Bank of Belgium suspended in 1838. A series of reverses HISTORY OF BUSINESS DEPRESSIONS 57 occurred in Holland in the years 1837 and 1838. Numerous mercantile failures took place and a brief panic ensued. The European troubles started in November, 1836, with the failure of two banks, one in Ireland and one in Man- chester. "Three large business houses known as the three W's, Wilkes, Wilde, and Wiggin, which had closest rela- tions in the granting of credit to America, were in particular affected. Since the imports of the United States to this time largely exceeded the exports the balance was met not by settlements in specie, but by the sale of American securi- ties of one sort or another and by the securing of credits abroad." The distress continued in England until 1839. It was so severe that revolutionary propaganda was spread broadcast and the "Condition of England" was seriously discussed in the Cabinet. A vivid description, typical of old time panics, is given by writers of the time. We have witnessed them in our country, but our children, perhaps, never will. John Francis wrote: "Consternation reigned paramount, and almost every third man was a defaulter. All foreign securi- ties were without a price; the bankers refused to advance money ; the brokers' cheques were at first doubted and then rejected. With a desperation which will never be forgotten, the jobbers closed their books, refused to transact any busi- ness, and waited the result in almost abject despair." From 1845 to 1847 England had what is called her Rail- road Panic. Fifty-two new railroad companies were chartered in England in the first four months of 1845. I? addition a large number had already started building. So fierce was the mania for buying railroad stock that disaster was early predicted. The London Times said: "We can not add fifty millions of money to railway enterprises with- out the most ruinous, universal, and desperate confusion." To the newspaper efforts were added repeated warnings by leading financiers. Finally came a general uncovering of big frauds. The London City Press said : "Never since 58 HISTORY OF BUSINESS DEPRESSIONS the days of the old South Sea Bubble has wild speculation run so rampantly mad." A large number of the new railway schemes had to be abandoned, and many persons possessed of property and estates found themselves involved in sudden and unforeseen disaster. At the same time there was great speculation in grain and cotton. In 1847 business on the whole European continent suffered severe reaction because of heavy rail- road building which was reflected in this country by a temporary crisis and depression. The severe depression occasioned in Ireland by the potato crop failure in 1847 paralleled famines of the darkest ages of the human race. Peasants literally died of hunger in large numbers. In some districts it became impossible to provide coffins. The population decreased from eight to six million in two years. More than 700,000 migrated to the United States. France experienced another severe depression between 1835 and 1840, the period when the failure of the Bank of France to meet expanding commercial needs being most keenly felt. Louis Philippe owes his fall in 1848 to the financial crisis and business depression which preceded it. There had been a long series of business failures, and the economic situation was so strained that the people became desperate. In 1848 and again in 1871 the Bank of France suspended payments, but its notes did not depreciate seriously. The panic which started in the United States in 1857 spread over the entire commercial world. The news of the failure of the Ohio Life and Trust Company caused intense alarm in England for the 80,000,000 of English money which was believed to be invested in American securities. A group of speculators added to the alarm in London by forming a combination to 'bear* the market, by finding flaws in securities and working through the press to excite general distrust and depress prices." Runs started on banks HISTORY OF BUSINESS DEPRESSIONS 59 all over England and the Bank of England itself was about to suspend when "a letter reached the bank on November 12th authorizing them to issue notes in excess of the legal limit, provided they maintained the rate of discount at 10 per cent." Public excitement was suddenly calmed, but the demand for discounts continued heavy for more than a fortnight. The English iron and textile industries were especially affected. Factories were closed, blast furnaces extinguished, and the greatest distress prevailed amongst the working classes. The pressure on the money markets of Europe was severe and prolonged, and those with investments in America were obliged to absorb their losses. Great prosperity in America during the ten years preceding 1857, referred to as the "Golden Age," had attracted millions of dollars of European capital. Europe had over-loaned and we had over-spent. There was a crash due in both countries. So heavy were the American investments that money again became scarce, but the cry had gone up against sending so much money to America. It seemed that everybody had investments in the New World. English banks holding American securities closed their doors one after another. As was customary in England, the crisis was followed by an inquiry. English people want to know the why and wherefore of their losses. The discussion brought out the old, old story of speculation and the entire lack of discretion on the part of public, banks and business. Simultaneously with the development of the American panic of 1857 mutiny broke out in India. With this came the news of the failure of the Western Bank of Scotland. During this crisis the discount rate of the Bank of England reached 10 per cent. Seventy members of the London Stock Exchange failed. Officials of the Bank of England after- ward said that there was more commercial distress caused by the panic of 1857 than by that of 1847. 60 HISTORY OF BUSINESS DEPRESSIONS An important step was taken by the Bank of England, following the panic of 1857, for the protection of its gold reserve. This consisted in raising the rate of interest rapidly by degrees of one per cent at a time, instead of fractions of one per cent, in order to curtail the export of gold. Other countries on the Continent suffered in the crisis, though less acutely than England, France and America, because of the smaller scope of their commercial affairs. France experienced her troubles also. The Credit Mobilier had paid 10 per cent in 1853 ; 13 per cent in 1854 ; 47 per cent in 1855; 24 per cent in 1856; and then the crash came. Paris and other cities felt the same stagna- tion in trade, the discharge of workmen, and the glut of commodities, as existed in England and the United States. The same phenomena existed in Germany, Austria, Bel- gium and Scandinavia in smaller degree. Hamburg, which was closely connected with American trade, felt it most. It spread to India, China, Australia and South America. But once more Europe recovered as usual, and prospered for a few years, until the cotton industry was almost ruined by the effects of the Civil War in America. A "cotton famine" occurred in Lancashire, when 800,000 wage-earners were deprived of their livelihood. The cotton famine of 1861 marks another epoch in the commercial history of the world. It was one of the most terrible depressions on record. Scherer in his book, "Cot- ton as a World Power," gives a graphic account: "English cotton manufacture had grown to such enormous propor- tions as to support one-fifth of the entire population, with an annual pay-roll of $55,000,000. Over a thousand million pounds of cotton were consumed every year, producing for exportation 2,800,000,000 yards of cloth and nearly 200,- 000,000 pounds of twist and yarn. There were 2,650 fac- tories, of which 2,195 were localized in Lancashire County and on the borders of its two southern neighbors, these fac- tories containing over 30,000,000 spindles and 350,000 looms HISTORY OF BUSINESS DEPRESSIONS 61 run by 300,000 horsepower, and employing nearly half a million operatives, of whom 56 per cent were females. Be- fore the close of the year 1862, 485,454 of the inhabitants of Lancashire were recipients of organized charity." "The cause of this swift and appalling catastrophe is not far to seek. A vast population in a limited area was dependent for its daily bread on the cotton industry. During the year 1860 America furnished 84 per cent of the entire European supply of cotton, and during 1862 only 7 per cent, while the increased imports from India had not yet had time to alleviate the situation even measurably, and the de- mand for cotton in the northern states had meanwhile be- come so intense that Liverpool actually re-exported 52,000 bales to the United States in 1862, so that the net receipts from America were less than 1,000 bales a week, as against 78,000 bales in 1860." The London Times on December 7, 1861, said: "Christ- mas comes this year on a country bright with sun and frost, but on a people oppressed with a national loss and threaten- ed with a formidable war. Already closed mills and short time have given some part of our population an earnest of what they may hereafter expect; already speculation is more careful than it has been for many years, and the comber appearance of our churches and chapels last Sunday portends a bad season next spring." The same paper said a fortnight later: "There should have arrived by this time at the southern ports of America, for shipment to England, from 500,000 to 1,000,000 bales of last year's cotton crop. By the latest estimate it was calculated that not 1,000 bales had been sent down, and it was known indeed that small stocks of cotton remaining over from the preceding year's crop had been removed from the ports to the interior of the country." During the first half of 1862 only 11,500 bales reached England from America, less than a hundredth of the quan- tity for the same period of the year preceding. Half of the Lancashire spindles were idle, and the prices had jumped to thirteen pence a pound. In August it went up to twenty pence, and in the following month to a half crown. A midsummer issue of the Saturday Review gives a vivid picture of the crisis at its height : "The cotton famine 62 HISTORY OF BUSINESS DEPRESSIONS is altogether the saddest thing that has befallen this country lor many a year. There have been gloomy times enough before this. We have seen Ireland perishing from actual starvation, and England half ruined from commercial dis- stress. War and rebellion have taken their turn among the troubles from which a great nation can scarcely expect to be long free. But in the worst of our calamities there has sel- dom been so pitiable a sight as the manufacturing districts present at this moment." Continuing, Scherer says: "By the close of that awful year the resources of organized charity for the relief of Lancashire pauperism had been exhausted, and alms were trickling in from Australia, Canada, India, and even China. Nearly a quarter million operatives were entirely out of work, while only 121,129 were working full time, and, as already noted, 485,454 people were receiving alms, com- prising 24.1 per cent of the entire population affected." Richard Cobden wrote from Lancashire in November to a friend in Staffordshire: "Few people can realize the appalling state of things in this neighborhood. Imagine that the iron, stone and coal were suddenly withheld from Staffordshire, and it gives you but an imperfect idea of what Lancashire, with its much larger population, is suffering from the want of cotton; it reverses the condition of the richest country in the kingdom, and makes it the poorest. A capitalist with 20,000 pounds invested in buildings and machinery may be almost on a par with his operative? in destitution, if he be deprived of the raw material which alone makes this capital productive. Unhappily, the winter is upon us to aggravate the sufferings of the working people." The London Times of December 31st said : "The memory of the year which ends this day will hereafter be chiefly associated with the American war and its consequences at home. No crisis in modern times has been so anxiously watched, nor has any European war or revolution so seri- ously threatened the interests of England." This was the final climax of the famine. George Mc- Henry was too late in 1863 with his book on "The Cotton Trade," addressed to the people of England in behalf of the Confederacy, and as an apology for slavery. The ma- chinery of the mills had been adjusted to Surat or Indian HISTORY OF BUSINESS DEPRESSIONS 63 cotton, of which 1,179 bales came in during the year, to- gether with increased supplies from Egypt, Turkey and Brazil. In 1864 the supplies from India proved sufficient to meet the demand, and the weekly number of applicants for alms was reduced to 135,000. Surat cotton was very unpopular, however, being short, harsh, brittle, and one- third less than normal wages were paid; so that many of the operatives preferred to be treated as paupers. Ham- mond cites reports that "the word Surat" became an odious epithet in Lancashire, so that a firm of brewers brought a libel suit to recover damages for having been maligned as "Surat brewers," and John Bright used to tell a story of a church-going operative who once interrupted his pastor's prayer for increased cotton supplies with the fervent ejaculation, "Amen, O Lord! but not Shoorat!" In 1865 the famine ended, having cost the British cotton trade in the neighborhood of $350,000,000, not including about $20,000,000 expended by the public in alms. Many mill owners, says Ellison, regained a part of their losses, but a large number lost nearly everything they were worth, while many were reduced to bankruptcy. John Bright, always an active friend of the Union, was astute enough to write to Sumner, during the height of famine: "This country is passing through a wonderful crisis, but our people will be kept alive by the contributions of the country. I see that some one in the States has pro- posed to send something to our aid. If a few cargoes of flour should come, say 50,000 barrels, as a gift from per- sons in your northern states to the Lancashire working men, it would have a prodigious effect in your favor here." Three relief ships accordingly came out from New York to Liverpool, laden with bread, meat, and flour, a gift which, coming as it did from "those involved in the real agony of war to those for whom that war had occasioned distress, passing though sharp, was neither unnoticed nor barren of results." 64 HISTORY OF BUSINESS DEPRESSIONS France also suffered in the cotton famine, consuming as she did 240,000,000 pounds annually, which was two-thirds as much as America itself consumed. All their cotton came from America and when it was shut off 300,000 people in one district alone were made absolutely destitute, subsist- ing, according to one writer, "by roaming at night from house to house, and demanding, rather than asking, alms." At Rouin, out of 50,000 operatives 30,000 were laid off, and in the surrounding country only one-fifth of the hand weav- ers had work. Conditions were so bad in France that Louis Napoleon, who then had an army in Mexico under Maximilian, at- tempted to induce England and Russia to join him in in- tervening in the American war on the side of the South. In America the cotton famine was only slightly felt. New England mills, of course, curtailed, but the manufacture of war munitions took the place of cotton manufacturing in giving employment and stimulating business. It will be seen that for three decades Europe had ex- perienced a panic regularly every ten years, beginning 1837, then 1847 and 1857. Is it possible that her people were superstitious enough to believe that another would inevitably come in 1867 and thus, by their fear and 1 reparation for it, cause the stringency and depression of 1 866 ? It is reasonable to suppose that people would be get- ting ready a year ahead. There is no direct evidence that this is a fact, but there were a number of articles going the rounds of the press in those days on the subject of the recur- rence of panics and depressions every ten years. It came a year ahead of time, in 1866, when the financial structure of Great Britain was shaken by failures of important broker- age houses, although trade itself was little affected. The crisis of 1866 was precipitated by the failure of Over- and & Guerney Company. Again it was the result of over- speculation. The announcement of failure was followed by what is referred to as the second "Black Friday" of English history. The Overand & Gurney Company had HISTORY OF BUSINESS DEPRESSIONS 65 liabilities of 19,000,000, and, with the exception of the Barings, was the largest brokerage house in England. Up to this time this was the largest single failure in commercial history. A number of other banks and joint stock com- panies failed, carrying with them numerous investors. For some months after the panic English credit fell into entire disrepute on the Continent and a circular from the Foreign Office containing an accurate explanation of the distinction between scarcity of money and insolvency, appeared only to aggravate* the prevailing suspicion. The disclosure revealed the irregularity and unsoundness of the affairs of a large portion of the English business world, and it was some years before confidence was fully restored. Duguid described it as the financial crisis of the century. Describing the second "Black Friday" of May 11, 1866, Andreadea says: "The prevailing excitement is in- describable; Lombard Street was impassable, it seemed that demands for accommodation must increase to an ex- traordinary extent, and doubt was thrown upon the position of the most respected houses. On this day alone the Bank of England made advances to the value of nearly four millions, and its reserve, which had been 5,727,000 pounds in the morning, was reduced to about three millions." English and French cotton manufacturers were again upset by the crisis of that year. During the Civil War blockade, when these countries were unable to get sufficient cotton, prices had practically trebled. Under the stimulus of demand India, Egypt, China and Brazil began growing cotton. These crops reached Europe at a time when the released crop of America had thrown large quantities on the market and a crash in price caused great disorganiza- tion in the cotton trade, which was reflected in all other industries. Various nations of Europe have at times attempted to start industries which were not adapted to their people or their conditions, and as cycles of depression came along these industries were wiped out. England attempted to 66 HISTORY OF BUSINESS DEPRESSIONS establish a silk industry, but trade depression wiped it out and the factories for cotton spinning and weaving in Hol- land have never really thrived in competition with Eng- land and have always been influenced adversely by every depression in trade. At the time of the separation Belgium tried to make herself industrially independent of Holland, but the trade depression which followed wiped out these weaker industries. In depressions the rule of the survival of the fittest seems invariable. Holland survived the monetary crisis of 1866, when confidence was tost through- out Europe and interest rates were 8 per cent in Amster- dam; when shipbuilding was brought to a standstill, and colonial trade collapsed. The panic of 1873 swept over all Europe, America and the entire world, although its effect was felt worse on the Continent than in England. Some writers describe it as "the most widespread and representative of all crises." Brazil, the Argentine Republic and Peru, all experienced the distress, as well as the countries of the Orient. For sev- eral decades the nations of the world had been becoming closely linked together by commerce and trade so that they were all affected by European financial troubles at times. Another writer says : "The crisis of 1873 was perhaps the first world-wide depression affecting all branches of trade, even in the most distant countries like Australia and South America." The money panic was felt from New York to Moscow, affecting trade, commerce and agriculture in all the intervening countries. It is supposed that the panic started in Germany as a result of over-speculation follow- ing the payment of enormous indemnity by the French to their conquerors. Prices were inflated on every European bourse, and when the crash came the fall in securities on the Berlin market alone was estimated at 131,138,000 thalers. The German government feared the results of over-specu- lation and instructed the Bank of Prussia to refuse the paper of new joint stock companies. The speculators transferred HISTORY OF BUSINESS DEPRESSIONS 67 their operations to Vienna and in the first quarter of 1873 $140,000,000 of so-called securities, but with little real security behind them, were issued at the Austrian capital. In reality, the crash in Vienna was the first signal of ap- proaching disaster. The Bank of Austria was permitted to lend largely on such securities in order to keep the speculators from failure, but on May 27th, the day before the opening of the International Exposition, seventy failures occurred, and on the next day one hundred and ten, involv- ing establishments of the first importance. "The bourse was closed, the government suspended the limit upon the note issues of the bank, loans were made by the treasury, and a syndicate of bankers was formed to make advances on sound securities. A general panic was thus prevented, but credit was so far impaired that it was not until 1875 that business in Austria resumed its wonted activity." France, having been forced to liquidate in 1870, after the Prussian War, felt only the ripples of the crisis which were wafted back from the storm in other countries. England passed through another short depression in 1875, when a number of large concerns failed, including several in South America and India, but the Bank of England got behind the situation and after a brief shakeup business resumed its normal course. The disturbance of 1882 in Europe started in France by the failure of the Union Generale, a banking institution founded in 1878 as an adjunct and backed by the Roman Catholic Church, being devised to aid her members as against the Jews and the Unbelievers, who, through a series of political upturns, had secured control of the finances of France. M. Eugene Bontoux, its promoter, was in a class with Law, only not so conscientious. The story of the Union Generale is a book in itself, and Zola wrote his novel, "L'Argent," based on its history. "In this institution was concentrated the money of the Church, its institutions, the hierachy, and its followers. At first it succeeded in beat- ing the Jews, causing one of the French Rothchilds to com- 68 HISTORY OF BUSINESS DEPRESSIONS mit suicide, but gambling in its stock became widespread and the crash came in 1882, affecting all of France and spreading to neighboring countries. France had so fully recovered from the Franco-Prussian War that stock-jobbing and other forms of reckless speculation flourished in Paris. Investment companies and various schemes had sprung up like mushrooms in the speculative atmosphere of the pre- ceding years, and those which were upon too grand a scale for any but the great financiers and the rich had their imitators among the adventurers of the street, who accepted gratefully in installments the petty savings of the poor." The panic started in Paris and Lyons in January, 1882, with the collapse of the Union Generale, followed by a fall in all classes of securities. The sum of 924,000 was withdrawn from the Bank of England for France on January 30th, and 2,000,000 was drawn out during the week. The resultant liquidation was attended by much loss and the uncovering of many corrupt financial practices. Great Britain experienced a long period of depression beginning about 1875, gradually growing worse until in 1885 a commission was appointed to investigate the causes and means for business recovery. This commission took evidence during a portion of the years 1885 and 1886. "Questions were submitted to the Chambers of Commerce, principal business men's associations and labor organiza- tions, calling for answers upon the conditions of trade, in- dustries and wages, during a period of twenty years, be- tween 1864 and 1884." Various causes were given for the depression, but as usual the commission reported a multiplicity of suggestions after the natural course had brought about some relief. The commission reported that wages had held up and the incomes of business and profes- sional men had actually increased, although profits had been smaller, land rents lower. The causes were given as over- production and keen competition, together with changing conditions throughout the world, particularly as to rela- tions between capital and labor. HISTORY OF BUSINESS DEPRESSIONS 69 The year 1890 marked the famous Baring failure in England, which started in Argentine. In Great Britain, during the seven years preceding the disturbance, the trade and industrial situation, although differing in detail, was practically identical with developments in the United States during the same period. The name of Baring had been closely connected with the financial world, and held in high esteem for more than one hundred years. At one time they were the fiscal agents for the United States Government in England. They were a strong house and represented some of the largest financial interests in foreign countries. As far back as 1819 the Due de Richelieu had said : "There are six great powers in Europe England, France, Russia, Austria, Prussia and Baring Brothers." And it was later on the loss of these foreign investments that the firm was wrecked. It was their Argentine investments which got them in the quicksands. On account of the prosperous conditions in England a considerable percentage of the population, including even laboring classes, had been able to accumulate savings which they were eager to place in some remunerative investment. The successful conversion of the national debt of Great Britain during the year 1888 had produced a considerable decline in the rate of interest and had stimulated the appe- tite of the public for new investments. The firm of Baring Brothers underwrote Argentine public loans and disposed of them to the British public. Thirteen Argentine provinces during the period 1886-90 floated securities in London to the extent of 38,700,000, the National Government nego- tiated loans amounting to almost 25,000,000, and Argen- tine municipalities floated about 5,000,000 of their bonds in London. British investors also placed between forty and sixty million pounds sterling in Argentine railroad projects, besides an equal amount in miscellaneous investments. Dur- ing the distress a total of 765 firms went into liquidation in Great Britain. The country, however, was saved from a panic. There had been no real panic since 1866, when by the 70 HISTORY OF BUSINESS DEPRESSIONS banking act of that year the Bank of England was enabled to assure the public that all solvent business would be able to secure loans to carry it through periods of distress. Money had been poured into the Argentine Republic from all Europe for the development of her resources until the natives might have well though their credit abroad was without limit. A boom began in 1866 which "carried up the price of lands, which a few years before could be had almost for the taking, to $50,000 per league, while suburban lots bounded upward from a few cents to several dollars per square metre. Extravagance and luxury ruled among the governing classes, and the banks which were opened in 1887 under the Guaranteed Banking Law advanced money with- out security by the hundreds of thousands to men of promi- nence and by the thousands to their humble followers." Germany was also involved in the Argentine crisis, a total of over $88,000,000 worth of Argentine securities having been floated in Germany. It was this period of heavy in- vestments and establishing branches of German banks in Argentine that was later reflected in the World War when German interests succeeded in keeping the moral influence of Argentine on the side of Germany. Germany recovered from the Argentine crisis very quickly, the rate of discount at the Reichsbank reaching only 51/2 per cent. France was scarcely affected by the catastrophe. It was many years before conditions in the Argentine Republic re- turned to normal and her business recovered its balance. The first shock of the crisis of 1893 was felt in Australia, where great headway had been made and people were fast piling up wealth, based mostly, however, on highly inflated valuations. The United States was next, and from here the shock was communicated to Berlin and Vienna. Italy was also affected by the prevailing distrust and France saw her importations shrink from 4,767,867,000 francs ($920,000,- 000) in 1891 to 3,936,720,000 francs ($760,000,000) in 1893. Even Turkey suffered in the widespread depression because of the fall in prices and lessened demand for her HISTORY OF BUSINESS DEPRESSIONS 71 products. In no country, however, was depression felt as badly as in the United States. The collapse of business in Australia in 1893 was one of the most severe ever recorded in any country. Large sums of capital had been poured into that country from Europe and the natives made the mistake of thinking it was a part of the accumulation of their own wealth. This year, when the time came to pay interest, difficulties were faced. The Australian banks were plunged deeply into land loans which could not quickly earn returns, and as Europe was no longer willing to send new money to take the place of the interest withdrawn, serious stringency was created. The signal of the actual crash came on January 29th, when the Federal Bank of Melbourne failed. The other banks attempted to create the impression that this failure was due anyhow and simply cleared the atmosphere and left the others still stronger, but withdrawal of deposits began against all banks and one after another stopped payment, among them the English and Australian Bank, with 91 branches, and the London Charter Bank with 58 branches. Altogether four- teen large institutions failed with aggregate deposits of 85,000,000. England again felt derangement in business in 1895, following the inflation of the Boer War. The war had drained Britain, and her consols declined to such an extent that the Government was sorely puzzled. The depression was not lengthy, however, and in two years business had re- covered its stride. The German industrial crisis of 1901 probably was confined to that country. Our crisis of 1903 followed this industrial upheaval in Germany and the one in England in 1902. Turkey has been very backward in modern business, although she has experienced periods of prosperity and depression along with other countries. Turkey's people are very suspicious and distrustful, and do not like paper money. In 1894 some counterfeit bank notes were found in circula- tion and a rush was made on the Imperial Ottoman Bank 72 HISTORY OF BUSINESS DEPRESSIONS to redeem the notes, a total of $1,000,000 being presented within a week. In 1907 the Imperial Bank of Germany was put to a severe test, not merely as a reflex of the crisis of the United States, but of the pressure from excessive demands at home, due to expansion and speculation. The commerce of Aus- tria was particularly affected in this crisis. In 1907 the Bank of Spain was the only institution in Europe that did not raise its discount rate. That year the Bank of France sent part of its gold to London to counteract the effects of the American crisis. Japan led the recent depression when her financial panic broke in May, 1920. This spread to one country after an- other until the whole civilized world was in the throes of depression with the possible exception of defeated Germany. Europe felt the depression about as much as did the United States. Great Britain had more men out of em- ployment in proportion to population. The stagnation was felt throughout the world, the Orient and South America being particularly affected, and Scandinavia and Denmark suffered seriously. France was less affected than any other country in Europe. Germany stimulated an artificial pros- perity which may finally end in utter collapse. In Holland most trading companies suffered heavy losses, and only by the most conservative administration kept their capital in- tact. The Dutch banks were generally wise enough to keep ample reserves from their years of enormous profits to tide over the period and no important failures were reported. Denmark's trade was severely depressed because of German competition. Other Scandinavian countries suffered from the same conditions. The shipping of the North European countries was badly affected. The unemployment in these countries took on a serious aspect, presenting a problem of grave proportions, the paper, textile, glass and shoe indus- tries of the Scandinavian countries being particularly af- fected by German competition. A very notable change be- gan in 1921, when England took the first steps to gain HISTORY OF BUSINESS DEPRESSIONS 73 control of its war-time currency notes. The minimum of 368,200,000 outstanding in December, 1920, had been re- duced to 316,000,000, or nearly 15 per cent during the year. The paper money issues of the Bank of France, which in November, 1920, were 39,600,000,000 francs, had been reduced 2,500,000,000 francs within ten months. Consider- ing how gradual the process of currency contraction has been in the past, this certainly was a remarkable achieve- ment. The financial chaos was so widespread that cancellation of international debts was seriously discussed in all coun- tries. Along this line Alexander D. Noyes, financial editor of the New York Times, recently said: "England was declared to be on the road to ruin half a dozen times during the century of costly wars which ended with the Battle of Wataerloo. . . . France was declared 'economically ruined' three times within two centuries. She had not only been depleted of men and treasure by the disastrous cam- paigns of Louis XIV., of Napoleon, and of the Franco-Prus- sian war, but on all three occasions she lost, like Germany, great portions of her national domain. France paid so- called impossible indemnities. History after 1720 and 1815 and 1871 is an open book." CHAPTER V DEPRESSIONS OF THE COLONIAL PERIOD Religious persecution has probably been played up too much by historians as influencing the colonization of America. It was economic distress prevailing in Europe and the efforts of men to get a living, more than any other one thing, that caused immigrants to come to America. This country offered a great attraction to the industrious settler, who was assured an independent existence owing to the great quantity of free land to be had practically for the asking. Capital was not required to finance agriculture as is the case today, for the reason that the pioneer with little or no money could set itself up and earn a living from the very beginning. In the earliest times, since there was no paper money, credit was not easily inflated. Gold and silver were fairly scarce, so that very little business was done in money trans- action, and fortunate was the colonist who could get hold of enough specie to buy necessary tools brought over from Europe. Barter was resorted to and certain staple com- modities were declared by law to be legal tender in payment of debts. Furthermore, a jail sentence was imposed upon debtors so that the borrower measured well his prospects for payment before going in debt. The first money of the early colonies was wampum, the currency the Indians used, but it was found inadequate for the growing needs. While wampum money was nothing but white and black beads made from shells, yet it had a definite value the same as gold or silver money have. It was not fiat money, as is generally supposed, because it was redeemable among the Indians in beaver skins and these had a definite, stable value in Europe. The decline of the beaver trade brought wampum money into disrepute. HISTORY OF BUSINESS DEPRESSIONS 75 When it ceased to be exchangeable in large sums for an ar- ticle of international trade the basis of its value was gone. While in these pioneer times there were periods of keen distress, there were no long continued and widespread depressions such as we began to experience later, because there was little speculation and over-production. Over- production was impossible when the producer lived next'N door to the consumer and knew his wants. Even the manu- facturer, who was the country shoemaker and village black- smith, knew exactly how many pairs of shoes the townspeople would want and how many plows the farmers would need. There must have been at least a financial stringency in the year 1649 when a student at Harvard, later president of the college, "settled his bill with 'an old cow/ and the accounts of the construction of the first college building include the entry, 'Received, a goat 30s. plantation of Water- town, which died/ " As the population of the colonies grew wider business relations became necessary, and with it came a demand for capital with which to develop the latent resources of the country. This agitation brought the Pine Tree Shilling, which was designed to take the place of the Spanish coins in circulation and to serve in the place of "country pay/' which was simply an exchange of farm com- modities, the price of which was set by the town judge or in similar manner. The coinage of Pine Tree Shillings was started in 1652, but this coin soon depreciated in value and their minting was stopped by order of the Crown in 1684. At various times the colonies were depressed by acts of the English government, which gave trade and industry severe setbacks. In 1651 it was enacted that the colonies should export only to England such products as they had to sell and that they should send them only in English built ships. "In 1697 the exportation of wool yarn, or woolen man- ufactures, to any place whatever was prohibited. In 1719 the House of Commons condemned all American manufac- tures as tending to independence. In 1732 the exportation of hats was forbidden ; and in 1750 rolling mills, iron fur- 76 HISTORY OF BUSINESS DEPRESSIONS naces, and forges were declared nuisances to be suppressed by the colonial governors." According to Hinsdale: "The finest pine trees in the forests were marked with the 'broad arrow,' denoting that they had been selected as masts for the King's ships, and that they must not be cut by the lumbermen. Even Lord Chatham said that in a probable contingency he would not allow the colonists to make a hobnail." The year 1666 was a year of greatly depressed trade which was so bad that the colonies of Maryland, Virginia and Carolina made a treaty under which they all agreed to stop planting tobacco for one year in order to raise the price. The first general depression which swept through the col- onies as a whole, so far as records show, was in 1669. "The 'glorious revolution' of that year did not bring the results that the people had wished, although a new charter had been won, but the friction between colonial and home gov- ernment almost immediately became greater than ever, be- cause many of the most pressing needs of the colonists were ignored, and the Americans felt obliged to help themselves. The business situation in the colonies was worse than it had been for a long time. Indian troubles at home and wars in Europe interfered with commerce and the help they should have had from England did not come. Moreover, the West Indies, with which the colonies had so much to do, were far from prosperous. The people of the Massachusetts Bay Colony were the first to devise a scheme to remedy the money troubles ; they believed that if these could be helped, the commercial situation could not fail to improve. The immediate cause of the legislation was the scarcity of money and the necessity of meeting the expenses of the wars with the Indians. An issue of paper money was authorized, the first on the Western Continent, as a means of relief. "In 1683 an extraordinary series of occurrences grew out of the low prices of tobacco. Many people signed petitions for a cessation of planting for one year for the purpose of increasing the price. As the request was not granted, they HISTORY OF BUSINESS DEPRESSIONS 77 banded themselves together and went through the country destroying tobacco plants wherever found." Another big depression occurred in 1690. Massachusetts issued paper money to put out an expedition against Quebec. Bills of credit were issued to the amount of $40,000, which sum was used mainly to pay the soldiers. The movement was frustrated and this money also depreciated in value until it was brought up to par by the governor of the colony making it legal tender for taxes. New York and Penn- sylvania soon followed in issuing paper currency. Later Rhode Island, Connecticut and New Hampshire resorted to this expedient and finally the southern colonies. By 1750 the paper money of Massachusetts had depreciated to one- half of its face value in silver. The country was flooded with issues of twelve distinct colonies, resulting in hopeless confusion. General business depression followed. There were few banks then, and those that did exist were private in character and under no governmental regulation or con- trol whatever. A pamphleteer of 1690 said, "Silver in New England is like the water of a swift running river always coming and as fast going away." In 1710 trade was adversely affected in the Province of Virginia, and there was much hardship on account of the confusion of coins in circulation. Such heavy discounts were exacted that "the General Assembly fixed the value of the coins of Peru, Mexico, Portugal, Flanders and other countries, and made the penalty for refusal to take them a loss of the debt. It was even necessary to enact a similar law to save the copper coins of the mother country from ruinous discount." In 1714 John Colman, a merchant of Boston, proposed a scheme for the establishment of a bank as a "remedy for the existing embarrassment of trade." All colonies issued paper money, and they all suffered from the results. In 1722 a notable industrial depression swept the colony of Pennsylvania. There was little currency and great dis- 78 HISTORY OF BUSINESS DEPRESSIONS couragement. The people had no money with which to buy, shops were deserted and many people were leaving Phila- delphia. The farmers' crops were reduced to the lowest value. "All the European goods imported, as well as the bread and flour or country produce, were bought up and engrossed at a low price by a cabal of only four or five rich men, who retailed them again on credit at what rate they pleased, taking advantage of the people's necessities and circumstances. By this means they soon got the whole country into their debt, exacting bonds of everybody at 8 per cent." The year 1740 is another one of marked depression. That was the year of the legislation in England against the colonies issuing paper money. The depreciation was so great that every department of business and industry was affected. (That year sterling exchange in Massachusetts was quoted at 550). Pelathiah Webster, a merchant of Philadelphia, writing about conditions which existed in 1741, said: "We have suffered more from this than from every other cause of calamity; it has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemies." A pamphlet of 1743 speaks of the bills of credit in New England issued on loan "to themselves, Members of the Legislature, and to other Borrowers, their Friends, at easy and fallacious Lays, to be repaid at very long Periods ; and by their provincial Laws made a Tender in all Contracts, Trade and Business, whereby Currencies, various and illegal, have been introduced which from their continued and depreciated nature in the Course of many years have much oppressed Widows and Orphans and all other Creditors." In 1748 New England again sent an expedition against Louisburg, a fortress on the Island of Cape Breton. The expedition was successful, but again too much paper money HISTORY OF BUSINESS DEPRESSIONS 79 was issued and depression followed when it depreciated ten to one. This was the last paper money issued until the Revolution, as Parliament had already voted to enforce the "Bubble Act" in the colonies, which prohibited the issuance of paper money. Despite their experience, the colonies liked paper money. It was demanded in all colonies and all made the error of issuing too great an abundance. Natu- rally, this led to depressions when periodical house-cleaning of finances came around. Much of the paper was never redeemed, being a total loss to the holders. All through our history we have had a peculiarity that stands out among all the nations of the world in that paper money was always popular with us. The denial of the right to make paper money was not the least of the grievances which led to the Revolution. One of the first things the Continental Con- gress did was to authorize an issue of paper money. Long before Cornwallis surrendered to Washington at Yorktown "continental paper money had depreciated to the value of 75 to 1, and during the formation of the Union fell to 1000 to 1 and then expired, but the people, satisfied with gaining their freedom, suffered the result without a murmur." The years preceding the Revolution found no organized activities in our banking or industrial system. An eco- nomic depression prevailed during the decade prior to the Revolution. This was due to the fact that the colonies depended largely on foreign trade for their prosperity, which was adversely affected by the enforcement of the un- popular English measures and from the colonies' retaliatory policy of non-importation. The depression of this period was accentuated by the "Sugar Act," which practically destroyed the lucrative business of rum distilling in New England, together with other branches of the trade con- nected with it. Dissatisfaction over existing conditions lurked in every corner, and a large element of the people inflamed by "hard-times" agitators, ranged in a body on the side of the Revolution. This depression set in in 1764 and lasted through to the outbreak of the Revolution. It 80 HISTORY OF BUSINESS DEPRESSIONS had more to do with the Revolution than has ever been recorded in history. The Colonists had outlived the barter days of their early history. They demanded a medium of money exchange out- side of the English specie, distribution of which was con- trolled from the other side of the water. There is no doubt but that the English government aided in bringing about the depressed economic conditions because of the spirit of revolt that was growing in America. England naturally did not want the Colonies to build up a monetary system of their own. It might later be used to finance a revolu- tion ; therefore the decree against the issue of colonial paper money. Students of economic history agree that the plan on which this paper money was issued was financially sound in principle, which fact cemented some of the more con- servative element with the radicals. When the war broke out the Colonists had been through a long period of depres- sion. They had no accumulation of wealth to fall back on and no system of money of their own with which to finance the conflict. The Continental Congress was only an emer- gency body with little authority and no compelling power, yet at the beginning of hostilities this congress authorized the first issue of paper money to an amount equivalent to two million pounds. A total of $241,552,780 of this paper money was issued. As the amount was so enormous for those times, and greatly in excess of the actual needs of the people, the different states failed to support their credit and the bills began early and rapidly to depreciate. The Continental paper dollar fell to the value of two or three cents in silver, and at that time an expression synonymous of utter worthlessness, "Not worth a 'continental" was started an expression that we still hear to this day. Thus did our colonial ancestors experience these cycles of business in their repeating monotony, the same as we of the Twentieth Century. CHAPTER VI CRISES, PANICS AND DEPRESSIONS DEFINED In our national history there has been twenty-one major business depressions. In addition, there have been nu- erous local disturbances or temporary setbacks that might be classed as minor depressions. Those described in this book, however, are the ones which carried business below the normal line as shown by official statistics. Various writers, sometimes for a particluar end, have ascribed cer- tain depressions to certain years, but the unfailing truth of statistics does not bear them out. Some claim that we had business depressions in such years as 1867, 1882 and 1900, but the most authoritative statistics show them to be normal years. Our eagerness to make progress, and our constantly in- creasing population, make it sometimes appear that we are having depression when in reality statistics show that we are only standing still. When we are passing through normal times we do not seem to know it; our mind wants to tell us that we are in one state or another, either boom or depression. When times are not actually booming, we think they are depressed. Such is the American spirit. We probably have the most severe depressions in this country because of our inane desire to make money rapidly, or in the language of the street, "to get rich quick." There- fore we take long chances, emboldened by examples which we see on every hand. We live in the only country in the world where a person can make a million over night, so to speak. A large element of our business people believe that liberality pays and that we can make money by spend- ing money. A foreigner who visited us said we are a great people because "we spend more accidentally than we do on purpose." Our individualism leads to recklessness. Then 82 HISTORY OF BUSINESS DEPRESSIONS when some untoward incident happens the bubble bursts and we are called to account by the natural order. It can be seen, however, that we are getting over our individualism to some extent. Our government is becoming more paternal, and we lean more and more on our neighbor and co-operate more extensively with our competitor. The gambling ele- ment in our business is being routed to some extent. We demand greater stability in business, and with this move- ment we are eliminating many panics and making depres- sions less violent and destructive. The ambition of the average American is in the direction of money. Money brings him power. A generation back the spectaicular American would risk his last dollar on the chance to win big stakes, and when he failed he carried many others with him. In recent years there have been some changes in this procedure because the rest of us do not care to be pulled down by the gambler, and his tactics are being disclosed and discounted. The best definition of what we call a commercial cycle is given by Lord Overstone : "A state of quiescence ; improve- ment; growing confidence; prosperity; excitement; over- trading ; convulsions ; pressure ; stagnation ; distress ; ending again in quiescence." The progress of the world and the advancement of civiliza- tion has gone forward in rising and receding waves. The world has been afflicted with economic convulsions at pe- riods the same as it has been with war and pestilence. The phenomenon of national or world depression may be likened to the "blues" which come over most individuals. The great writer, Defoe, in 1728 said : "The prosperity of a na- tion rises and falls just as trade is supported or decayed." A panic is a sudden outbreak or fit of hysteria in financial circles. It is a frantic effort to get hold of money either by withdrawing deposits or selling securities for fear of loss. A crisis is a brief period of acute strain and may be either financial or commercial; financially, because of a HISTORY OF BUSINESS DEPRESSIONS 83 stringency in the money market and commercially, because of uncertainty from various underlying causes. A depression is a state of lowered vitality of more or less lengthy duration in financial or commercial circles or both. Usually depression is brought about as a result of panic or crisis, although that rule is not invariable. A panic breaks suddenly, although it may have been smouldering for a long while, only waiting for a match to touch it off. A crisis is the peak of a multiplicity of troubles which have come to a head. If a crisis is not promptly and properly met, it will break out in panic, but with the proper application it will pass off without affecting the industrial structure to any great extent. Crises occur, as a rule, at the height of periods of great activity and speculation. They usually mark the close of such periods and the coming of depres- sions. The literal definition of the word "depression" is: state of dullness or inactivity ; a protracted season when business falls below normal. A depression is a decrease in the rate of production in wealth, both by lack of power to buy by one class and unwillingness to buy by another class. Sometimes we recover from depression quicker when it is accompanied by a panic, because when the financial structure is threatened all the resources available to the Government are thrown into the breach and the currency is placed where it will do the most good and bring quicker relief. Where no panic accompanies depression it is often allowed to wear itself out, which is a long and painful pro- cess. Business depressions are not necessarily the out- growth of panics or money stringency, although with few exceptions they have followed that phenomenon. In the short depression of 1914, as a recent instance, there was neither panic nor money stringency, but purely an un- certainty which prevailed on account of the outbreak of the European war. A crisis often marks the culmination or turning point from expansion to liquidation and accompany- ing depression. It is the result of the use or abuse of capital 84 HISTORY OF BUSINESS DEPRESSIONS leading to exhaustion of funds. Webster describes crisis in this manner : "The point of time when it is decided whether any affair or course of action must go on or be modified or terminate; a state in which a decisive change one way or the other is impending; specifically, a time of difficulty, danger and suspense in commerce or finance." An essayist on the subject says: "Unless new resources are placed in the breach crisis will lead to panic. In 1907 the United States Treasury was too late in coming to the rescue of the New York banks, which caused a panic. The crisis of that year occurred several months before the panic broke in October." A crisis is something we will always have, but with proper legal and economic safeguards provided, the danger can be avoided through the same process as the signal system on a railroad. We should have reached a station now where we can safeguard against panics by being prepared for such crises as unlocked for conditions might bring about. While there can be crises without panic, there can be neither crises nor panics without depression, either local or general. Panics do not necessarily bring general depression. We have had many panics that have passed away without affect- ing more than the financial centers, and these only temporar- ily. Some of them never got on the first page of the news- papers. As to whether or not a panic will lead to depression depends upon whether its force has broken the credit struc- ture. If the prosperity phase of the cycle has not run its course, and inflation has not reached its height, a panic will have little effect on business in general. If, however, it hap- pens at a time when inflation and speculation have run ram- pant, and the elasticity of credit has reached its limit, then depression will result because there are no resources at hand to stem the evil effects. The depressions of 1837, 1857, 1869, 1873, 1893 and 1907 started with panics. Such depressions as 1809, 1819, 1847, 1914, 1920 were not accompanied by panics, although they set in following crises. HISTORY OF BUSINESS DEPRESSIONS 85 From medical science we learn that anything that stimu- ulates the heart will bring an indirect reaction. The same may be said of our economic life. Bagehot expresses it well: "At intervals . . . the blind capital of a country is particularly large and craving ; it seeks for some one to devour it, and there is 'plethora;' it finds some one, and there is 'speculation' ; it is devoured, and there is panic." Panics, crises and depressions are often interlocked. Back of the entire structure of business, however, is money, and some details of money panics and crises here are given when they are directly responsible for 'the depression of the period. Only those panics directly bearing on trade de- pressions are recorded here. England has had no panic since 1866, although she has had a number of severe and pro j tracted industrial depressions. Not even the Baring failure of 1890 caused a panic. Men writing of their day unanimously say that the people were in much better condition to withstand the shock of the depression about which they wrote than were those of pre- vious times. This shows that as the decades go by we have at least made some progress in softening the blow, spread- ing the periods of frequency and preparing resources to withstand the strain. Depressions run their course in all countries. France particularly suffered from depressions at the end of the Eighteenth and beginning of the Nine- teenth Centuries. Had we not declared our independence when we did, it is doubtful whether we would have received any help from France. After her war with England, which was raging during our revolutionary period, France's finances were in such a condition as a result of a terrific depression that it is a practical certainty she would have been unable to render us any help whatever. All writers agree that the most severe depressions o6cur in countries whose business is highly developed, and this is obviously true because there is more money in circulation, more commodities and securities changing hands and, there- 86 HISTORY OF BUSINESS DEPRESSIONS fore, more possibility for wide fluctuation. In the older countries, such as France, Germany and Italy, depressions have been less violent than in America, which was new and on a more speculative basis. For one hundred and fifty years previous to 1844 England experienced the most des- perate panics. Her money then was placed on a sound basis and the government practically took control of the Bank of England. They have not suspended specie payment since that time. In the world-wide depression of 1920 Japan was the only important country that experienced an actual old-fashioned panic. This was no doubt because of the fact that her finan- cial system lacked a sound basis and her inflation was so extraordinary that a panic was inevitable when the turn came. A country in a state of rapid development is more exposed to fluctuations than an older country whose values have become stabilized over a long period of years. Consular reports, as filed with the Department of Com- merce in Washington, reveal business depressions in every country at different times, or at the same time. Business depressions usually follow the accumulation of idle capital in the banks in the form of deposits, the swelling of the cash reserves, and the reduction of commercial loans. Newton believed that the voluntary actions of men en masse are subject to the Law of Action and Reaction. Says a contemporary: "We look upon a mob as the last thing which would work in accordance with scientific law, but psychologists tell us that the mob is one of the best illustra- tions of Newton's Law of Action and Reaction." There is more in that than one would credit on first thought. Men's minds follow the spirit of the times, but what creates that spirit often requires deep study to ascer- tain. We know that we have the phenomena of political uprisings, racial upheavals, the rise and passing of social fads or fashions. These pass away and oftentimes look fool- ish to us afterward. The phenomenon of the business cycle affects our minds in the same way. When a spirit of pros- HISTORY OF BUSINESS DEPRESSIONS 87 perity prevails, people's minds run in that direction and they are entirely over-sanguine. Then the tide turns, they lose confidence, and all people talk about is disaster. We saw a perfect example of this in 1920. There was no panic, no untoward incident, but a variety of small local conditions that started men talking hard times. Early in 1920 the highest peak had been reached; buyers were determined that they would not pay the exorbitant prices asked. It therefore was to their interest to talk hard times and pre- dict depression so as to bear the market. This may not have been a major cause of the depression, but it all had its psychological effect and spread rapidly, and actual condi- tions followed the thoughts that were in the minds of the people. Waves have come over the United States that historians now look back upon and find almost inexplicable. They sim- ply must be attributed to a state of mind, a mania that ex- isted at the time. Admittedly, if we have these periodical social phenomena, there may be something to the claim that we can have economic phenomena as a result of a peculiar state of mind. We can readily see where theorists have some foundation to stand on when they point out that na- ture is in itself a succession of waves. The tides of the ocean have never been explained ; epidemics appear and re- appear ; religions take hold of people and die out. Who can explain the Salem witchcraft, if it was not purely a craze that temporarily affected the minds of the people? How can we account for the waves of resentment that swept our country in its early years, at one time against the Quakers, again against the Baptists, still later the Anti-Masonic out- breaks, the "Know-Nothings," the Ku-Klux Klan, or Anti- Catholic movements ? Such phemomena have swept through our history from time to time ; they could not be explained at the time and have never been explained since. But busi- ness and financial panics are not altogether the result of fear or a state of mind. There are deep underlying condi- tions which must be met by real action. 88 HISTORY OF BUSINESS DEPRESSIONS It has been a practice since the days of the Mississippi Bubble to legislate against business depression, and from time to time legislation has helped. Hard times will almost invariably turn a poltical party out of power. Statesmen have repeatedly promised on the stump relief from distress, and after getting into office have taken the stand that eco- nomic conditions could not be changed by legislation. In times past economists have gone to a great deal of trouble in writing books and articles on the causes of de- pression, and many were quite sure that they had found the seat of all the trouble. Today, causes they attributed are en- tirely removed and yet we still have depressions. A century and a quarter ago Adam Smith insisted that the production and importation and exportation of corn was the one con- trolling barometer of business. He said, "the money price of corn regulates that of all other home-made commodities." In my opinion, Ricardo, himself a successful business man, wrote far better on economic questions than Adam Smith, whose admittedly classic works are the bible of theoretical economists. History indicates that we have a general depression on an average of every nine or ten years, some more severe than others. Sandwiched in between, about every five years, there has been a minor depression or temporary setback. Statistics prove that business has never remained below normal for more than three years, and, on an average, only a year and a half. While production is shown not to remain below normal for more than this average, it may remain at normal for three or four years, after which time great up- ward strides are made and a boom usually sets in. Our panics have usually occurred in the Fall of the year when finances are ordinarily strained on account of crop- moving demands. The crises of 1837, 1847, 1857, 1873, 1890 and 1907 all occurred in the Fall. The minor crises nearly all occurred in the Spring, breaking out in March and May. It stands to reason that there is no accurate regu- larity as to the time of arrival of depressions, because if HISTORY OF BUSINESS DEPRESSIONS 89 that were true safeguards could be taken that would to some extent eliminate depressions. One of the most interesting stories bearing on this subject is that told by a Chicago real estate man, which gives the history of a quarter acre of land in the heart of Chicago. The story tells of its original value at $20.00 in 1830, when Chicago had a couple of hundred people, and how it rose and declined through the vicissitudes of boom and panic, each succeeding wave of good times carrying it higher and making it more valuable, reaching a value of $1,250,000 in the nineties and probably two or three times that today. One early European writer referred to America as a back- ward country, giving his opinion that backward countries which produce raw material largely for export felt depres- sions far more than manufacturing countries. He said: "The specialization impressed upon a backward country by commerce with advanced industrial countries, confining it to growing cotton or wheat or sheep or wine, exaggerates the irregularity imposed by nature upon its productivity, by making it subservient to the fluctuating demands of dis- tant and wholly incalculable markets." There is no one outstanding cause of depressions, unless it be speculation, and all crises can hardly be laid to the door of this evil. We have had depressions caused by war, cur- rency inflation, political changes, and many other causes. One panic, that of 1857, was caused largely by too much gold. This will probably be a revelation to the average citizen, because in our day we have heard so much of lack of money as a cause of depressions. The discovery of gold in Califor- nia in 1848 flooded the country with great quantities of gold until it became cheap. This gold reached the East in such abundance that it brought about a development far beyond the needs of the country at the time. These new enterprises, together with needless numbers of new banks, could not pay dividends, with the result that confidence was under- mined and panic ensued. However, this is the only depres- sion on record caused by too much gold. In practically all 90 HISTORY OF BUSINESS DEPRESSIONS of the others the question of too little gold entered, unless an exception might be made in the depression of 1920, when we had so much gold that the exchange rate was decidedly against us, causing us great loss of foreign trade. Periods of abundant gold have their handicaps the same as periods of lack of gold have theirs. In classifying our depressions five can be attributed to financial panics, and these are the worst in our history. These were in 1819, 1837, 1857, 1893 and 1907. They brought the most far-reaching effects because confidence in the financial system itself was shaken. When people lose confidence in the value of the currency that is handed them in payment for labor or commodities, it takes a long time to recover. In each of these periods a new system of money had to be adopted and the old financial system reorganized. Herbert Hoover recently said there had been fourteen depressions since the Civil War. No doubt, included in that number were some minor crises that were largely confined to Manhattan Island. The old idea that Wall Street is a barometer of the business of the country has long been ex- ploded and, to a large extent, its manipulations have but lit- tle effect on the balance of the country. The history of our nation has not been the steady tri- umphal march so often depicted, but an irregular growth in- terspersed with periods of depression in length equal to those of prosperity. CHAPTER VII. THE DEPRESSION OF 1785-89 Following the Revolutionary War, the country went through an experience similar to that following the late World War. For the three years 1782, 1783 and 1784, fol- lowing peace, conditions were fairly prosperous because of the reaction from the strain, the jubilant feeling of victory, and as a result of war demands and the comparatively abun- dant specie left in the country by the British and French armies. But this was not to last long. The brief period of over-trading led to the depression of 1785 to 1789. The specie quickly left the country for payment of imported goods, and industry and commerce were hampered by the absence of a good monetary system. They also suffered severely from the falling prices and the loss of the markets that were now more than adequately supplied, as regards many articles, by importations from Europe, mainly from England. Not only did peace in Eng- land and other European countries affect our exports ad- versely, but what wealth we had was soon spent in supply- ing our urgent needs from those countries. American merchants had become embarrassed and were unable to pay for the goods they had bought on credit. The position of both producers and traders in the United States was made much worse by the closing of the British West Indies to American shipping. In 1785 the panic came. The monetary situation was deplorable, not only because the coin had been exported to pay for imported goods, but also from the fact that the Confederation had no authority to coin money and to establish a uniform system of currency. Politically and economically that was the gravest crisis in American history. Both the government and the people were bankrupt. There was no money to pay the ministers to 92 HISTORY OF BUSINESS DEPRESSIONS foreign countries, and they actually had to beg the foreign governments for funds. It was made a part of their duties as envoys to solicit loans without security for their govern- ment and, incidently, for their own expenses. Franklin attempted to borrow from France and got only insignificant sums. France was having her own economic troubles that year, which were brought to a climax by bad crops and the scarcity of metallic money. A petition addressed to Congress by the tradesmen and manufacturers of the town of Baltimore represented the sentiment of the manufacturing sections of the country : "Since the close of the late war, and the completion of the Revolution, they have observed with serious regret the man- ufacturing and the trading interest of the country rapidly declining, and the attempts of the State Legislatures to remedy the evil failing of their object; that, in the present melancholy state of our country, the number of poor in- creasing for the want of employment, foreign debts accumu- lating, houses and lands depreciating in value, and trade and manufactures languishing and expiring, they look up to the Supreme Legislature of the United States as the guar- dian of the whole empire, and from their united wisdom and patriotism, and ardent love of their country, expect to de- rive that aid and assistance which alone can dissipate their just apprehensions, and animate them with hopes of suc- cess in future, by imposing on all foreign articles which can be made in America such duties as will give a just and de- cided preference to their labors; discountenancing that trade which tends so materially to injure them and impov- erish their country ; measures which, in their consequences, may also contribute to the discharge of the national debt and the due support of the Government." John Jay wrote: "Our commerce was then (before the Revolution) confined to Great Britain. We were obliged to carry our commodities to her market and, consequently, sell them at her price; we were compelled to purchase foreign commodities at her stores and on her terms, and were for- bidden to establish any manufactures incompatible with her view of gain. In future the whole world will be open to us, and we shall be at liberty to purchase from those who will HISTORY OP BUSINESS DEPRESSIONS 93 sell on the best terms and to sell to those who will give us the best prices." No country is prosperous with trade balances so largely against her, and it is little wonder that American business suffered at this period with a heavy trade balance against her. During this period, known as the Industrial Revolu- tion in England, that country had come into possession of many marvelous inventions which gave her an advantage over our manufacturers in producing cheaply. It was during this period of depression that the first eff ort was made on behalf of the distressed "Infant Industries" to secure a protective tariff against foreign competition. The second act passed by Congress under the new constitution on July 4, 1789, opens with the preamble, "Whereas, it is necessary for the support of the government, for the dis- charge of the debts of the United States, and for the en- couragement and protection of manufacturers that duties be laid on goods and wares and merchandise imported lo- cally." Thus was the beginning of protection for the ex- press purpose of "encouragement and protection of manu- facturers." The country was flooded with foreign goods, largely from England. The industrial isolation during the war, as well as the demand for material for sustaining the army and navy, gave a decided stimulus to the struggling manu- facturers of the colonies. Many iron works and other manufacturers were called into existence, and in some cases were given encouragement by a system of bonuses. Upon the resumption of imports these industries suffered immediate and disastrous setbacks. Many were not firmly established and were forced out of existence. In 1784 the imports from England amounted to 3,679,000 and in 1785 to 2,308,000. These goods largely took the place of those manufactured in the states during the war. To make matters worse, the exports fell off proportionately to a large extent, as against an average of 1,045,000 dur- 94 HISTORY OF BUSINESS DEPRESSIONS ing the ten-year period before the war they dropped to 749,000 in 1784 and to 894,000 in 1785. Following the war, starting in 1781, in spite of previous disastrous experience, seven of the states again plunged into the issuing of paper money. This money, of course, depreciated in value to almost nothing, and, in fact, this depreciation helped the already depressed conditions, and the resentment was such that when the Constitution was adopted, the emission of bills of credit as legal tender by the states was forbidden and an end was put to the issue of government paper money for seventy years. The loss of the West India trade amounted to 1,537,664. This was caused by an Act of Parliament which excluded American vessels from the West Indian trade, by admitting only British built and manned vessels. The economic prosperity of the states depended largely upon our trade with the West Indies, and its loss was a third important factor in the depression of that period. Such were the stagnant condi- tions of business in the states at that time that it is little wonder that predictions were freely made in England that the new government would never survive. The Revolution was primarily a struggle for commerce, and tactics of Great Britain through trade and navigation laws largely destroyed our foreign commerce for some years after independence was won. In 1787 a Philadelphia man came into possession of two carding and spinning machines which were supposed to save the labor of one hundred and twenty men a day. These machines were purchased by an agent of a British manu- facturer and shipped back to Liverpool, the object being to nip American manufacturing in the bud. Bolles says: "The hostility to American manufacturing was manifested in another way during the same period. Experiments were then rife for introducing the cotton-plant into the country. Whether the English manufacturer at that early day foresaw the adaptation of the plant to the climate and soil, we do not know, but, with the vain hope of HISTORY OF BUSINESS DEPRESSIONS 95 destroying its cultivation, and preventing its manufacture, a considerable quantity of cotton-seed was purchased and burned in Virginia by a British agent. The same spirit continued for years, and was exhibited in many unexpected and exasperating ways to the American manufacturer." "It is notorious," says Niles, "that immediately after the close of the Revolutionary War great sums of money were expended to destroy our flocks of sheep and ruin our rising manufacturers. They bought up and immediately slaugh- tered great numbers of that useful animal, and spared no expense to send 'home' the few artisans who had struggled hither, with their machines and implements of trade." The depreciated Continental currency augmented the de- moralization of business. The immense profits that were anticipated from Independence were far from realized. The non-intercourse with foreign countries during the war had involved merchants and shipbuilders in financial embar- rassment. Independence placed us outside the British Navi- gation Act and deprived us of the commercial advantages hitherto accorded American vessels in British ports, so that, in addition to our depreciated currency and lack of a definite financial foundation, we were faced with the problem of building anew our foreign trade. European manufacturers accumulated stocks which they were ready to dispose of at 25 per cent below London prices in order to regain their American trade. "Ships filled with sail duck and linen from Holland and Russia, muslins and silks from India and China, thronged our ports and found eager buyers among the wealthy Americans who had been deprived of these luxuries during the war. Such a trade balance of $18,397,335 worth of imports against $3,746,725 worth of exports was bound to bring depression because the difference had to be made good in gold and silver, which could not be spared." The feature of the depression of this period, with its at- tendant economic chaos, was the emigration of people from the seaboard over the mountains into the Central West, where a cheap living and a new start in life were possible. 96 HISTORY OF BUSINESS DEPRESSIONS That the laborer should take advantage of this situation to better his lot in a new country was only natural. This is in direct contrast to the depressions of the later part of the Nineteenth Century, when the reverse was the rule : the new settlers of the newer parts of the West finding no market for their products and the mortgages threatening foreclosure returned to their old homes in the East, where they were among friends and relatives. The migration westward had a beneficial effect in aiding depressed conditions, by bring- ing about a scarcity of skilled labor and other wage earners. Those remaining began to receive increased pay. This condition was confined almost entirely to the North. The agriculturists of both the North and the South were able to produce or secure the necessities of life, the standard of living being low. There were few of extreme wealth and few in extreme poverty. The payment of bounties was one of the means adopted in different states to aid industry and trade to recover from the depression. "New York gave liberal bounties on hemp ; New Jersey gave similar assistance to wool, flax and hemp ; Maryland encouraged salt production, and Georgia assisted the producers of hemp, flax and wheat." Fiske describes conditions in his Critical Periods of Amer- ican History: "The War of Secession (Revolution) was a terrible ordeal to pass through, but when one tries to picture what might have happened in this fair land without the work of the Federal Convention the imagination stands aghast. Certainly it cannot be too strongly insisted that the winning of the Revolutionary War did not establish the liberties of the American people ; it merely cleared the path for their establishment." The depression of the period was a large element in the ratification of the Constitution. There was a strong paper money partly in all of the states who feared that if the states were federated they would not be permitted to issue paper money. In reading the history of debates in the dif- ferent states on the question of ratification, it is noted that HISTORY OF BUSINESS DEPRESSIONS 97 the principal point at issue was the best means to relieve the existing distress. New York ratified because she feared economic pressue from New Jersey and Connecticut. Dela- ware was the first to ratify because she had a big trade with Philadelphia. But it was still a serious question whether the Union would ever be perfected because of the attitude of Virginia, which finally ratified by a very narrow vote. There was a strong movement in Virginia to withdraw from the Confederation and join Spain through an alliance, as shown in a letter from Wilkinson to Governor Miro, of Louisiana: "I can give you the solemn assurance that I found all the men belonging to the first class of society in the district, with the exception of Colonel Marshall, our surveyor, and Colonel Muter, one of our judges, decidedly in favor of separation from the United States and of alliance with Spain." New Hampshire demurred from ratification for some time on the paper money issue, as shown from the following ex- tract : "There are perhaps (if it could be impartially known) , three-quarters at least, and more likely seven-eights of the people so fractious and discontented as to wish paper money on loan may be made by government to give a spring to commerce and agriculture . . . extreme disorders re- quire extreme medicines as their remedies. Paper money, or even leather buttons, when stamped by authority and funded with realities, will answer for internal commerce as well as silver and gold." New Hampshire furnished quite a number of men for Shay's Rebellion. Further borrowing at home or abroad was almost impos- sible; requisitions were of slight avail; domestic creditors were thoroughly alarmed. Furthermore, the depression lasted much longer than was expected. The hopes of the new states were very slow in being realized. It was the economic stress of the times that prompted Alexander Hamilton to start gathering statistics for his memorable report on manufactures. Had it not been for the genius of 98 HISTORY OF BUSINESS DEPRESSIONS Hamilton the commercial future of our country would have been dark indeed. Hamilton took hold and established a reasonably sound financial system which gained the con- fidence of the business communities, and industry was helped to regain its feet. It required ten years to get our industries on any kind of a stable basis and start a general upward trend. Before the war the fishing industry had given employ- ment to the largest number of people, but it was virtually destroyed, and the people who had formerly depended upon it for their livelihood were reduced to destitution and misery. "For a time the coastwise trade prospered, but before long, in common with the other branches of trade, it expe- rienced a severe depression. Credit everywhere was im- paired, there was little money, and the various states, jealous and fearful of the commercial prosperity of one another, began to erect barriers that crippled the commerce of all. New York attempted to break up the trade of Connecticut and New Jersey by imposing heavy fees on every vessel en- tering from those states. Delaware and New Jersey tried to attract to their ports the foreign trade of Pennsylvania and New York by a system of legislation offering lower import duties and more favorable trade regulations. When Massa- chusetts and Rhode Island placed almost prohibitive duties on imports carried in British ships, Connecticut admitted such imports free, hoping to obtain a monopoly of do- mestic trade in British products. Several of the states im- posed heavy duties on goods from all other states with the two-fold object of encouraging domestic production and of conserving the supply of coin." In those days even the mails were of little aid to business, the postal service not having been organized on a practical basis. There were very few concerns doing a national busi- ness. Each state was a political parcel to itself, and eco- nomically so to a great degree. We can imagine the extent of intercommunication when a decade after the Constitution was adopted and the permanent government established, in the year 1801, the gross receipts from the post-office were only $32,000. "Nearly all the clothing was made in the HISTORY OF BUSINESS DEPRESSIONS 99 family, as was the cloth from which it was cut. The leather was tanned and the grist ground at a near-by tannery and mill, but the boots and shoes were made by father during the long evenings of autumn." This was the business situation in those days outside of the cities which had a shipbuilding and carying trade. The general poverty, therefore, was felt and described as a general scarcity of money. A writer of the day said : "Many are willing to buy and pay fair prices, but they have no money ; they cannot borrow it, although they have large stocks of goods to hypothecate." While there was plenty of specie immediately after the war, prices were abnormally high, which of itself indicated a scant supply and accompanying poverty. Outside of land wealth the colonists had been largely drained, and toward the end of the war, and perhaps two years after, we had more specie wealth than anything else. John Marshall, de- scribing the situation at that time, said: "The discontent and uneasiness, arising in a great meas- ure from embarrassments in which a considerable number of individuals were involved, continued to become more extensive. At length two great parties were formed in every state which were distinctly marked, and which pur- sued distinct objects with systematic arrangement. The one struggled with unabated zeal for the exact observance of public and private engagements. The other party marked out for itself a more indulgent course; viewing with ex- treme tenderness the case of the debtor, their efforts were unceasingly directed for his relief. They were uniformly in favor of retarding the administration of justice; of af- fording facilities for the payment of debts; or of suspend- ing their collection and remitting of taxes." Mass meetings were held, radical speeches were made, and complaint was general. There was particularly an under-current of agitation against the extortion of lawyers, who profited from suits against debtors, pauperizing many for their own gain. It was charged that salaries of public officials in Boston and the State of Massachusetts were unreasonably high, and that taxes due in 1786 in that state were estimated to amount to nearly a third of the income of the people. 100 HISTORY OF BUSINESS DEPRESSIONS All this had its culmination in the outbreak of Shay's Re- bellion, which involved a total estimated at 12,000 to 15,000 men recruited from Massachusetts, largely, and augmented by men from Rhode Island, Connecticut and New Hamp- shire. This nondescript army was composed of the ignorant in their respective communities, who imagined their condi- tion might be bettered by fighting, although they knew not how. It could not be said that taxes fell heavily upon these men because they were generally not property owners, but men who felt the pinch of poverty and entertained the idea that their new liberties meant license. The Massachusetts Gazette in 1787 published the following letter from New York City: "This morning the Governor, the Attorney General, Adjutant, etc., set out for Albany to take meas- ures to quell any insurrection that may happen in that quar- ter. The Legislature of this State are decided in prevent- ing any adherents from joining the Shays, but there are a great proportion of people who are ripe for confusion and war. This is because they are so embarrassed in their af- fairs that they believe no disturbances can make them worse." No doubt they complained most against the extravagance of officials. The rebellion was soon put down, however, and before long had passed into history. The depression grad- ually cleared away. The nation grew and prospered to such an extent that the children of those who took part in Shay's Rebellion became some of the wealthiest families in New England. Under conditions existing at that time there could be noth- ing else but depression. There was no legal money and no central government. Trade of every kind was awaiting the adoption of the Federal Constitution, which went into op- eration in 1789. The Constitution gave the Federal Gov- ernment the exclusive right to coin money, and as soon as the Government began to function the First Bank of United States was chartered in 1791, under a charter granted by Congress. Business then began to take on a better aspect. CHAPTER VIII. THE DEPRESSION OF 1808-09. The new republic of the United States of America had become well established when the depression of 1808-09 came on. Washington and Adams had both served as President and retired, and Jefferson was at the head of the govern- ment. This depression followed a period of great prosper- ity. In 1793 war broke out between France and England and involved all the nations of Europe. For over twenty years the best energies were devoted to destruction and war- fare. This was America's day. While England was sweep- ing French merchantmen off the seas American shipbuild- ing showed an enormous expansion. France, who was hard pressed, bitterly resented the fact that America would not enter the war as her ally, claiming that we had agreed to make common cause against Great Britain in return for the help she had rendered us twenty years previous. Against the generally accepted view, this nation did at one time enter into a foreign alliance. This was with France, made in 1778, but in the year 1798 Congress abrogated this treaty and never since then have we entered into any alliance whatso- ever with any foreign power. It was in this period that America practically was master of the seas so far as mer- chant carying trade was concerned. There was a large and steady demand for our agricultural products among the belligerent countries. Our foreign trade increased fourfold in a decade. It was a situation very similar to that which existed during the recent World War. America captured the trade in the western hemisphere of most of the countries at war, and by the time the struggle was over American shipping tonnage exceeded that of any other nation except England. The temporary check in 1802 during a short peace in Europe gave our commerce a slight setback, but 102 HISTORY OF BUSINESS DEPRESSIONS at the outbreak of hostilities, in 1803, commerce expanded until in 1807 it amounted to $138,500,000 in imports and $108,300,000 in exports. Pitkin says, "the increase in American tonnage during this period has no comparison in commercial annals of the world." The depression that followed set in in 1808 and lasted through 1809, starting as the result of various Orders in Council and Napoleon's decrees which were directed against the neutral trade, largely American. Our shipping felt the full force of the British blockade and the retaliatory meas- ures taken by the French. About sixteen hundred American vessels and $60,000,000 worth of property were captured by France, England and other privateers. Jefferson recom- mended to Congress that an embargo be placed on Ameri- can shipping or, as he expressed it, "immediate inhibition of departure of our shipping to ports outside of the United States." This had a far-reaching effect on the business of the country. The announcement of the embargo came almost without notice and caused a violent shock to busi- ness, which was paralyzed for a period. In a single year our exports fell from $108,300,000 to $22,400,000, far greater proportionately and much more abruptly than any cessation of business known in our history. Quoting from an article written shortly after this period, "in the large shipping towns business of every kind fell off and soon utterly ceased. Rope walks were deserted, sail makers were idle, shipwrights and draymen had scarcely anything to do. Pitch and tar, hemp and flour, bacon, salt fish, flax seed became drugs upon the shippers' hands, but the great- est sufferers of all were the sailors." It was estimated at the time that 30,000 seamen, an enormous army of people at that time, were thrown out of employment, and that in all 100,000 men were out of work for a year. The $50,000,000 of capital invested in American shipping brought in no revenue. In the year 1809 customs fell from $16,300,000 to $7,200,- 000 and the Secretary of the Treasury, Mr. Gallatin, was HISTORY OF BUSINESS DEPRESSIONS 103 forced for the first time to confront a deficit of $1,300,000. Prices of foreign commodities doubled, while prices of domestic goods fell below cost of production. Lumbermen and fishermen were reduced to beggary, and farmers un- able to dispose of their produce offered their lands for sale. In New York the depression caused one hundred and twenty bankruptcies and threw twelve hundred debtors into prison. Farmers, who had been buying land on credit, and who had planted great crops in expectation of foreign demand, soon began to feel the effects, and many of them, together with merchants depending upon them, were forced into failure and bankruptcy. This depression was brought on entirely because of stoppage of trade with the outside world. Local conditions entered very little into it. When our ships were idle British merchants were cap- turing the West Indian and South American trade. Gibbins in his "Economic and Industrial Progress of the Century" tells that more Manchester goods were shipped to South America in a few weeks than in twenty years preceding, and the quantity of English exports that poured into the city of Rio de Janeiro was so great that warehouses could not be provided sufficient to contain them. While the Con- tinental edicts which brought on the embargo were the primary cause of the depression and caused great resent- ment in this country against Great Britain who enforced them eventually leading to war with that country yet it is generally overlooked that France originated the block- ading policy. In those days debt was a crime and the jails were full of debtors. New York was described as a graveyard, so dead was its commerce, and while New York and New England were the greatest sufferers, the South and West felt the effects disastrously. The depression ended when Jefferson yielded to pressure and the embargo was repealed in 1809, after which American commerce quickly responded and our tonnage engaged in foreign trade the following year reached 981,000 tons. Those were the days known as our heyday of 104 HISTORY OF BUSINESS DEPRESSIONS shipbuilding. We built fine wooden ships, an art that later passed out of existence and was not resurrected until the late war, when several hundred wooden ships were built. The period of this depression makes what might be termed the turn from industrial dependence of the United States and the starting of manufacturing and commercialism largely as it exists today. It was at this time that we first began to realize that we were really a nation. What busi- ness we had, previously had been carried on much the same as during colonial days. The shipping depression turned the attention of both capital and labor to the development of our own country. Henceforth, we looked less and less across the waters to the eastward for our material pros- perity, but rather we faced to the west, where a great em- pire lay ready for development after Jefferson had pur- chased Louisiana. In many respects the depression was a blessing in disguise. We now started to develop our own resources and get rich by trading among ourselves. We are the only nation in the history of the world that has ever been able to do this. Countries like China and Russia which, in previous centuries, largely traded among themselves be- came impoverished. Mr. Gallatin, Secretary of the Treasury, in 1809, esti- mated the annual product of American manufacture at $120,000,000 and strongly approved of the policy of over- coming the existing depression by developing our own re- sources and our own markets. Unsound banking existed in New England up to this period the same as in other sections of the country, but following the crisis the Massachusetts Legislature adopted stringent measures to correct the system and thenceforth New England banks have been the healthiest and soundest in the country in every period of trouble. They even passed through the crisis of 1814 without suspension. After a breathing spell industries again started up, and 1809 saw sixty-two new cotton mills with 31,000 spindles erected in New England and building steadily continued until the end of the European War. CHAPTER IX DEPRESSION OF 1814 The year 1814 records a financial flurry which might be termed a short panic. However, it was of brief duration be- cause the war with England was on and the entire resources of the nation were of necessity thrown behind the situation. The shock was caused by the capture of Washington by the British on August 24th, 1814. So severely was it felt in financial circles that practically all the banks except those in New England were forced to suspend specie payments and the country was again put on a paper money basis. All the old evils of the Continental period began to appear over-issue, depreciation and inequality of value. The notes of the New York banks were 10 per cent below par, those of Washington and Baltimore 22 per cent, while in the West some of them fell to as low as 50 per cent. The people were compelled to use this depreciated and fluctua- ting currency because there was no other to take its place. It was this crisis that led to re-establishment of the Second Bank of the United States, the First Bank of the United States having been dissolved in 1811, at which time $7,- 000,000 in specie an enormous sum for those times was returned to Europe, this amount having been held by Eu- ropeans in the stock of the First Bank. The military events of the war were mostly disastrous and humiliating to the United States. The outcome can be said to have been no better than a draw. It was at this time that the importance of American manufactures was forced upon the attention of the nation. Munitions of war, clothing, and articles of living had to be provided. Specula- tion and extortion were practiced to a large extent, high prices as usual bringing temporary prosperity, checked only by the uncertainty caused by the events of 1814. 106 HISTORY OF BUSINESS DEPRESSIONS New England had at this time "cornered" the available supply of specie. In 1814 there were $7,000,000 in specie lying in the Boston banks, while the states south and west of New England were practically stripped of metallic money. To make up for the deficiency in a circulating medium, the banks resorted to the expedient of issuing large sums of paper money. During 1814 the unfavorable turn in the for- tunes of war and a sharp attack on all paper issues by the disgruntled Boston banking interests caused a great depre- ciation in this credit currency and the nation suffered from the ensuing panic. The New England banks were the only institutions in the country that did not suspend specie payment. When three wagon loads of specie had been collected in New York and had started on their way to New England to balance accounts, the shipment was seized by the collector of the port at New York on the pretext that it was the intention of the New England banks to send the money to Canada. As an instance of how bad the money situation was, the Government failed to redeem Treasury notes and actually paid some of the soldiers in bank notes which were not re- ceivable for taxes. The War Department could not pay a bill for $3,500, and the Secretary of the Treasury went beg- ging for smaller sums. Yet business flourished. Manu- facturers increased their output to supply the needs of the war and the people patriotically took state bank notes, many of which were caught in the jams of later panics and were never redeemed. The following table of our imports and exports will show the effects of the year 1814 on industry : Domestic Total Year Exports Imports 1811 $45,294,000 $ 63,400,000 1812 30,032,000 77,030,000 1813 25,008,000 22,005,000 1814 6,782,000 12,965,000 1815 45,974,000 113,041,000 1816 64,782,000 147,103,000 1817 68,313,000 99,260,000 HISTORY OF BUSINESS DEPRESSIONS 107 The demand for goods and the general inflation brought on by the war and stoppage of imports increased the num- ber of banks from eighty-eight to two hundred and eight. During the panic of this year ninety banks suspended. The close of the war brought a period of fairly good times with its consequent evils of speculation and reckless banking. The fact that good times followed peace in 1816 is another instance that belies the claim that depression in- variably follows war. 108 1600 1620 16iO 1060 1660 1900 io?n HISTORY OF BUSINESS DEPRESSIONS & i 3 3 .S 1 B 6 > tV fc x i *- i -> X * c: ^. > . "-* p x- ^ ^ / > ^*^ towing that prices were higher in 1815 than at ar and lower in the depression of 1893. by Jevons & Sauerbeck Recalculated by Layton ( > < ^s J ^ > ^ - -/ / I r ^ f ' ^-. 5 > <, ^ v t V < / ^ V, > 1* / < I tn m y (M 3 en bo TH e o c -^ s z % fc -t w 1 JS 0 g rf / / } S 4 \ \ } L S > *s s ( < . ^ *i ^ 1 CHAPTER X. THE DEPRESSION OF 1818-19 In the first few years following the signing of peace which ended the War of 1812, business experienced a re- markable revival. Credit money issues to prosecute the war made currency free and easy. The total volume of exports and imports in 1816 amounted to ten times that in 1814, but this prosperity was short lived, and 1919 saw a lament- able decline. The poor and inadequate banking system in vogue at the time was a major cause of the depression. In addition may be mentioned the speculation in western lands, the over- rapid commercial expansion and the unstable position of the manufacturing industries which had grown abnormally during the embargo, and after the war were left exposed to foreign competition. At the same time the State banks contracted their note circulation of $100,000,000 in 1817 to $45,000,000 in 1819 and thus reduced the credit facilities at the very time they were most in demand. Specie payments were again generally suspended, prices fell disastrously, and failures occurred in every part of the country. This depression set in during the year 1818. The worst conditions existed, however, in 1819, and this is commonly known as the crisis of 1819. It continued during the whole of 1820. Our three years of prosperity following the war made us eager buyers with our inflated money. Further- more, it had taken Great Britain that long to realize that America was becoming independent of her manufactures, and when realization came British manufacturers, eager to regain control of their lost markets in this country, began sending in ship loads of merchandise which they offered on most liberal terms. These goods began arriving during the height of our prosperity, and as money was readily avail- 110 HISTORY OF BUSINESS DEPRESSIONS able they were snatched up at low prices. But the people finally paid the bill with compound interest when our own industry began to feel the pinch. American woolen mills closed down, many of them being ruined. In spite of the suspension of specie payment in 1814 the country had prospered because of the large amount of paper money put into circulation during the war, which was readily accepted after its close. During the prosperity preceding this depression the prices of commodities rose higher than ever before or since in American history.* Europe, as well as America, suffered commercial reverses in this year. Our finances were probably somewhat strained as a reflection of the severe crisis that was sweep- ing over Europe following the Napoleonic wars. The causes of the panic only indirectly resulted from the war. A period of three years of great prosperity fol- lowed the War of 1812, which ended in 1815. With the coming of peace came renewed activity in shipping. In 1816 our imports reached the high mark of $147,000,000. Surplus stocks of European goods fairly flooded the country. American merchants liked the situation because the con- sumers were buying, but the manufacturers gradually be- gan to feel the strain of competition and again set up a cry for stronger protection. Short crops abroad, together with other favorable conditions, created such a market for our own agricultural products that we could for a time readily absorb the large imports, but as soon as the demand for our staples was supplied disorder resulted. The pre- vailing prosperity and accompanying high prices blinded the people to the dangers ahead. Currency had again be- come inflated. In 1818 the report became widespread that the banks were in a critical condition. An attempt had been made to resume specie payment, but this had failed, being successful only in spots or for a limited time. In preparation for this the banks had restricted their loans, limiting credits to busi- *See Chart Page 108. HISTORY OF BUSINESS DEPRESSIONS 111 ness and agriculture. The following year business felt the full effects of depression. In 1819 steps were taken to compel banks to pay specie or forfeit their charters. Many banks seeing this was impossible suspended, bringing the first widespread panic in our history. The first national bank which Hamilton had organized had failed of re-charter ten years previous, and to take its place hundreds of so-called joint stock companies secured charters and proceeded to issue bank notes with no adequate provision for redemption. The banks of Massachusetts and New York, which sections had learned their lessons in the evils of over-inflation, were restricted as to the issues and assets, but in the South and West, where an abundance of money was needed to develop their resources, the people hankered for cheap money and plenty of it, and the state authorities and bankers sympathized with the movement. Our circulating medium had increased to $100,000,000, when it became so apparent that trouble was ahead that business men began to petition for a national bank of issue in order to provide a sounder currency. The Second National Bank was accordingly chartered with $35,000,000 capital. The notes issued by this bank proved a welcome addition to the currency and were taken in many parts of the country where local issues were thor- oughly discredited. But the national bank had assumed too much of a load in undertaking to force the state banks to a specie basis, particularly in view of the mismanagement in its own affairs, as charged by some historians. Of the $7,000,000 specie required in the charter, but $2,000,000 was actually contributed, and of the $21,000,000 bond sub- scriptions but $9,000,000 was made good in government bonds, the personal notes of subscribers being accepted in lieu of the stipulated payment. Unwarranted accommodations and speculation brought the institution to the verge of bankruptcy in 1818, when the Baltimore branch failed for $3,000,000. An investigation of its affairs was ordered by Congress and a vigorous reform 112 HISTORY OF BUSINESS DEPRESSIONS prescribed. The original management was obliged to re- sign. Langdon Cheves, of Charleston, was elected president, and under his conservative administration; the national bank retrieved its financial standing. But a reform ad- ministration could not avert the business crisis which years of speculation and wild-cat banking had engendered. The sudden contraction of credit, following upon a period of reckless financing, jeopardized banks and business enter- prises everywhere outside of New England. These curtail- ments were ordered in March, 1819. The bank at that time was in a truly deplorable condition. Vast sums of specie had been imported at large expense to maintain specie payments, but nearly all was gone. On the 21st of April there was only $126,745.28 and the bank owed to the city banks of Philadelphia $79,125.99. In April, 1819, the circulation of the Second Bank of the United States was less than half that of the year previous, April, 1818. The fail- ures of the State banks began in 1818, the year after the Second United States Bank came into existence. In the year preceding, June 26, 1819, according to later authorities, $800,000 in specie was drawn from banks in Ohio an enormous amount for those times. The financial stringency was such that everyone was in debt and payment was almost impossible. In 1819 state banks, following the national bank, con- tracted their circulation as shown by the following figures : On November 1, 1816 to $4,756,000 On November 1, 1817 to 3,782,000 On November 1, 1818 to 3,011,000 On November 1, 1819 to 1,318,000 It was during this period that savings banks got their first impetus. During periods of business adversity people were thrown out of employment, and improvidence during prosperity brought consequent suffering and even pauper- ism in times of depression. Agitation started among the working people and the poorer classes to provide savings against these gloomy days. Thus was the great savings bank system of today founded. HISTORY OF BUSINESS DEPRESSIONS 113 Not only the banks, but business men of all classes had been mortgaging the future beyond warrant. Manufac- turers, encouraged by the prospect of adequate protection, enlarged their plants and doubled their output. Land com- panies invested borrowed money in property that could not be sold at a profit, and farmers mortgaged their lands for the funds with which to make improvements. Large sums were sunk in canals and post roads that could not pay divi- dends on the investment, much less make good the obliga- tions incurred. Confidence in the resources of the country and its ultimate prosperity led men to anticipate industrial development by a generation and to risk too much upon the immediate future. The contraction of the currency and the refusal of the National Bank to discount any but well-secured paper, called a sudden halt in this mad career of speculation. Hundreds of business enterprises were prostrated and thousands of apparently prosperous men were ruined. The closing of factories threw workmen out of employment, and the streets of Philadelphia, Baltimore, New York, Pittsburg, and many lesser manufacturing and commercial centers, were thronged with destitute men and women seeking work. Prices fell, and the value of real estate shrank to one-third the level of the speculative period. During this time speculation was so wild that no one failed on account of a smaller sum than $100,000. A draw- ing-room that had cost $40,000, and a bankrupt's wine- cellar estimated to have cost $7,000, were cited as instances of the general prodigality. Congress appreciating the condition, immediately set about to ascertain the effects of the panic, and a Senatorial Committee of Inquiry, appointed for the purpose, declared that the panic imposed ruinous losses upon landed property, which had fallen from a quarter to even a half of its value. In consequence forced sales, bankruptcies, scarcity of money, and a stoppage of work occurred. House rents fell from $1,200 to $450. On the 13th of December, 1819, a com- 114 HISTORY OF BUSINESS DEPRESSIONS mittee of the House of Representatives reported that "the panic extended from the greatest to the smallest capitalists." Lands and agricultural products fell to one-half the prices which were readily obtainable ten years previous. In the Mississippi Valley the speculative demand for money had been even greater than in the East. Virgin soil and limitless possibilities in the way of development created a reckless system of financing that brooked no restraint. Sil- ver sufficient to serve as the medium of exchange came into the country through the New Orleans trade with the West Indies and Mexico, but the demand for capital with which to develop the country could only be met by credit agencies. In 1817-18 forty banks of issue had been chartered in Ken- tucky, and Tennessee and Ohio hastened to adopt the same alluring expedient. The banks issued money with- out stint and loaned to speculators on easy terms. Prices rose, and though the silver went over the mountains to New York and Philadelphia, the Mississippi Valley seemed in the heyday of prosperity. Then when the National Bank presented an accumulation of notes for redemption, the state banks, unable to meet their obligations, were forced to suspend specie payment, and the boom collapsed. To mitigate the general distress the state legislatures passed relief laws, staying proceedings against debtors. Knox's "History of Banking" quotes a Connecticut paper of that period, which comments on the distress as follows : "Why is the community so much embarrassed? Because banks lend money that they have not go to lend. And because people spend money they have not got to spend. REMEDY Own the money before you lend it! Earn the money before you spend it!" Nile's Register, which is unquestionably the best authority for details on our early economic history, prints a letter from a United States Bank director to a friend in England vividly portraying conditions of the period : "Our difficulties in commerce continue without abate- HISTORY OF BUSINESS DEPRESSIONS 115 merit. Men in business are like patients in the last stage of consumption, hoping for a favorable change but growing worse every day. You have some regular and profitable trade (in England), we have none. It is all scamper and haphazard. A long continuance of distresses in the commer- cial world has had a bad effect on the morality of the coun- try. The vast number of failures takes away the odium. Men fail in parties for convenience, and the barriers of honesty are broken down by a perpetual legislation suited to the convenience of insolvent debtors . . . The farmer is become as poor as a rat; the labor on the farm costs him more than the produce is worth. He cannot pay the storekeeper and the storekeeper cannot pay the mer- chant." Various State legislatures undertook to pass laws 389,o I 346,779,889 1892 Number 3,384 2,119 1,984 2,857 l,344 Liabilities. . .39,284,349 22,989,331 18,659,235 33,111,252 114,044,167 Bank failures are given below as shown from the table compiled by the Comptroller of the Currency : BANKS, ETC., WHICH SUSPENDED, JAN. 1 TO SEPT. 1, 1898 Class Number Assets Liabilities State Banks 172 $41,281,848 $36,903,266 Savings Banks 47 17,673,938 16,830,809 Loan and Trust Cos.__ 13 14,337,500 22,354,000 Mortgage Companies. _ 6 760,803 1,790,000 Private Banks 177 20,237,259 19,315,455 415 $94,291,348 $97,193,530 The following year, 1894, really saw the worst of this depression. Great poverty existed in the cities; factories were closed and distress was felt everywhere. The Chemical National Bank of Chicago, with a capital of $1,000,000, closed its doors on May 9th, and was followed two days later by the Columbia National Bank of Chicago, with a *Figures from "The Commercial and Financial Chronicle." HISTORY OF BUSINESS DEPRESSIONS 195 capital of an equal sum. The Distillers and Cattle Feeders Company was another large concern which was involved, its shares falling from $70 to nothing. In 1893, the pro- portion of loans to deposits rose to about 109 per cent, and proportion of specie to loans declined to 13 per cent. The average price of twenty prominent stocks reached about $47 per share. The number of failures for the year ex- ceeded 15,000. *"Aggregate liabilities of bankers and banking insti- tutions in the United States failing in 1893 and the two succeeding years: 1893 (year of crisis) $170,295,698 1894 (year of depression) $13,969,950 1895 (year of depression) 22,764,000 Average for the years 1894 and 1895 18,366,975 Excess in 1893 (year of crisis) over average for 1894 and 1895 (years of depression) $151,928,723 or 827 per cent." ""'Aggregate liabilities of all others, including mer- chants and manufacturers: 1893 (year of crisis) $231,704,322 1894 (year of depression) __ $135,030,050 1895 (year of depression) __ 136,236,000 Average for the years 1894 and 1895 135,633,025 Excess in 1893 over average for 1894 and 1895 $ 96,071,29T "Excess of liabilities from failures of merchants, manufacturers, and others in 1893, year of crisis, over average for two ensuing years of depression* slightly less than 71 per cent." "It thus appears that the percentage of excess of liabili- ties in the crisis year over the average for the two succeed- ing years of depression was nearly twelve times as great (827 to 71) in banking failures as in mercantile, manufac- turing, and all other failures." This revulsion witnessed the distress incident to a finan- cial collapse of the ordinary type, intensified by the depletion *Figures used by Burton. 196 HISTORY OF BUSINESS DEPRESSIONS of the gold reserve in the Treasury and the perils which threatened even the gold standard. The range of leading industrial stocks on the New York Stock Exchange in 1893 is shown as follows :* Miscellaneous Opening Lowest Closing American Sugar 111 61 July 26 81 American Tobacco Co 121 43 July 31 70 National Cordage 138 7 Aug. 25 20 Pacific Mail Steamship 27 8 July 27 14 United States Rubber Co 46 17 Aug. 17 42 Western Union Tel. Co 96 67 July 26 82 *Figures used by Lauck. CHAPTER XXII THE DEPRESSION OF 1903 The year 1903 may be characterized as the culmination of that long period of prosperity which had its inception In the sound money triumph in the presidential election of 1896. Wonderful strides had been made by the nation if we may judge by the largest three industries. The iron and steel industry was never so busy, the railway industry was burdened with all the freight that it could handle, while the agricultural interests of the country were favored by enormous crops. If these three industries are a reflector as they usually are, the prosperity of the nation was such as to stand almost without a parallel. We might expect, therefore, that the prices for securities representing large industrial concerns would be quoted at a very high level. And we might also expect a reverse in the upward swing, characterized by conditions in the stock market approxi- mating a panic. It was a year marked by fluctuations in stocks. In a single day Pennsylvania Railroad stock was quoted at the low and high extreme of 110% to 157%. There was a period of sharp increase in money values. All stocks lost heavily through the resulting liquidation. As the speculative period had apparently ran its course it was to be a year generally of declining prices which periodically comes, at which times weaker stocks suffer and com- panies are often taken over by more powerful corporations. The Northern Securities suit of that year undermined confi- dence because of the publicity given to unsavory financial methods. The shrinkage in the value of stocks was so pronounced and so continuous that it may be said to have had few, if any, parallels in stock exchange history. The extent of the decline may be understood by the quotations of 198 HISTORY OF BUSINESS DEPRESSIONS a few high grade stocks. Pennsylvania Railroad stock dropped in January from 128% to 110% in November. It again rose to 140 in 1904. New York Central fell from 156 in January to 112% in July. It again rose to 145 in 1904. Chicago and Northwestern declined from 224 V^ to 153 dur- ing the year, but again rose to 214. Union Pacific fell from 103% to 653^ but again rose to 117 in 1904. The depression, affecting mostly investors and specula- tors in stocks, started through the collapse of large corpora- tions which had been over-inflated and watered beyond reason. Over $6,000,000,000 worth of securities had been floated in the few years preceding, many of which were of questionable value but which were bought eagerly by the in- vesting public who had been duped with stories of immense fortunes having been made in industrial lines, the out- standing example of which was Andrew Carnegie. The shipbuilding trust, as it was called, was the first to collapse, revealing as it did some of the evils of high finance which permeated the period. Disillusioned investors threw every kind of stock on the market, resulting in severe declines and a reaction of public sentiment against industrial stocks. This followed the day of rapid organization of trusts and combinations. One hundred and eighty-five had been formed within a few years of this time, taking in from four to as high as forty plants in a given industry with a total capitalization of $1,436,625,910. Some of them did not meet with the success that was anticipated and these followed the shipbuilding trust in collapse, due to over capi- talization and stringency in the money market. The barometer, as indicated by the iron trade, was still rising at the opening of 1903. Good crops had been gathered and were being sold at good prices ; railway earnings were large, and railway companies were making heavy expendi- tures for new equipment and improvements, and every de- partment of business and manufacturing industry seemed prosperous. So heavy, indeed, was the demand for iron and HISTORY OF BUSINESS DEPRESSIONS 199 steel that the capacity of the plants was unequal to it, and we were importing iron and steel to some extent, as we had been in 1902. Then in June the iron industry experienced one of its well-known quick changes. The figures suddenly registered a severe drop. The demand subsided with sur- prising celerity in all lines, and by November prices in some lines were 50 per cent lower than in January. The boom in the iron trade which commenced in 1899 was at an end. Before the end of 1903 liquidation on a large scale in stocks had run its course and exhausted itself, and the market quieted into comparative steadiness. In this same year Canada made material progress, more so than in any previous year of her history; money was plentiful, crops good, and 150,000 emigrants had entered the Dominion. The depression affected the United States Steel Corpora- tion to such an extent that, for the first instance in its his- tory up to that time, the wages of the men employed in the plants were reduced. Gross sales for the year were only $444,405,431, and net profits $73,176,522. No special ap- propriation for new construction was made and, despite the small profits, the corporation managed to show a sur- plus of $5,047,852 after the payment of the full preferred dividend. Bank clearings showed a reduction of $9,000,000,000 as against the previous year. During this period several bills were introduced in both houses of Congress aimed at cor- recting the financial system so as to avoid recurrence of crises. At this time we heard the first serious discussion on the question of taking the center of the national finance away from Wall Street and establishing reserve cities so as to distribute financial centers throughout the country. CHAPTER XXIII THE DEPRESSION OF 1907-08 This depression followed a financial panic which broke in November, 1907, almost without warning. The business de- pression following it was of comparatively short duration, lasting only through 1908, or about fifteen months. The crisis proved to be a blessing in disguise, as it demonstrated the weakness of our financial system and awakened us to the need of urgent action, finally bringing about the pas- sage of the Federal Reserve Act. The causes of the dis- turbance were the weak financial system and unrestrained speculation, although a number of other theories have been advanced. On the whole there had not been extensive over- production or construction work beyond immediate needs. Neither was there undue inflation in real estate values. On the surface the events of 1907 were more startling, more spectacular and more unexpected than the events of either 1873 or 1893. No word had gone out to the public about dangerous underlying conditions that existed in the financial world. Since the facts have come to light, the crisis that was developing during the whole of that year has become known as the "silent panic." This panic would have broken in March, 1907, had it not been for prompt relief from Washington. Previous months had witnessed high tension in the financial center. Call money in December, 1906, commanded from 9 to 15 per cent. During a few days in January as high as 50 per cent was paid for call money. By March the situation had be- come so bad that the banks were forced to call loans, and securities dropped in a single day five to twenty-five points. General prosperity ruled throughout the country and there seemed to be no fear on the part of the public of an impend- HISTORY OF BUSINESS DEPRESSIONS 201 ing disaster. Relief measures taken at Washington rem- edied matters somewhat and had proper precautions been taken perhaps the panic which came in the fall could have been averted. However, everybody was making money, sales were good, bank clearing the highest on record, and nobody wished a halt in the good times. Those with their ear to the ground saw, however, that inevitably something must happen. Financial leaders should have demanded a gradual con- traction, or at least no further expansion, confining loans to what were absolutely necessary to protect the solvency of the borrowers. But the banks apparently went ahead un- checked, and when the emergency came they called on the treasury as they were in the habit of doing. In May of that year the banks called for help and again in August, when additional relief was rendered, but all this did not suffice. It left the ever increasing weight of obligation still on the banks, and when rumors of the weakness of certain banks persisted runs started and the crash came. It is now conceded that the officials at Washington made a mistake. Instead of calling attention to the capital weak- ness of the banks, the Government permitted them to con- tinue to use the large treasury balance without interest. It was a period of confidence, large crops and ample business. All the leading influences contributed to make it a period of unexampled activity. The railway industry and the iron and steel industry were favored to an exceptional degree. Bank clearings in New York were $29,350,894,000 in 1896 and increased in 1907 to $95,315,441,000, and for the entire country the increase was from $51,935,651,000 in 1896 to $154,662,515,000 in 1907. The volume of money in circu- lation rose from $1,506,434,966 in 1896 to $2,772,956,455 in 1907. In the five years from 1903 to 1907, inclusive, the world's output of gold was $1,855,421,300. The country made rapid strides in every line agriculture, manufactur- 202 HISTORY OF BUSINESS DEPRESSIONS ing, banking, etc. Par value of outstanding securities in the United States in 1905 totaled $35,000,000,000. Money rates continued reasonably low until the latter part of Sep- tember. The activity and tremendous rise in prices which marked the year 1904 were hardly a circumstance to the extraordinary buoyancy and unrestricted optimism that de- veloped in 1905, '06 and '07. As the Commercial and Finan- cial Chronicle stated : "Unfavorable developments were completely ig- nored and favorable features long seemed to count, yet this year was marked by some very severe breaks subject, however, to almost immediate re- covery. Thus in January there were rumors of an early settlement between the Harriman and Hill factions. There were also rumors concerning a combination of the Union Pacific, Standard Oil, and Vanderbilt interests. Largely because of these rumors, and other circumstances, the price of Great Northern jumped from 236 to 254. Northern Securities rose from 113 to 123. As a matter of fact, nothing came of all these rumors except that there were some changes on the directorates of these corporations which made for greater uni- formity of management. Yet in spite of these conditions the last few days of the year showed a tremendous decline in the value of almost the whole list of securities, and the market on the closing day of the year was practically on the verge of a panic. Great Northern dropped from 335 to 270; Union Pacific from 137 to 118; New York Central from 163 to 141 ; Milwaukee and St. Paul from 187 to 170 ; Ontario and Western from 63 to 49 and Pennsylvania Railroad from 144 to 137." This decline in the value of these securities while theii earning power continued undiminished and the condition of their business was as favorable as could be desired serves as an illustration of the eifect of extraneous forces upon the security market. HISTORY OF BUSINESS DEPRESSIONS 203 Amalgamated Copper took a turn downward in the sum- mer, thence leading up to the fall crash. Steel and other stocks were moving down without any apparent cause. Lord Rothschild gave an interview in London, which, coming from the source it did, was ominous. He said New York was hoarding money. Apparently, it was the insiders who were selling and holding the money in order to buy back cheaply. This feature has been referred to as the "Con- spiracy of 1907." Alvin S. Brown, a New York man, issued a pamphlet of that title ; he gathered in a unique collection of clearing house certificates issued in various cities in the United States. The reversal came quickly and dramatically. Starting in November it overwhelmed banks and industrial corpora- tions, the most important of which was the Tennessee Coal and Iron Company. The Morgan interests seized this op- portunity to take the property over as a part of the United States Steel Corporation. This was the most important in- stance of a tendency that had sprung up during recent de- pressions of powerful corporations to absorb the weak. That does not, of course, mean that large corporate interests have any great liking for depressions. Rather, they have a great deal to fear because of the heavy overhead involved in keeping the many plants in running condition, thus tax- ing their resources to the limit. Corporations that are sound and have strong banking connections weather these periods and even take over their smaller competitors, but an independent plant, if in sound financial condition, and properly managed, has the advantage in years of depression because it is able to more quickly and effectively curtail ex- penditures. Large companies, commonly known as trusts, have a further disadvantage in that they are looked to in setting the market prices of the commodity they control. With large stocks on hand they are not able to make the quick reductions necessary to stimulate business in times of depression, because of the loss they would have to take which 204 HISTORY OF BUSINESS DEPRESSIONS would often weaken them and bring their finances to an un- stable condition. These corporations invariably make worse rather than im- prove depressed periods by draining the resources of the financial world. Unless they followed this practice they would be forced into bankruptcy, with its attendant ruin, so that it is necessary to sustain them until they can de- crease their stocks and readjust their costs. On the other hand, small independent concerns do not require such large financing and are more able to make a quick readjustment. These corporations have banking institutions closely affili- ated with them in order to protect them when no call money is to be had. Sometimes the resources of the banks are strained to support the large corporations, so that the aver- age business man and investor is without resources to tide him over. This was the case in the depression of 1907 and '08. This panic has been called the "rich man's panic". A writer who lived in the day of the Great Chief, and was probably numbered among his enemies, has attempted to brand it as the "Roosevelt Panic." Still another even goes so far as to record on the sacred pages of history the state- ment that Roosevelt's speeches were the main and principal cause of the panic and depression. What "malefactor of great wealth" this writer was interested in is not known ! Adolph Edwards, a long forgotten writer, wrote a book entitled "The Roosevelt Panic of 1907," in which he started off thusly : "In the course of time a man in clerical garb will stand before the earthly remains of Theodore Roosevelt and repeat the familiar words, 'Dust to dust and ashes to ashes,' and the gaping multitude will look on, as it always does, dumb, stolid and unflinching, before the last and greatest mystery of human existence. 'The evil that men do lives after them,' and the unmoved and inexorable his- torian shall submit to the judgment of unborn masses the record of the achievements of this unique figure in the an- HISTORY OF BUSINESS DEPRESSIONS 205 nals of American history. The ruin he may have caused, the homes he may have wrecked, the unspeakable misery of want and starvation, or the dread of them he may have inflicted, the reckless blunders, the wanton lack of judgment and deliberation, of which a nation of eighty millon, nay, the whole world, has suffered the inevitable consequences all this shall be written, not in the heat of passion or under stress of suffering, but coldly and with relentless delibera- tion." Fourteen years have passed since this was written and Theodore Roosevelt has passed on, but even after this short space of time no living soul would hold him responsible for the panic of 1907. Yet, at the time, there were thousands who, probably conscientiously, held the opinion of the author quoted. It was fashionable in those days to blame Roosevelt for everything, and some scored him who now are haunted by their words. Had President Roosevelt not taken the bold stand he did against the flagrant abuses of those times we would have had a worse day of reckoning than we did in 1907. Roosevelt saw plainly where those practices were leading us and he knew that there had to come a shock in facing it, at one time or another, and he must be given credit for having the courage to face it himself and not leave it over to his successor. As time goes on we see that his course was timely and providential. Attorney General Bonaparte facetiously said "that there was a fine covey of game among the large capitalists in control of corporations, and that it would be a poor marks- man who would not bring some of the birds down." All of this had the wrong-doers in a very nervous state. However true it was that the panic was a "rich man's panic," it af- fected seriously the business of the whole country and some claim that we did not fully recover until the World War. It is true that we did not have any further boom times, but 1909 was a normal year according to all statistics, and normal 206 HISTORY OF BUSINESS DEPRESSIONS years continued with the exception of the depression of 1914-15. The insurance scandal unearthed by the Hughes investi- gation had already undermined confidence in the financial structure. Coman gives this as the cause of the general weakness of American financial organizations: "Undoubt- edly, the antics of the big people caused investors to be wary, with the result that the corporations were not able to market securities readily and resorted to the heavy use of their borrowing power, thus draining the money market, so that ordinary concerns who were in pressing need were driven to failure." When New York banks found difficulty facing them, particularly the Carnegie Trust Company, with which, incidentally, Andrew Carnegie had no connection, they were unable to obtain immediate help because of already lowered reserves in other institutions. As that disaster was well within the memory of most of us now living, what can be said here will be taken only as the opinion of an individual. Others might have a different diagnosis. It is known that the match that lit the confla- gration was the single incident of a scandalous bank failure at the opportune time, when a slowing up was very much desired, if not past due. When the first bank failure came along it caused other banks to call loans and a contraction resulted in general fright. After it was under way the enemies of Roosevelt who swarmed from Wall Street and from other high places quickly seized the opportunity to "wrap the child in their own soiled garments and lay it on Roosevelt's doorstep." Three great trust companies of New York failed, bringing fear and distrust into the minds of the people throughout the country. Clearing house script was in vogue in all large cities. Laws were quickly passed by legislatures in session allowing savings banks as much as sixty days' time in meeting withdrawals. Agricultural dis- tricts were not affected so much, since the depression was HISTORY OF BUSINESS DEPRESSIONS 207 quickly over, and the end of 1908 found the country ap- approaching normalcy. "In 1890, according to statistics compiled by the director of the mint, the world's supply of gold available for momen- tary use was less than $4,000,000,000. In 1907 it exceeded $7,000,000,000. At the same time, based upon this gold, there was a gigantic expansion of banking credit. In the United States bank deposits (including those of savings banks) increased between 1890 and 1907 from $6,000,000,- 000 to $19,000,000,000, and practically all of this expansion took place after 1897. According to compuations made by the Comptroller of the Currency the item of individual de- posits in national and state banks increased from $7,000,- 000,000 in 1900 to $13,000,000,000 in 1907. During the same period the advance beginning in 1897 and ending in January, 1907 the average prices of commodities in gold- standard countries rose some 40 per cent. In the stock market the upward movement of prices during those ten years was still greater. According to computations made by Mr. James H. Brookmire, of St. Louis, who bases his calcu- lations on the quotations of twenty representative railroad stocks, the lowest point was touched in December, 1896, when the average price was 41. From then until the end of the Boer War in 1902 there was an irregular advance to 130. In the Fall of 1902 began a decline in stocks which continued until September, 1903, the lowest point which these stocks touched being 88. Then began a more rapid upward move- ment continuing through 1904 and 1905, the highest point, 138, being reached in January, 1906. Throughout 1906 the prices of these stocks barely held their own. A rapid down- ward movement began in January, 1907, until in March they touched 98; then they advanced until July, when a decline began which finally carried them during the October panic down to the lowest point of 82." "It is very difficult to escape the conclusion that all this advance of prices and expansion of credit must in the main be attributed to the great increase in the world's stock of gold. This prosperous decade had much more than its share of untoward events which were calculated to restrict enter- prises and hold credit in check. There were, for instance, our own war with Spain in 1898, England's war against the Boers in 1900 and 1901, the Russo-Japanese War and in 208 HISTORY OF BUSINESS DEPRESSIONS 1904 and 1905, the anthracite coal strike in 1902, and the Baltimore and San Francisco conflagrations. Despite these events and others of a similar character, which tended to waste capital and destroy the confidence of conservative men in the business outlook, the tide of prosperity rolled on almost without check until the beginning of 1907, prices advancing, the stock market booming, bank clearances swelling, the average man convinced that good times, being deeply rooted in natural conditions, would persist so long as the sun shone and the rains fell. This prosperity was by no means confined to the United States. It existed in Canada on the same scale as here, and in a lesser degree throughout Europe and in the countries of South America, in which large sums of European capital were invested. For example, the loans of Canadian banks rose from $225,000,- 000 in 1896 to $712,000,000 in 1907. The total bank clear- ings of the United States increased from $51,000,000,000 in 1896 to $160,000,000,000 in 1906 ; clearings at London rose from 7,500,000,000 to nearly 13,000,000,000, and the Paris clearing from 7,000,000,000 to nearly 18,000,000,000 francs. "In 1897 prime commercial paper sold in New York City at from 3 to 31/2 per cent. In 1904 it sold at from 4 to 5 per cent. In 1906 and 1907 the rate was often 7 per cent and the average was fully 6 per cent. The bank of England, ex- cept for brief intervals, has maintained rates ranging from 4 to 6 per cent for the ten years, but finally in 1907 it advanced its rate, as the result of the panic in the United States, to 7 per cent. The rates of interest at other Eu- ropean financial centers were correspondingly high. The most spectacular evidence of the shortage of investment money in Great Britain was furnished by the decline of consols to 83."* General speculation was the order of the day, and when the year 1907 opened it was apparent among far-sighted financiers and business men that inflation had been carried to extremes and conservatism must prevail to avoid serious difficulties, but the public would not have it that way. In the early part of 1907 old time traveling salesmen said they never had such a bonanza ; everybody bought liberally. To those who did not have their fingers on the pulse of the Quoting Laughlin. HISTORY OF BUSINESS DEPRESSIONS 209 economic situation it looked like the good times would con- tinue perpetually. The short collapse in the stock market in March only caused the rest of the country to sit back and grin. They saw no trouble ahead and felt secure against the evil influence of Wall Street. The year before the United States Treasury held $816,- 354,352 in gold, the largest amount held up to that time by any government or institution in the world. Other causes advanced for the panic were the agitation against the rail- roads and the decision of Judge Landis against the Standard Oil Company, inflicting a fine of $29,000,240, which fright- ened capitalists and investors. The speculators became ex- cited and reasoned that if one corporation could be fined $29,000,000 there might be no end to it and bring ruin to many. With this idea they outdid each other in selling their holdings. Some claim the financial stringency was caused by the San Francisco earthquake, which took $350,000,000 out of the money market in order to pay the losses. There was also the revelation of scandals in the life insurance business by the Hughes investigations, and the New York State Utilities Bill which caused street railroad stock of New York City to fall from $127 to $20 per share, playing havoc among investors in New York City. The connection of these corporations with some of the picturesque but unsav- ory incidents of then recent Wall Street history caused uneasiness in powerful circles. In addition it was felt that the complete reorganization of the insurance companies was inevitable, that restrictive legislation would follow which would prevent them from participating to the same degree in underwriting operations, and that it was within the range of possibility that they might be forced to sell large quanti- ties of securities which they had in their possession, which were also held to a large extent by speculative interests. Probably no one of these caused the panic, but rather a com- bination of all of them. Business had reached a high water mark and the country's 210 HISTORY OF BUSINESS DEPRESSIONS currency had been stretched to the last point. A contrac- tion was due, and there was little doubt that there would have a business depression in 1908 even if the panic of 1907 had been averted. Probably the first failure was the Heinze crash which involved the United Copper which F. A. Heinze controlled. Commercial failures increased 60 per cent the last few months of 1907 and early in 1908. Money had been overused. Interest rates were extremely high and failures were frequent everywhere. The Westinghouse companies of Pittsburg were placed in the hands of receivers for inability to meet maturing obligations. The exchanges of the country were thrown out of joint. On October 29 Chicago drafts on New York were quoted at $2.50 per $1,000 discount. In other places the usual country balances in New York had been so far drawn down that the banks in the interior, although having plenty of cash in hand, could not sell drafts on New York at all. Most of the cotton, woolen and other mills of New England and the East shut down for a period or ran on part time only. In several western states holidays were declared by the authorities in order to give the banks a breathing spell and allay distrust. Between October and December $100,- 000,000,000 in gold was imported from abroad which fil- tered through New York to all parts of the country. Ar- rangements were started to secure gold from the Bank of France, but the French Bank, when approached in behalf of America, responded that as there was no central bank in America similar to the Bank of England, it would be glad to help, but through the United States Treasury, which could not be done. Our exports had fallen off that year. Europe wanted nothing but our gold because they were overstocked with goods themselves. England was suffering from the result of the Boer War and her consols sold as low as 81, the lowest price since 1848. Germany was particularly overstocked and the Berlin stock market was going through a depression HISTORY OF BUSINESS DEPRESSIONS 211 of its own. Even the city of New York was embarrassed in placing a new issue of municipal bonds. Abroad there were abundant evidences of difficulty, extending to Egypt, Japan, and Chili. Some bourbon English writers attributed the stringency of money in England in 1907 to the "labor socialistic" government under Lloyd George, whom they called a "fresh up-start." Interest rates were higher all that year all over the world ; there was not an easy money market anywhere and 4 per cent issues could not be market- ed in any country. The trust companies had been making in- roads on the business of the national banks, thus weakening the national banking system. It was the trust companies, which had extended their business to commercial banking, that engaged in operations far beyond the limit of conserva- tive practice. They particularly did not protect their de- posits by adequate reserves. Our neighbors in Canada avoided the worst of the cata- clysm, probably because they had a better banking and credit system. Canada has often had trade declines and depressions, but seldom has she been involved in panics. With bad crop conditions in 1907 and stringent money she faced difficulties. At the grain growers' appeal for assist- ance the Government finally decided to exceed her legal minimum of note issues in order to place currency at the command of the farmers. This plan carried them through the depression without serious consequences. The crisis of 1907 was much less prolific in bank failures than its larger predecessors. The reference to the "Rich Man's Panic" is largely true, because at that time the sav- ings banks were full of money and the average citizen throughout the country was fairly well fixed. One New York City institution, the Bowery Savings Bank, held over $100,000,000 of deposits. Wall Street capitalists no doubt envied their poor brethren who possessed this cash. The fol- lowing year, 1908, history repeated itself; money accumu- lated in the banks, interest rates fell, and securities steadily 212 HISTORY OF BUSINESS DEPRESSIONS advanced. In all leading commercial countries industrial revival quickly proved that the catastrophe, although se- vere while it lasted, was of shorter duration than previous ones. The banks of the country, New York particularly, took a wise course, making necessary loans liberally where urgent and furnishing funds to other parts of the country. The week ending November 9th saw their lawful reserves de- clined $51,000,000 below the legal limit. But imports of gold were flowing in to take their place. At the height of the crisis rumors spread that the Trust Company of America was in difficulties. This institution had a capital of $3,000,000 and resources of $74,000,000, including $12,000,000 cash in its vaults at the time. Under normal conditions it was perfectly solvent and able to meet its depositors' claims, but that it was not in position to withstand a prolonged run was proved by subsequent events. Realizing that the failure of the Trust Company of America would make the crisis far more acute, Mr. Mor- gan and his associates resolved to come to its assistance, provided it could prove that its statement of conditions were correct. A contemporary describes the scene as follows : "In vain did the officers of the company put seven tellers to work instead of the usual one, in vain were all deposits paid promptly and unhesitatingly. Denser and denser grew the crowd of depositors, and it became obvious that the millions that had been passed over the counters m the morning hours would not suffice to stem the tide. Thorne hurried over to the Morgan offices and there succeeded in obtaining $2,- 500,000 immediately. This loan was subsequently augmented by another of $10,000,000 made a few days later and a third of $15,000,000 made early in November. On this one day, October 23rd, $13,500,000 was paid out over the trust com- pany's counters ! But this was not enough to stem the run. As near as can be estimated something between $30,000,- HISTORY OF BUSINESS DEPRESSIONS 213 000 and $35,000,000 was paid to depositors. But the Trust Company of America was saved. It has been claimed that the price of its salvation was the surrender by its president of some 5,500 shares of Tennessee Coal, Iron and Railroad stock which he owned. "The whole financial community had turned to Morgan as its Joshua to lead it out of the desert. Upon his shoulders fell the burden of saving the country from financial ruin. The Morgan library looked like the headquarters of an army. Here were congregated at all hours of the day and night bankers, brokers, business men of all kinds, both those who needed help and those who could assist the banker in the work he had thrust upon him and the ardous duties which he had assumed. Men rushed in and out of that li- brary, pleaded for help, begged for information and, awaiting their turn, even slept in its luxurious chairs. The task that Morgan and his associates had undertaken was one of exceedingly great difficulty. Despite all that had been done to dam the torrent of financial disruption and the fact that each weak spot was strengthened as soon as dis- covered, the banker knew that his herculean efforts might, be brought to nothing by one big failure which would let loose the panic fears it was sought to allay." As we have now had fifteen years to look dispassionately- into the causes, it is apparent that steel had a great deal to do with this debacle. The United States Steel Corporation was apparently determined to absorb the Tennessee Coal and Iron Company, its strongest competitor. The latter company had been making big inroads into the business of the larger concern, which felt that it should either destroy or absorb its rival. "The friends of the, corporation, on the other hand, are equally emphatic in asseverating that the competition offered by the Tennessee company was not such as to cause anxiety to the management of the steel corpora- tion, that it was not a very valuable property and that the corporation purchased its stock only upon solicitation by 214 HISTORY OF BUSINESS DEPRESSIONS the interests controlling the company and their assurance that a refusal to do so would result in the failure of an im- portant security house, which would add greatly to the severity and danger of the panic. They claim further that the price paid was more than the actual value of the stock and that, far from using any advantage it may have had to squeeze the smaller concern, the steel trust, against the bet- ter judgment of its management and with the single purpose of alleviating the panic dangers, paid for the securities it took over something like 60 per cent more than good business practice seemed to warrant." Cotter in his "History of the United States Steel Cor- poration" says : "If the claims of the first are correct and the corporation did use its power to force a competitor to the wall, regardless of the fact that in so doing it was bringing misery and calamity to the ninety millions of people of the United States, this act alone must be more than sufficient to convict it on a more serious charge than 'monopoly in restraint of trade' of high treason and be- trayal of the trust which big business, willy nilly, under- takes. But if the corporation, through its directors, put the national welfare before all other considerations this, con- versely, should prejudice public opinion, properly informed, in its favor. And this is why the year was by far the most important epoch in the corporation's history and its events are worthy of careful consideration." An officer of the Tennessee Company later said: "The sale of the Tennessee Company was an incident arising in the course of the panic, not a cause. The corporation was offered a chance to get what I consider a valuable property and seized it. But let me tell you,'" he added, "the corpo- ration did not get the property cheap." On the other hand, other members of the Tennessee organ- ization did give damaging testimony against the United States Steel Corporation in the suit brought by the govern- ment to dissolve the corporation. The story is told that the HISTORY OF BUSINESS DEPRESSIONS 215 Tennessee Company secured an order from E. H. Harriman for 150,000 tons of steel rails early in 1907 and this angered the steel corporation to such an extent that plans were set under way to put the Tennessee company out of competition. Whether the steel trust actually and premeditately planned and brought on the panic, or whether they waited for a financial storm of its own making to bring them their op- portunity is a mooted question. Banks often get in trouble and are helped by others, and some claim that the Knicker- bocker Trust Company under ordinary circumstances would have been helped by Morgan. The father of the steel trust passed up help, looking in the direction of the Trust Company of America, against which also rumors had started and whose officers were controlling stockholders in the Ten- nessee company. George B. Cortelyou, Secretary of the Treasury, had hur- ried to New York on the night of October 22nd and went into conference with Morgan, Geo. W. Perkins, Jr., James Still- man, and Henry B. Davidson. They later summoned Oak- ley Thorne, president of the trust company, and agreed to assist his institution. The next morning, however, the run started and a clamorous mob surged through the doors and demanded its money. After the storm had lulled Judge Gary and Henry C. Frick, representing the steel trust, went to Washington and obtained an interview with President Roosevelt, who had with him William Loeb, Jr., and Elihu Root, Secretary of State. Roosevelt was asked for his approval of the taking over of the Tennessee company by the steel corporation. Under the circumstances Roosevelt said he would put no obstacle in the way of the completion of the transaction, although he had no power to give it any official sanction. Two points stand out in the whole transaction that allow the reader to draw his own conclusion. First, the Morgan interests which controlled the United States Steel Corpora- tion did save the Trust Company of America, but after they 216 HISTORY OF BUSINESS DEPRESSIONS had in their possession controlling shares in the Tennessee Coal and Iron Company. Second, while Roosevelt unoffi- cially acquiesed in the merger, the fact is that the deal was already closed and would have been consummated whether or no. However, had the administration been antagonistic, the Government might have had a better chance to win its suit of dissolution later. A peculiarity of the situation also, was the fact that Moore and Schley, leading brokers of Wall Street, became embarrassed to the extent of several million dollars. Affairs of this concern were deeply mixed with the Tennessee com- pany, one member of the firm being one of the syndicate that controlled the Tennessee company and the firm itself had marketed a considerable proportion of the securities of the Tennessee company. This firm was also saved by Morgan by the surrender of Tennessee securities which it held. Another reason for the steel company's supposed fear of the Tennessee company was that the latter, being located in the South, would be in a position to capture not only the business below the Mason and Dixon line, but would have a distinct advantage in exporting steel to Latin America. The steel trust always claimed that the merger saved the financial situation and stopped the panic. Following the successful merger which so pleased the steel corporation, Judge Gary, it is said, gave on November 20th the first of the famous dinners which were later widely criticized in the newspapers. The stated object was to get all the steel operators together for the purpose of devising ways and means to meet the exigency arising out of the .panic then existing and to prevent further calamity to the industry. The ways and means devised consisted of nothing more than an agreement to hold prices firm, to keep their heads and avoid the consequence of reckless price cutting. While this was practically an agreement in restraint of trade among the steel people, yet it no doubt helped greatly to alleviate the panicky conditions and get business back HISTORY OF BUSINESS DEPRESSIONS 217 to normal. While all circumstantial evidence shows that there was a deliberate attempt on the part of the steel cor- poration to bring its competitors to terms, resulting in its success as incident to the panic, yet there is no telling after the panic was on where the end would have been had the merger not taken place. The effects of the depression on the United States Steel Corporation were reflected in the last quarter, earnings for those three months, net for dividends, being only $18,614,- 416, compared to $28,758,142 for the three months preced- ing. But it was not until 1908 that the full force of the storm was to be seen. In the first quarter of this year net profits applicable to dividends dwindled to $8,854,297.37, compared with $27,031,008.20 a year previous, and second quarter profits were $9,042,027.55 against $30,843,512.61 in the same period in 1907. At this time Thomas A. Lawson, running a series of ar- ticles in a magazine, exposed "the system" and among the panic producers must be recognized these vitrolic articles. Few railroads were forced into bankruptcy, and the pro- portion of business failures was not so high as after the crisis of 1893. It was largely a rich man's panic in a true sense, the effects being mostly confined to the stock market and credit operations. There was no appreciable decline in prices, wages, land values, or railroad earnings. The Postal Savings Bank System was created in 1910, the agitation for it having started in the panic of 1907. It was pointed out that small depositors had a tendency to with- draw their deposits from the savings banks in the times of financial crisis and it was proposed to establish postal savings banks in order that the small depositors could leave their money with the Government at a small rate of interest. Thus the memorable panic of 1907 again served a great good after all the suffering it brought. CHAPTER XXIV THE DEPRESSION OF 1914 The money crisis at the outbreak of the World War, while of short duration, was of unequaled intensity or extent. Practically every stock exchange in the world was closed, but the needs of the day were so imperative that business soon resumed after the immediate effects of the shock. The world financial system held its equilibrium, but business suffered according to the relations of the various countries with those at war. Some claim that world events could be forseen as early as 1912. According to Hull "the business world seemed merely to be hesitating, to be timorous about making new ventures, to question the future as if ripening for the great war, for although conditions over the end of 1912 and into 1913 were good, this hesitancy was still in evidence, something ominous seemed to hang over the world of business and finance. Probably then some of the leaders of finance foresaw, even though dimly and uncertainly, the trouble that was brewing. The depression really started in 1913. When the war broke out July 30th, 1914, disastrous results followed in the busi- ness world. Industry was just beginning to struggle out from the depression that had begun in the latter half of 1913, when the sudden clash of arms paralyzed world money markets, closed the stock and other exchanges, closed or re- stricted operations at hundreds of plants of one kind or another, and threw thousands of workers out of employment. The demand for steel, never very active at any time since about July, 1913, fell almost to a vanishing point, and earn- ings of the United Steel Corporation, in the last quarter declined to the lowest point in its history $10,935,635.36 Total earnings for the year were only $71,663,615.17, and although the dividend rate on the common stock was re- duced from 5 per cent to 2 per cent annually in the third quarter, and the dividend for the last quarter was passed, earnings were not sufficient to meet charges, and a deficit HISTORY OF BUSINESS DEPRESSIONS 219 of $16,971,983.83 was reported. The company passed all dividends for the first time in its history." At that time we owed a large sum of gold to Europe and her banks hastened to recall it because of the needs of war, but it soon flowed back in payment for the phenomenal ex- ports of war material. An account of this crisis coincides with the history of the inauguration of the Federal Reserve System. This law was drawn up in 1913 by the House "Banking and Currency Committee" of the Sixty-second Congress. Honorable Carter Glass, of Virginia, later Secretary of the Treasury, was chairman, and it was enacted as a law just in time to save us from a great financial catastrophe. At the out- break of the war in the Summer of 1914, Europe began withdrawing gold in enormous quantities, and it was at once evident to all that very striking changes would result in every department of business life. The closing of the principal stock exchanges of the country almost immediately upon the definite announcement that the war was unavoid- able was thus dictated by two considerations. First, the belief that prices for stocks and other securities would be reduced to a point so low as to bring about the repurchase of the securities by Americans, who would then be obliged to pay for them in gold; and secondly, the belief that, in consequence of this reduction of prices, many bank loans based upon securities would have to be "called," thereby bringing about failures and incidentally assisting in the movement of specie out of the country. The exchanges had closed in previous years, but never for the reasons which now controlled them. Laughlin writes : "That they should close because of the fear of failure and the loss of gold implied a serious danger of disaster which appealed powerfully to the public mind, and which presented a problem that could not be explained away. The fact that, coincident with this closing of the exchanges, international trade was practically suspended for several days, and was seriously interrupted for several 220 HISTORY OF BUSINESS DEPRESSIONS weeks, until British vessels assumed control of the North Atlantic, tended greatly to increase the public anxiety. It formed, apparently, good ground for the suspension of business operations and for the non-fulfillment of contracts, even when the very difficult conditions did not themselves compel a recourse to such methods. The fact that foreign countries had adopted legislation deferring the date when debts need be paid or contracts fulfilled, although not paral- leled here, produced a sympathetic influence upon business in the United States, which practically resulted in the partial or tentative adoption of a somewhat similar relaxation of commercial requirements in many industries and branches of trade. Europe was throwing American securities on the market by loads, and when the exchanges opened the banks still found themselves under great strain to meet the situation. The national currency associations, which had numbered only eighteen up to the beginning of the European war, rapidly increased until they aggregated forty-four, and prompt preparations were made in Washington for supplying emergency currency, under the terms of the Fed- eral Reserve Act, to any such association as might need the notes. At the same time, practically all of the clearing- house associations of the larger cities arranged for the issuing of certificates." Congress amended the measure lowering the rates of taxation upon emergency issues and giving wider latitude for the issuing of currency. Under this act a total of $380,- 000,000 was put into circulation, together with clearing- house certificates of $211,000,000, a total of nearly $600,- 000,000 of new money that went into circulation in this country within a few months. Apparently, no need could be had for such sums unless there were withdrawals in other directions. No doubt this is what occurred, banks hoarding the cash by withholding it, so far as possible, both from one another and from the public; while the public hoarded lawful money by retaining it as it came into its possession, and applying to the banks for more supplies of circulating media. Foreign exchange rates soon became prohibitive, and for a time trade between this country and the Old World was HISTORY OF BUSINESS DEPRESSIONS 221 practically suspended. "The breakdown of trade with Europe through the inability of vessels to run regularly at the outset of the war, and through the reduction of buying power, due to the interruption of all regular industrial, commercial, and financial operations, meant that in the absence of some restoration of the normal course of busi- ness it would be necessary to find other means of liquidating our obligations to foreign countries." In order to relieve the situation and keep the money at home the Federal Re- serve Board began an investigation to ascertain the extent of international indebtedness, so that a means could be had to liquidate without sending more gold abroad. The Allies were very desirous of keeping the good will of business interests in the United States and after a few months pressure was greatly lessened from that source. In a short time the urgent pressure for note accommodation passed away, gold reappeared in circulation, clearing-house certificates were retired, and practically the whole of the emergency currency was taken up within ten months from the beginning of the crisis. The closing of the stock exchange affected business in every direction, despite the great issues of temporary clearing-house certificates. Several enormous failures oc- curred in June and July, including the Claflin catastrophe. Bank clearings for the whole country fell to $155,000,000,- 000, from $170,800,000,000 in the previous year. Liabilities of failures touched nearly $350,000,000, the heaviest mor- tality for twenty-two years, involving over 1 per cent of the total number of firms in business. A writer on the steel and iron industry says : "So acute was the depression that it was decided to stop construction work at the new Duluth plant of the United States Steel Cor- poration in the Fall of the year. Expenditures for this ac- count for 1914 amounted to $4,094,363.97. In December, 1914, production at the corporation's plants fell to the lowest point ever recorded. The general average of operations was reported to have been about 25 per cent but this is probably 222 HISTORY OF BUSINESS DEPRESSIONS somewhat overstated, as two of the largest subsidiaries reduced operations as low as 15 per cent in one case, and 18 per cent in the other, during the last fortnight of the year. Never did a year dawn blacker for the steel trade than did 1915. The financial upset that followed the outbreak of the great war paralyzed industry, and the effect was felt in steel, the barometer of trade. Closing 1914 with operations at the lowest point in years perhaps on record and with no actual sign of early betterment, it was small wonder that all except the perpetual optimists faced the future with some dread. And the events of the early part of the year seemed to justify this dread. In the month of January the steel corporation's earnings fell to the lowest point on record, $1,687,150." Cotton fell to the lowest point it had reached for several decades, bringing five and six cents on the plantation. The distress was so severe that the "Buy-a-bale" movement started and spread over the country. Northern wholesale merchants and investors bought a bale in order to relieve the South, and the wealthier classes throughout the cotton growing states bought what they could to take it off the market. Many who did so, and held it, sold that same cotton later for upwards of thirty cents. The Underwood tariff had begun to hurt. Manufactur- ers feared a great influx of imports that would adversely affect their commodities. The depression from this cause had already set in and even before the war broke out it was generally expected that a period of hard times was ahead. While this depression was of comparatively short dura- tion, it is surprising to note that the number of failures was greater in proportion than in the depression of 1920-21. The depression lasted well into 1915, when orders from Europe began pouring in and a period of abnormal condi- tions followed. CHAPTER XXV THE DEPRESSION OF 1920-21 Chas. Duguid in his "Story of the Stock Exchange" is the only prophet we can find who might lay claim to having predicted the depression of 1920. After referring to the South Sea Bubble and the Mississippi Bubble of 1720 and the world-wide depression of 1820, starting in this country in 1819, he said, "The history of 1720 repeated itself in 1820, as it may who knows ? repeat itself in 1920." The causes which may be given now from the best judge- ment later may be proven wrong. Certainly in economic affairs as well as in romance "distance lends enchantment." That is shown in perusing the newspapers and periodicals published at the times of our various crises. Time proves that writers apparently see things from too close a view- point. They are prone to take a narrow view. Many ar- ticles written at the time of the various depressions, ascrib- ing different causes, have later proved to be wrong; indeed, many of them ridiculous. As time goes on, the small and minor details of crises that are often magnified are lost to view and the main causes uncovered by time itself. At the time we invariably find politics given as the paramount cause of business depression. The administration in power is always condemned. Jackson was blamed for the crisis of 1837, Cleveland for that of 1893, Roosevelt for that of 1907 and Wilson for that of 1920. The central buffer which receives the ultimate shocks of depression is, of course, finance. Most of our crises and depressions have revolved around the question of money or the medium of currency. The depression of 1920-21 is an exception to the rule, being one of the first depressions in our history in which the question of money or currency did 224 HISTORY OF BUSINESS DEPRESSIONS not enter either in cause or effect. It is true there was some demand for a more liberal policy of rediscounting by the Federal Reserve Banks, as it was the curtailment of credits that largely brought on the depression. A violent quarrel started between politicians and the of- ficers of the Federal Reserre Board regarding the advis- ability of a more liberal use of Federal Reserve notes and a reduction in the discount rate. Governor W. P. G. Harding, of the Federal Reserve Board, in a letter to Sena- tor Sheppard, of Texas, said that wild speculation might result from such action. "If our present large gold hold- ings were deliberately made the basis for an undue exten- sion of domestic credits, as might well be the case if our discount rates were made so low as to offer an alluring profit to banks," Governor Harding wrote, "there might develop a very dangerous condition in the United States. No small part of the responsibility of the Federal Reserve system is to make sure the consequences of this flood of gold is not wild speculation and unsound banking practices." Terrific price declines were the rule of the day, and these so shocked the industrial system that there is little doubt that but for the Federal Reserve System an unprecedented panic would have ensued. The Federal Reserve Board may have justly deserved some of the criticisms directed against it because of its policy of too sharp action. Mistakes were made, no doubt, and it since has been admitted that the same result could have been accomplished by a more gradual de- flation attended with a lesser degree of loss particularly as regards to agriculture. On the other hand, Governor Hard- ing and other members of the Board give as their defense the fact that they repeatedly warned business and finance to start deflation. They claimed, and it is true, that their warnings were disregarded, and not only was there no start made in deflation, but inflation continued. It is further known that even after the Federal Reserve Board absolutely shut down and deflation had set in, bringing depression in HISTORY OF BUSINESS DEPRESSIONS 225 many lines, yet thousands of business men refused to be- lieve that a reversal was coming. Many went straight ahead, using up the round sums they had made during the war period and continued expansion beyond reason. The people as a whole continued their extravagant habits, feeling that the depression would be of short duration. In looking back it is apparent now that there could have been a middle ground; that the deflation could have come more gradually by the proper use of resources at our com- mand through the Federal Reserve System. Let us not over- look the idea that business has its rights the same as banks. The banker would not like it if he were forced to liquidate too quickly. He simply could not do it. Yet the banker takes a notion all at once that business must liquidate. In- stead of giving business the same time that banks would require he proceeds to force things at the drop of the hat. Liquidation and deflation should have been stretched out over a period of three or four years, and we could have returned to normal without the great shock of depression that we are passing through. We did it after the Civil War, assuming that the panic of 1873 had nothing to do with the war period. I know what my industrial friends will say in answer to this. They will answer it by asking the question, "How could we have liquidated- labor without the depres- sion?" Admittedly that is the hardest question that could be put to me to answer, because no man can tell what the attitude of labor would have been. The probability is that labor would have balked. Though their leaders may have tried to lead them aright, yet these leaders themselves know only too well how difficult that is. "What might have occurred during that period without the facility of Federal Reserve note issue is impossible to surmise," says Laughlin, "but the magnitude of the prob- lem is indicated by the fact that money in circulation in- creased from $3,419,000,000 on July 1, 1914 to $6,393,000,- 000 in November, 1920, when the peak was reached, during which period the net increase of gold held in the country 226 HISTORY OF BUSINESS DEPRESSIONS was only $848,365,000, and that gold constituted the reserve base for probably ten times that amount of credit created in the process of the Government's financing its war ex- penditures. On December 23, 1920, they were outstanding in the total amount of $3,404,931,000 as compared with $2,420,831,000 on November 9, 1921, a decrease of $984,- 100,000 in eleven months. "During the war we did the unbelievable. The people furnished in taxes and loans to the Government the stu- pendous sum of $34,000,000,000 to carry on the war, and besides that we carried on unprecedented enterprises, much of it on a credit basis. But at the end of 1919 com- bined demands of both these factors brought us to the limit of our banking power. The way we were going it is a question whether we realized that there was such a thing as a limitation of credit. We now see where we made many mistakes in our wartime finances. It was a time of enor- mous profits, and the discount rate should have been raised on both war and commercial paper, as borrowers could have well afforded to pay for it. It is also now seen that ex- pansion should have been penalized at its source by auto- matically adding a sliding scale or commission to the rate of discount to member banks as their re-discounts rose rela- tively to their capital. We had an abundance of gold con- centrated in the hands of reserve banks, but it created a dangerous over-confidence. This high funded gold en- couraged expansion and deposits and notes rose to such figures that no great margin of free gold was left. The halt should have come before it did, because it was plainly evi- dent that a sudden reversal in international trade would call for gold exports and leave us in a serious predicament." The victors in the Great War suffered more, economically, from the aftermath than did the defeated. The peculiarity of war is that often the victors, attaining the objects of the war, find themselves in as severe internal difficulty as the loser. This was the case in the Napoleonic wars, when the victors suffered through depression as much as the van- quished, and again in 1870 when Germany experienced a violent crisis and depression after her victory over France, while the latter prospered. Half in humor and half in earnest, a German comic newspaper said at the time : "Let HISTORY OF BUSINESS DEPRESSIONS 227 us have another war ; let us be beaten and pay an indemnity and then we shall be prosperous again." The depression in Great Britain was equally as great proportionately as in this country. France also suffered a depression because of the readjustment of war prices, but not to any such degree as in Great Britain and America. The other allied countries suffered severely Italy, Japan, Greece, and the smaller nations. The repudiation of the Russian debt, in some respects, counter-balanced the enor- mous indemnity exacted from Germany. This is the second time in history that Russia has repudiated her national debt. In 1843 the empire declared itself bankrupt and paid two-sevenths in a new issue of currency for the old issues that were outstanding. The Italian Government met the problem of unemployment and depression heroic- ally. The sum of $32,000,000 was voted for public works and land reclamation. The water power and natural re- sources of the country were developed and $6,000,000 more spent for laying cables to Spain, Greece as well as South American countries, rendering Italian trade independent of foreign cable lines. We have heard much adverse criticism of the paper cur- rency regime in Germany. Dire predictions are made as to the outcome. But while we are making these predictions let us not forget that our own country went through the same periods of paper currency, not only once but several times, and we have come out whole. After the depression set in in 1920, and including the first three-quarters of 1921, failures numbered 6,503 in- volving $202,532,000 August 1921 showing the greatest number of defaults, a total of 1,562. Unlike most previous depressions the West was the least affected. Only 565 failures were reported from the Central West, with $7,740,- 727 of liabilities as against 1,695 in the Middle Atlantic, with $46,406,944 of liabilities. Altogether 17,000 concerns, large and small, were forced to go out of business in 1920 228 HISTORY OF BUSINESS DEPRESSIONS and 1921 and a large number of others no doubt suffered enormous losses. When the depression set in people started saving. Every- body had spent wildly, getting little value for their money, until the buyers' strike came and men were thrown out of employment. Then they started saving. Preceding the depression prices of average commodities were higher than ever before known in the memory of people living. However, they did not reach the prices that prevailed during the Napoleonic wars, the price peak of all our national history having been reached in 1815. Whatever differences of opinion may exist as to the main and principal cause of this depression, all admit that the buyers' strike had a great deal to do with it. The public had gone its limit and refused to put up with further profi- teering. There was the wholesaler and other middle men, each taking a long profit. Figures indisputably show, however, that the retailer was the greatest profiteer and of all hands through whom merchandise went on its way to the consumer the manufacturer was the "gamest." That substantiates the best theory of all economists for decades back. There is less proportionate profit in manufacturing than in any end of merchandising. All available records show the predominance of wealth in mercantile communi- ties over manufacturing communities. The greatest wealth invariably goes to the selling center rather than the manu- facturing center, proportionately speaking. A certain merchant liked to make excuses for his prof- iteering by telling about how he sold shoes. He placed ladies' shoes on sale at $7 and at the side of those the identical shoe, excepting a different style, for $12. He boasted that nine out of ten purchasers would by the $12 shoes. That merchant may not know it, but such instances is what helped bring on the depression of 1920. His cus- tomers eventually found out that they had been tricked. It was not smartness on the part of the merchant that caused HISTORY OF BUSINESS DEPRESSIONS 229 230 HISTORY OF BUSINESS DEPRESSIONS the customer to buy the $12 shoes. Times were prosperous, the customer had money, could afford the best and wanted the best. When they bought $12 shoes they trusted the merchant to give them $12 values, not being leather experts themselves. When the customer found that the merchants were taking advantage of their trust, easing their conscience with the thought that "everybody is doing it," they revolted, bringing on what was called the "buyers' strike." In the far background the failure of America to enter the League of Nations was another cause of the depression. This opinion is held by Republicans and Democrats alike, by supporters and opponents of the father of the League. That body offered a medium through which we could get our heads together with other nations upon whom we are more or less dependent and help them solve their problems. By admitting Austria and Germany the League could have established a monetary commission which would have de- vised ways and means of stabilizing exchange, of funding the international indebtedness, and general promotion of international commerce. The world will come to see the day when it realizes the price we have paid for the stub- bornness of one man and the spite of a group of others. Confidence in our money system was a bright feature of the 1920 depression there being no runs on banks of any consequence. There were no outstanding failures, no spec- tacular panic, although in various parts of the country smaller banks closed their doors and some consolidated with stronger institutions in order to pull through the stringency. There were a large number of failures, but mostly superflu- ous concerns which had no good reason for existence. There were no restrictions on withdrawals of deposits, no morato- ria, no stock exchanges closed. We had in our vaults 50 per cent of the world's gold, which was a bulwark against loss of confidence. In 1920 there was a grocery store to every 218 persons in the United States, or one to every forty-eight families, ac- 231 cording to Alvin E. Dodd, manager of the Department of Domestic Distribution of the United States Chamber of Commerce, who intimates in an article in the Nation's Business that there may be too many retailers. On the basis of the estimated average family budget the average grocer in the United States would have an annual turn-over of only $9,400. This is too small to permit him to obtain a living, and the result appears in the high mortality rate in this trade. In 1920 there was one failure for every two hundred grocers in the country, and in the past five years, although during this time the country was highly prosper- ous, retail grocers succumbed at the rate of about twenty a day. "This, of course, only means that competition is simply weeding out the unfit and that economic laws will not be thwarted." Our population was practically double in 1920 the popu- lation at the time of the depression of 1873, at which time three million workers were thrown out of employment. According to figures given out by President Harding's un- employment conference the unemployment reached six mil- lion. From that angle the depression of 1920 was equally as bad as any on record. However, economists point out that in 1920 perhaps two and one-half million were counted among the unemployed who were not heads of families or needed wage-earners, but who had been pressed into the ranks of workers during the war. History repeats itself with uncanny regularity in cycles of business depression. Referring back a hundred years to the depression known as the panic of 1819, but at its worst in 1820, a writer in Niles Register says; "Mail robberies and piracies are the order of the day." How like our own times ! In 1921 mail robberies were so numerous that Postmaster General Hays and Secretary of the Navy Denby placed arm- ed marines on mail trains and at stations where mails were handled. 232 HISTORY OF BUSINESS DEPRESSIONS One of the big factors of the depression, and the one which undoubtedly prolonged it, was the enormous issue of tax free bonds. In order to avoid excessive war taxation on incomes investors bought tax free state, county, and muni- cipal bonds. Such issues were eagerly grabbed up on the market, creating an orgy of public spending at exhorbitantly high prices and taking the wealth of the nation out of the channels of trade and industry. Money used in public work goes through a slow process in getting back into the chan- nels of commerce. It often is injudiciously used and the large amount of money spent in this direction retarded business activities because of tied up credits in channels of slow liquidation. "As a rule," says John Mills, "panics do not destroy capital ; they merely reveal the extent to which it has been previously destroyed by its betrayal into hope- lessly unproductive works." Steel and iron people claim that the depression of 1914 was worse than 1920-21, claiming the percentage of unem- ployment was not so great and there was plenty of money to be had in the recent depression, whereas in 1914 money was very scarce. President Harding, upon coming into office, found a deplorable state of affairs with increasing distress and un- employment. As winter approached a conference of indus- trial and labor leaders and well known economists was called under the leadership of Herbert Hoover, Secretary of Commerce. This conference attempted to devise ways and means of alleviating unemployment. Many plans were proposed and discussed, but the outgrowth of it all was that there was nothing to do but to go to work. The President in an address made it plain that the public treasury would not be used in giving out alms. This attitude was approved in general by press and public. In Canada, where the English idea of doles was growing, the President's attitude was given outspoken approval. The Montreal Gazette said; "The United States is still the most individualistic of the HISTORY OF BUSINESS DEPRESSIONS 233 great nations, and is likely to remain so. It grew great by the work of men who, when in need, turned to and did what- ever their hands could find to do. The Government's atti- tude may seem hard, but it is in keeping with the country's record. The giving and taking of doles does not make for manliness or self-reliance." The President's conference was at first inclined to out- line an educational program to show individuals how to pre- pare for their own protection against recurring depressions, but Secretary Hoover declared the Conference to be entrust- ed with the duty of relieving present evils and doing some- thing of a definite nature to relieve unemployment and help industry back to its feet. The final recommendations of the conference show that this idea finally prevailed. In the Fall of 1921, unfortunately just at the time of the Washington Peace Conference, financial panic broke out in China and spread over the Republic. Some observers say that Japanese plotters instigated the panic for the purpose of showing that China was unable to handle her own financial affairs without help from outside. Whatever truth may be in that it is known that China's Government did default in payment of loans to the Continental and Com- mercial National Bank of Chicago. The panic halted, how- ever, before great damage was done. Various leaders, among them Postmaster-General Will Hayes and Secretary of Commerce Herbert Hoover, were sure that prosperity was just around the corner from 1922. Others, such as Secretary of Agriculture Wallace, said in a speech in Chicago that the depression in agriculture was the worst known in history and it would take five years to recover. Ex-Senator Beveridge, before the New York Chamber of Commerce, said that the return of prosperity was still a long way off. If we can go by the past, however, striking an average, we will find that depressions run their course in two or three years. Business has never remained below the normal line for longer than three and a half 234 HISTORY OF BUSINESS DEPRESSIONS years. Our longest depressions were 1837 to 1840, 1873 to 1876 and 1893 to 1896. The U. S. Department of Commerce furnishes a table of 1921 prices with approximate index numbers based upon 100 for 1913. Cost of Living: Index Number Department of Labor (May Survey) 180 National Industrial Conference Board 165 Average price to producer, farm crops 109 Average price to producer, live stock '. 113 Average wholesale price, foods 152 ^ Average retail price, foods 155 Wheat and Flour: Wheat average to producer 128 Flour, wholesale, U. S. average 173 Bre-td. rcia I U. S. -average--: 173 Freight rate flour, Minneapolis to New York, domestic 187 Live Stock and Meats: Pork- Hogs to producer 116 Retail ham 197 Retail sliced bacon 162 Wholesale short side 108 Wholesale pork chops 184 Retail pork chops 181 Retail lard 115 Beef- Cattle, average to producer 91 Wholesale carcass besf at Chicago 124 Retail, sirloin steak 157 Retail, round __ 160 Retail, rib roast 147 Retail, chuck roast 1>30 Retail, plate beef . 112 W^ees in meat packing (Dept. of Labor Investigation) 186 Freight rates, dressed beef, Chicago to Mew York 214 Hides and Leathers: Hide*, green salted, packers, heavy native steers rChica*O 76 Hides, calfskin No. 1, country, 8 to 15 Ibs (Chicago) 86 Leather, sole, hemlock, middle No. 1 (Boston) 120 Leather, Chrome, calf, dull or bright, "B" grades (Boston) 195 Wholesale boots and shoes, men's vici kid, blucher- campella 225 Freight rates, shoes, Lynn, Mass.. to Chicago 210 Wage scales in shoe industry (Massachusetts), about 200 235 Cost of Living: Index Number Cotton : To producer 105 Yarns, carded, white, Northern mule, spun, 22 cones (Boston) 107 Wholesale sheeting, brown, 4-4 ware, shoals LL, N. Y. 118 Wholesale printcloth 27 inches, 64 x 60, 7.60 yards to pound (Boston) 137 Wool: To producer 92 Wholesale worsted yarns 2-32, crossbred stock white in skein (Philadelphia). 148 Wholesale women's dress goods, storm serge, all wool, double warp, 50 inches, (New York) 157 Wholesale suitings, wood-dyed, blue 55-56, 16 ounces, Middlesex (Boston) 183 Freight rate clothing, New York to Chicago 210 Wage scale in mills, about 200 Building and Construction : Prices Lumber, average southern pine and Douglas Fir (at the mill) 128 Brick, average common, New York and Chicago 199 Cemet, Portland, net, without bags to trade f. o. b. plank (Buffington, Ind.) 175 Freight rates Brick, common, Brazil, Ind., to Cleveland, Ohio 204 Cement, Universal, Pa., to New York 179 Building labor: Union scale, simple average, 15 occupations 190 Union scale weighted average, 8 occupations, frame houses (3) 197 Union scale, weighted average, 8 occupations, brick houses (3) 193 Common labor 130 Construction costs: Cement building (Aberthaw Const. Co.) Coals : Price bituminous, Pittsburg 186 Price, anthracite, New York tidewater 198 Union wage scales about 173 Non-union scale, about 136 Freight rates 187- 209 Metal trades, union wage scale: Simple average, 19 occupations 218 236 HISTORY OF BUSINESS DEPRESSIONS Cost of Living: Index Number Metals : Prices Pig Iron, foundry No. 2, Northern (Pittsburgh) 137 Pig iron, Bessemer 128 Steel Billets, Bessemer (Pittsburgh) 115 Copper, ingots electrolytic, early delivery, New York 76 Lead, pig, desilverized, for early delivery, New York 100 Zinc, pig (spelter) , Western, early delivery, New York 80 Day labor, scale U. S. Steel Corporation 150 Printing and publishing: Book and job, union wage scale 194 Newspaper, union wage scale 157 Railroad, average receipt per ton-mile 177 Bureau Railway Economics estimate of railway wages based on average annual compensation, third quarter 226 General estimate all union wage scales by Prof. Wil- son 189 NOTE The wage indices refer mostly to wage scales, not the earnings, which necessarily depend upon regularity of employment. The figures show that agriculture has liquidated to a greater extent than any other product, and also that for the first time in our history we have gone through a de- pression with commodity prices higher than the average for the preceding period. CHAPTER XXVI MINOR DEPRESSIONS A number of lesser depressions affecting certain indus- tries or sections have occurred in the intervening years which had little effect on the country as a whole, and no les- sons are to be gained from them other than that can be gained from general depressions, so that but brief space is given them here. In 1798 the country experienced a short panic and de- pression when we were quarreling with France, who in- sisted that we help her in her war against England. In that year news of Napoleon's victories had reached England and a panic ensued; it was reflected in this country. The prisons of Philadelphia were filled with debtors, formerly honorable men of good standing. This panic was soon over and peace was made with France. There occurred in 1828 and 1829 an accidental and very brief scarcity of cash. This depression marked the begin- ning of the agitation against the Second National Bank, causing uncertainty in financial circles. The cry was taken up by an element of politicians who wanted the State Bank system, which they thought would help more to develop new lands in the South and West. Defenders of the National Bank pointed out that its notes were accepted the same as gold in every part of the country and practically at their face value in all the financial centers of the world. The parent bank at Philadelphia was housed in a marble palace, with hundreds of high-salaried clerks. There were twenty- five branches in different cities of the Union. A large ex- port of specie was taking place at the time, and when it became known that the volume of paper currency was so large against the specie in the vaults of the banks general 238 HISTORY OF BUSINESS DEPRESSIONS distrust swept over the country. A committee of the Sen- ate reported in 1829 that the soundness of the bank was unquestioned and the uniformity of the currency satisfac- tory. The crisis which occurred in 1833 was of short duration and felt but little in business circles. It was precipitated largely by the hostile attitude of President Jackson against the United States Bank. The bank felt compelled to contract its discounts suddenly, causing confusion among borrowers, who quickly retrenched, and the stringency was short lived. At this time President Jackson withdrew the government deposits from the Second National Bank. The year 1833 was one of contraction of credits and decreased business, mostly on account of uncertainty and the crop failures of 1832, but business soon emerged into the great boom that preceded the panic of 1837. The expansion of the West demanded so much capital that there had to be a temporary let up, but the West would not down and insisted upon rid- ing ahead ot its fall in 1837. When the contraction had set in Jackson's friends led him to believe that the Second Bank was bent on causing a prolonged depression so as to injure his administration. Jackson then set about to start good times, and this resulted in inflation. Jackson felt very triumphant in that he had forced the Second Bank to "aban- don the system of curtailment and extend its accommoda- tions to the community." An incident of this crisis was the failure of the Bank of Maryland, then an important institution. Bitter feeling arose between the directors and the stockholders and de- positors, and, after the trustees had not rendered an ac- counting for seventeen months, the depositors became so exasperated that they mobbed the houses of all the parties concerned in the partnership, resulting in considerable de- struction of property. The mob held sway for five days. Upon petition to the Legislature an indemnity of $102,550 was granted to those who suffered by it. HISTORY OF BUSINESS DEPRESSIONS 239 The year 1851 marked a short period of depressed busi- ness described in typical language by a writer as follows : "A bad credit system has been in vogue, trade with Cali- fornia had not met expectations, imports had been large, exports of gold heavy, cotton declined in Europe, the banks contracted, property was sacrificed to raise ready money, mercantile credit was disturbed everywhere, and distress was general in all cities. In Wall Street large blocks of stock were unloaded and the market was broken. Erie went down from 90 to 68%. Later in the month money be- came easier, prices advanced, and the market resumed its ordinary aspect." The depression of 1882 was inconsequential and probably a reflection of the crisis in France of that year ; 1867 prob- ably also was purely a reflection of the great European crisis of 1866. A short depression came in December, 1895 at the time of President Cleveland's "Venezuela Message." A panic was precipitated in Wall Street, and iron production dropped off about 25 per cent. The trouble passed over, however, within a few months and conditions returned to normal. The year 1901 witnessed a remarkable performance in Wall Street. It was the year of the Northern Pacific cor- ner, which dazzled the boldest speculator that ever entered the Street, and it is now admitted that had there been other disturbing elements at the time it would have caused a panic equal to that of 1907. The incident did not disturb business as a whole, and it is entitled to little space here, but Wall Street was severely shaken and many fortunes lost in a single day, while "the rest of the country stood off and literally laughed." The flurry of 1900 was purely financial and did not affect business. Industrial conditions were encouraging; foreign commerce was expanding, and harvests were generous, so the Wall Street excitement reflected only slightly on the rest of the country. The year 1918 had a 240 HISTORY OF BUSINESS DEPRESSIONS breathing spell of about sixty days following the armistice, when hundreds of thousands of workmen were let out of war industries. Other minor depressions or short financial crises are recorded in the years 1846, 1855 and 1882. Still other finan- cial panics have been confined to Wall Street and had little or no effect upon the country, and can not be included in a list of business depressions. CHAPTER XXVII OUR RELATIONS TO FOREIGN DEPRESSIONS It has been seen that depressions afflict other countries as well as the United States. Sometimes they are world-wide, at other times they spread to a group of nations, and again only one country may be affected. In many cases reverses in one country spell profits to another. "It's an ill wind that blows nobody good" is a saying that obtains in the world of business and finance as in everyday affairs. A general world depression is the exception rather than the rule, although with the increasing intercourse between na- tions disaster in one has a growing tendency to affect others. It is claimed that the entire world was passing through a period of lethargy previous to the recent war. Arnold Toynbee in his book, "The Industrial Revolution," said that depressions in England were generally associated with bad harvests, although free trade had lessened their force, because when they had bad harvests there they got plenty of corn in America, but admitted that trade depres- sions were then getting to be of international scope and of more widened area, as "a bad harvest in Brazil may preju- dice trade in England." We have been having business cycles regularly in this country ever since we have been a nation, and England has had them ever since the beginning of the mercantile period. In former years crises in England developed into the worst kinds of panics, until in 1866 they developed a plan of panic financiering. This included the adoption of a centralized banking system, the vital feature of which was to give practical assurance that every business enterprise not actually insolvent can, by paying a stiff rate of interest, obtain bank loans to meet its liabilities. This act tended to stave off panicky runs and retain an element 242 HISTORY OF BUSINESS DEPRESSIONS of confidence in business and finance, no matter how dark the outlook. It is true that England has had crises since this time, but they have lost their dramatic intensity and the nation has come through some very trying times, while the system held true. England was fifty years ahead of us in taking steps to avert panics. Our Federal Reserve Act, no doubt, kept us from having a panic in 1920, and will probably be a bulwark against them in the future. How- ever, we, like England, will for some time have recurring business depressions, and since we are now practically se- cure from panics our thought should next be developed into mitigating the violence of deflation and resulting depression. We have been affected by England's crises and depressions and she by ours, more than any other two countries, be- cause of the close inter-relationship of our financial and commercial systems. Seldom have we felt the effects of a foreign depression other than England's, unless it was in 1884. This, some think, was a reflection from France's trouble of 1882. We have, however, felt world-wide depres- sions along with most all other countries. In the early part of the Nineteenth Century, from the years 1801 to 1804, France suffered a financial reaction. The most important reason for this was no doubt the disturb- ance caused by the continual wars in which she had been engaged, both foreign and internal, rendering the .paths of industry precarious in the extreme. , During these years America prospered from supplying the warring nations of Europe. The depression of 1819 was general in all the western world because of a general crash following the Napoleonic wars. It spread to America. Our 1825 depression was nothing but a reflection of the English and French crises and depressions of that year. Our domestic situation was sound and it had little effect upon us. India had notable depressions around the years 1830 and 1866. We felt neither of them. In October, 1836, a financial crisis over- HISTORY OF BUSINESS DEPRESSIONS 243 whelmed Great Britain. While our panic a year later cannot be wholly and definitely attributed to the crisis in England, yet one had considerable bearing on the other. In 1841 Great Britain experienced a financial crisis which brought many failures among mercantile houses and wide distress among the working classes, but had no effect on this country. In recent years, up to the Great War, Germany has been very fortunate in avoiding serious commercial depressions. She had suffered very severe financial reverses from the revolutionary movements in 1848 and the various disturb- ances as an outgrowth of quarrels in welding the various 110 8 I860 1870 2 4 6 a 2 100 a 6 4 2 90 a 6 4 2 60 e 6 4 2 70' 8 6 .4 2 60 I860 . 1890 1900 1910 1920 4 6 S 460 4608468846 V Prices of English Food Commodities as a Whole Since I860. Prices, Reached a Lower Level Throughout the World in the Depression of 1893-4 than for a century previous. The Comparatively Low Level of the War Period 1914-1918 was Due to the Government Purchases of Food Stuffs That Were Sold to the People. Below 'Cost. 244 HISTORY OF BUSINESS DEPRESSIONS states together. Her crisis of 1848 was echoed in this coun- try. After the lull following the Franco-Prussian War she went forward in great strides, few depressions of wide- spread consequence being recorded. The story of the growth of Hamburg compares well with that of the great and rapid rise in Chicago. The crisis of 1857 affected England and America. In 1864 Brazil and Australia were both affected by severe business depressions, neither of which were felt in America. That of 1873 swept over the continents of North and South America and Europe. Silver was very high and the amount of silver in a silver dollar was worth several cents more than par. When great quantities of German silver were dumped onto our market at these prices, a tremendous decline set in, augmenting the already precarious state of affairs, merg- ing into the general panic. In 1886 Great Britain appointed a Royal Commission on Depression in Trade, which carried on an extensive investi- gation of underlying conditions. Our depression of 1884 was over by that time. All of South America was affected in the troubles of 1890. The difficulties centered in Argen- tine, quickly spreading to other Latin-American nations, thence to Europe, causing the Baring failure in England, and finally to America. Our depression of 1893, terrible as it was, affected us almost alone. India had a panic and depression that year, though it probably bore no relationship to ours, except the re-echo of the demonetization of silver in that country. Acute commercial conditions also existed in far-away Java and the Straits Settlements in 1893. In 1907 the whole world, including the Orient, felt the crisis. It seriously affected business in Latin-America. At the out- break of the World War in 1914 every country on the globe was affected for at least a year. Again in 1920 scarcely any country escaped. Our depression of that year followed the severe Japanese panic, which caused numerous failures on the Pacific Coast 245 of our country. A depression had also set in in England and Italy and to some extent in France. On the other hand, Germany and Belgium were prosperous Germany be- cause her people were going back to work, willingly taking depreciated money; Belgium because the first Germany in- demnity payments went to her. There have always been small local depressions in the dif- ferent countries and depressions affecting individual in- dustries in a single country. But it can be seen that as the nations of the world engage more and more in commercial intercourse the major depressions of the future are bound, to some extent, to affect them all. YEARS OF DEPRESSION IN UNITED STATES AND OTHER COUNTRIES. Other countries mentioned had various depressions not noted here. Those are given which had relationship to our own. United States England 1785 1808 1808 1814 1819 1819 1825 1825 1837 1848 (1836) 1857 1860 1869 1857 1873 1873 1884 1890 1890 France 1785 1808 1819 1825 Other Countries Ireland, Holland. Entire Europe. 1903 1907 1914 1920 (1902) 1907 1920 1848 Germany, Austria* Austria, Russia, Latin-America. Latin- America, Germany, Tur- key, India, Java, Australia. Orient, Europe, Latin America. Entire world, except Europe. Entire world. . 1907 1920 CHAPTER XXVIII CAUSES OF DEPRESSIONS Theoretical Causes. In the early part of the Eighteenth Century British merchants and financiers spent much time worrying over their relative cash basis as compared with other countries, and sometimes studied that matter so in- tensely that they lost all sense of the real proportion of things, and thought that the nation was being ruined be- cause the importation of gold and silver was hindered or stopped. Wise old Joshua Gee, who wrote (1730) "The Trade and Navigation of Great Britain Considered," ended his book with this paragraph: "The trade of a Nation is of Mighty Consequence, and a thing that ought to be se- riously weighed, because the Happiness or Misfortunes of so many Millions depend upon it. A Little Mistake in the Beginning of an Undertaking may swell to a very great one. A Nation may gain vast Riches by Trade and Commerce, or for want of due Regard and Attention may be drained of them. I am the more willing to mention this because I am afraid the present Circumstances of ours carries out more Riches than it brings home. As there is cause to apprehend this, surely it ought to be look'd into ; and the more, since if there be a wound, there are Remedies proposed, which, if rightly applied, will make our Commerce flourish and the Nation happy." He had studied the trade for the year 1723, and had found that he could trace the export of more than a hundred and seventy tons of silver and about eleven tons of gold. In another place he says, "yet so Mistaken are many people, that they cannot see the Difference be- tween having a vast treasure of Gold and Silver in the Kingdom, and the Mint employed in coining money, the only true token of Treasure and Riches, and having it car- HISTORY OF BUSINESS DEPRESSIONS 247 ried away; but they say Money is a Commodity like other Things, and think themselves never the poorer for what the Nation daily exports." Investigation of trade cycles and causes of depression bring on an interesting study. In late years it has been demonstrated, notably in 1901, 1905 and other instances, that Wall Street can have a regular old-fashioned panic and the rest of the country go on unaffected to any degree. Such might be called "financial hysteria" and be confined to the "Street." On the other hand, we may have business depression, such as came in 1914, resulting from uncer- tainty due to the outbreak of the European war. At that time Wall Street prospered by making foreign loans at usurious rates, while the business of the rest of the country was stagnant. Wall Street panics are usually brought about by the selling of securities by holders who feel that the peak has been reached, particularly when some unto- ward instance happens which might look like a setback was ahead. A large number of sellers appearing at the same time naturally causes the market to recede. A few days of sharp drops causes the holder to become frightened and a general unloading ensues, and the legitimate investor often follows the speculator, but too late. By the time he has awakened to the fact that a genuine stock panic is on the value has sagged considerably. Such declines are caused by or are followed by stringency in the money mar- ket, and others are forced to sell because their margins are exhausted. The decline continues with disastrous effects until a point is reached where many times the stock becomes an actual bargain and it is picked up by that element of for- tunate people who always have money through steady in- comes or are able to borrow under any circumstances. A friend, during a game of cards where the luck of the players was going bad, used to say: "Never mind, your luck will change bye and bye and get worse." That well describes some of the depressions we have had. The de- 248 HISTORY OF BUSINESS DEPRESSIONS pression of 1848 did not follow any particular period of inflation or expansion, but came on during very normal times. Likewise the depression of 1884. The depression of 1893 also followed a period of six years which were below normal rather than above normal. In other words, bad times got worse. A class of economists hold to the doc- trine that trade cycles follow the fluctuations of precious metals. They attempt to explain that scarcity of gold means retrenchment and a stagnation, and that a great output of gold brings expansion and prosperity. How, then, do they explain the depression of 1920 in the United States, which had over half the world's gold, and a depression of equal volume in Great Britain, which had the next largest gold reserve, as against the unprecedented prosperity in Germany, which had very little gold? Another school of writers claims that depressions are caused by unsound money, in the form of too large coinage and circulation of silver. That theory has been generally accepted in this country because of the unfortunate experiences we have had with silver money. But, on the other hand, we can point to many countries that are and always have been on a silver basis, and they have suffered less from severe depres- sion than have we in this and other gold standard nations. The money of Spain, known as a silver country, brought a premium during the World War, and on the western conti- nent up through history Spanish silver money has always been at par and usually brought a premium. Thomas Jeffer- son favored putting this country on a silver basis, pattern- ing our currency after the Spanish coins, which circulated freely and were in great demand in some of the colonies for thirty years after the Revolution. The examination of finan- cial history shows that there is no reasonably close relation between depression and the output of precious metals, either gold or silver. It is known that the decade ending with 1850 shows the output of gold doubled, compared with the previous ten years, yet that decade was marked the HISTORY OF BUSINESS DEPRESSIONS 249 world over by financial reaction. Our panics of 1857, 1873 and 1907 all occurred during periods when there was a great inflow of new gold. Still again there is another group that sticks to the money question as the root of the depression evil. These probably come nearer to a correct diagnosis than the others. The issuance of paper money of unsound backing has un- doubtedly caused several serious depressions. The use of this money led to extravagance, over-expansion and wild speculation, so that a halt was bound to come. The issuance of paper money within reason as a circulating medium is necessary. We are so used to paper money that in these days the tendering of a silver dollar causes curiosity if not resentment. We have already entered the Paper Age. We are reaching a point where we realize there is something of basic and intrinsic value in the world besides gold and silver. These metals may always be used as a basis of money issues simply because of their rarity, but they will grow less and less in importance. The Bolshevists of Rus- sia tried the age-old theory that money is unnecessary, and they will find to their own surprise and to our chagrin that they are half right. When we are further along money will be necessary only as a paper medium to represent rec- ognized essentials of mankind upon which it will be based. Our Federal Reserve Act provides that we may issue paper money on something besides gold and silver and the notes still be more than a mere promise to pay. Our Federal Re- serve notes are based on certain approved securities which are far more necessary to the progress and welfare of man- kind than gold and silver. True, these notes are redeemable in gold, but it is well known that the issues outstanding are ten to twenty times as great as the gold reserve back of them. As we go along the Federal Reserve Act will proba- bly be so amended, and at the same time strengthened, that our money will represent the accumulated wealth of our 250 HISTORY OF BUSINESS DEPRESSIONS brains and our toil, which is the finest intrinsic value that God has created. There have been minor depressions in our country that are really hard to analyze, with no apparent causes. In the case of our major depressions, however, the causes may be well defined. At different times various governments have attempted to analyze depressions and if possible find a remedy. Among these are the United States, Great Britain, France, Belgium, Germany, Switzerland and Italy. A va- riety of causes have been advanced by scores of writers, economists, investigators, financiers and business men. Some are old and have been eliminated by the march of time. Some are obviously of little consequence, while others are very apparent causes and these are defined later. Among the causes that have been advanced at different times are : Underconsumption. Large Exportations of Gold. Large Importations of Goods. Effects of Fear of the Tariff. Weak Banking Systems. Presidential Elections. Unpopular Taxation. Lack of Foreign Markets. Unemployment. Want of Confidence. Inflation of Values. Variation in the Cost of Production. Unpopular Legislation. Unreasonably High Prices. Centralization of Capital. Manipulation of Money Power. Depreciation of Currency. Withdrawal of Money from Circulation. Contraction of Currency. Inflation of Currency. Suspension of Specie Payment. 251 Disturbed Value of Gold and Silver. Lack of Fixed Policy in Governmental Affairs. Extravagance, Public and Private. Inefficiency of Labor. Large Immigration of Pauper Labor. Speculation. Depressed Value of Farm Products Exhorbitant Transportation Costs. Artificial Stimulation. Timidity on the Part of Money Lenders. Bank Failures. Conflicts between Capital and Labor. Buyers' Strikes. Enforced Economy, Public and Private. Starting Needless Enterprises. Political Distrust. At different times various causes, more or less absurd, have been ascribed, many of them of course having little bearing on the question. Among them are : "Withholding Franchise from Women." "Want of Training of Girls for Future Duties." "Faulty Laws Relative to the Guardianship of Children." "The Custom of Issuing Free Railroad Passes." "High Telegraph Rates." "The Use of Tobacco." Professor Frederickson, of the University of Copenhagen, earnestly believed his theory that depressions "were due to the minds of men" or the result of "mental process." Many of these theories have been disproved, as for in- stance, that relative to the exportations of gold. Let us refer to the case of the French nation, which in 1871 paid Ger- many a large indemnity in gold. Yet depression followed in Germany in two years, while times were normal or good in France. Sun Spots. Some years back Professor Jevons advanced 252 HISTORY OF BUSINESS DEPRESSIONS a theory which attracted considerable attention and many believers, viz., that cycles of depression followed the appear- ance of sun spots. He sought to prove that sun spots oc- curred in the history of England during the dates of her fi- nancial crises which he named as 1701, 1711, 1731, 1742, 1752, 1763, 1772, 1783, 1793, 1804, 1815, 1825, 1836, 1847, 1857, 1866, 1878. In seeking an explanation of this strange coincidence the Professor claimed that sun spots caused de- fective harvests which, in turn, brought on industrial disas- ter. Both astronomists and biologists, however, failed to agree with the Professor and the theory has long since been discarded. Over-Population. It has been held in Europe for some time that depression was caused by over-population; that there was not sufficient employment and too many had no buying power. Yet we have had depressions in America of still greater severity when the country was sparsely settled and even now it certainly cannot be said that this country is over-populated. Over-Production. The cry of over-production goes up, particularly among theorists, as a cause of business depres- sion. Yet there has never been a time, even in our most prosperous years, when there were not thousands in need who would gladly give labor or its equivalent for the very articles that were claimed to be over-produced. Mafty students of economy laid the distress of 1920 to over-pro- duction, as was the case in many previous depressions. This was a quick change of front from a year preceding, when all the professional economists told us that we must have greater production in order to relieve high prices and profi- teering. In 1919, in the face of the fact that prices were then outrageous, salesmen went up and down the country with the stereotyped phrase that they were doing the cus- tomer a favor by selling at prices quoted and that the next order would cost more because prices were sure to rise still higher. They claimed there was an under-production and HISTORY OF BUSINESS DEPRESSIONS 253 that raw material and labor could not be obtained to supply the demand. Then came the buyers' strike, and almost over night we switched the blame for our predicament from under-production to over-production. Over-production is responsible, more or less, for our temporary depressions and set-backs, yet that is a wrong diagnosis of the primary causes for the sickness of America in 1920. Stimulated by universal demand manufacturers, and farmers in particular, produced abundantly. Of most commodities we always have a surplus, and what surplus we had could easily have been taken care of had international finances been anywhere near normal. Foodstuffs were rotting in this country while China and half of Europe were starving. Europe also had urgent need of the products of our mines and mills, and our surplus would ordinarily have been shipped there had not their finances been strained to the breaking point. We had a surplus, not from any cause of over-production, but because of our time-worn custom of producing a surplus, and the use of the word "surplus" in this connection gives the unthinking man an entirely erroneous impression, for it gets the cart before the horse. It implies that foreign trade is a device to get rid of a surplus product, whereas the so-called "surplus" was brought into existence because of the demand originally created by foreign trade. Excessive Saving. Several writers have come forth with articles taking the stand that excessive saving is a cause of depression. These writers put forth earnest efforts to show the fallacy of saving, but their arguments are without merit. We know that money saved is not taken out of cir- culation at all, but the savings institutions lend it to bor- rowers and it is put to work in production just as if the original owner had spent it. The only time the question of excessive saving might enter into depressions is when the depression is at its height. When banks are liquidating to an extreme and people are saving to an extreme, a bad situ- ation is certain to be created. 254 The solution is that people must save more in good times and the banks must lend more in bad times. Foreign Investments. We are facing today a new situa- tion that might in the future be agitated as a cause of de- pression in this country. This factor is the large investment of American capital in foreign countries. English econo- mists of fifty and a hundred years ago complained that their industrial conditions were depressed because of enormous investments of British capital in foreign countries. No doubt that did drain England of money for the time being, although in later years those investments were a source of great wealth to England. It is easily possible to see that in this country the matter of foreign investments can be overdone, bringing temporary detriment to business in this country. Some insist that we are still a new country, that in every locality there are great possibilities for develop- ment and a need for investment capital. Yet enormous sums of American wealth during the depression of 1920 and 1921 were invested in buying the Hapsburg estates in Aus- tria and Hungary, in South American oil fields, in Russian concessions, in Cuba, Mexico and the Orient. It is pointed out that these investments were necessary to secure future supplies of oil, rubber and other raw materials, and prob- ably we missed the money less in 1920 and 1921 than we would in normal times, because of the great wealth poured into this country during the war. Most of these investments were made as a result of exchange of loans already owed us, and will no doubt benefit us in future years. In 1846 John MacGregor in his "Commercial Statistics" described the condition of Holland during the progress of her decline. He called attention to the fact that a great part of her specie and capital was then being diverted into investments in the manufacturing trade and securities of foreign countries, which permanently exhausted and weakened the power and energy of Holland. It was soon found that where a man's money went he eventually followed, so that not only the HISTORY OF BUSINESS DEPRESSIONS 255 money but the life blood of Holland went to other countries; not only to her colonies, some of which she later lost, but to many other countries. American investments abroad may not cause our best business men to follow, but unless it is a gradual process it is certain to be reflected in our domestic industrial welfare. Falling Prices, CarrollD. Wright, former United States Labor Commissioner, gives falling prices as one of the chief causes of depressions. His report made in 1886 on this subject is interesting and shows thorough investigation of a practical nature. As a cause of depression falling prices is secondary, be- cause they, in turn, are brought about by more fundamental causes. Rising prices have a psychological effect. They stimulate hope and courage, whereas falling prices cause caution, fear and depression. Falling prices may follow a linancial crisis or may precede a general depression. In 1920-21 the depression could have been largely avoided if prices could have been gradually reduced in proportion to a decline in cost of production. In such a sharp fall of prices as we have recently witnessed great losses must take place and depression will follow until these losses can be made up or overcome. Low prices naturally bring depression in values of property and stocks on hand. Mr. George Grubb, National Secretary of the Marine Engineers' Association, claimed the depression was brought about by a concerted effort of employers who wanted to squeeze labor. No doubt there was a general desire on the part of employers to discipline labor because of alleged in- efficiency, although no evidence is at hand to show that this movement was organized. If it is true that the depression was deliberately brought about, which is extremely doubtful, then the employers badly mismanaged matters when they let the movement get away from them. It is certainly plain that the employers lost enormous sums of money when the buying power of millions of workers was curtailed, as well 256 HISTORY OF BUSINESS DEPRESSIONS as through the depreciated value of their own enterprises arising from curtailed earning power. For instance, a manufacturing institution might easily be worth a million dollars as a going concern, if its output is being consumed and it is earning healthy dividends. Yet it is also possible that the value of that same plant might depreciate to half that amount through lack of orders, stringent credits, de- creased earnings and disorganized employees. In the face of these facts what would the employer gain by a concerted movement to shut down? Thus decreased earning power will cause falling prices entirely outside of the natural order of supply and demand. Changes which take place in the prices of commodities may be due either to changes which affect the commodity only or, since price is the relation of the commodity to money, to changes which take place in the value of money. Change in price may therefore arise from a change in (1) the de- mand for, or (2) the supply of the commodity. Changes of this nature are reflected in the prices of one commodity as compared with another; their positions in the price scale change. It may be noted that when prices change "by rea- son of differences in the demand for, and the supply of commodities, some commodities may rise in price while others fall. Such readjustments in prices of commodities are constantly taking place. On the other hand, should price changes be wrought by changes in the value of money we should expect uniform action upon prices a general rise of prices or a general fall. "The study of prices has long been a subject of particular solicitude, not only to the men actually engaged in business but to the students of business affairs. To separate the general from the particular, economists have invented what is known as the index number. The purpose of this device is to ascertain the average change in prices of a group of commodities. The prices of a given period or a given time are selected as a base, and the price of each commodity HISTORY OF BUSINESS DEPRESSIONS 257 is determined," says Joseph French Johnson, dean of New York University School of Commerce, Accounts and Finance, who tells in "Economics of Business" how the method of tabulation arrives at a scientific price barometer. "The advantage of taking as a base the average price for a series of years is that this course makes it possible to eliminate as far as possible the influence which, in a shorter period, Unusual conditions might have had on the price of a particular commodity. When the base price is ascertained other prices during, before and after the period of the base are expressed as percentages of this base. Commodities A, B, C and D will each have a diiferent base, but when the base is turned into a percentage it becomes uniform for all, namely, 100. We may suppose that at a later period A is represented by 110, B by 106, C by 102 and D by 98. Now, if these figures be averaged the result is 104, and this repre- sents for the group an average rise in price of 4 per cent over the base. One of the commodities indeed declined in price, but this does not alter the fact that the general ten- dency is to advance the price. In following the method, briefly indicated, of constructing an index number, each article has been given an equal importance in determining the change. If instead of abstract designations, A, B, C and D, concrete articles had been named, such as wheat, iron, wool and indigo, there might be some doubt as to the propriety of giving each an equal importance in fixing the result. To avoid such questionings various methods have been devised to give an appropriate weight to the different articles, such weights being arranged in accordance with the foreign trade, or with the estimated national consump- tion, or the expenditure of workingmen's families." None of these highly complicated methods have, how- ever, led to substantially different results from the simple arithmetical average. It is clear that if each article moved upward in price exactly 5 per cent it would not matter how many articles were added to the list or how they were com- 258 HISTORY OF BUSINESS DEPRESSIONS bined, and one could not get any other general result than a 5 per cent advance. If some articles increased 4 per cent and others 6 they would, if equally divided, show an aver- age of 5 per cent, but no method of combination could make the advance less than 4 or more than 5 per cent. In other words, in a group of prices the general tendencies outweigh the particular ones, and no combination of different results, according to any plausible system of weighing, will empha- size the particular tendencies at the cost of those which are general. Economists agree that there is not a level of prices, whether it be high or low, which causes either prosperity or distress, but it is the conditions brought about by either that brings the need of readjustments. In case of falling prices being the direct cause of depression in a given in- dustry where production costs have been high and losses entailed, lower prices do not of course necessarily mean depression. If production has been large the reduced cost lowers prices and sometimes stimulates trade because of greater consumption. Through a period of depression prices gradually decline until the bottom has been reached. Sometimes prices go down beyond reason because of the panicky feeling among buyers, in which case production must stop, bringing sharp reaction. For instance, in 1920, when cotton went far below cost of production, the result was a curtailment of acreage amounting to 40 to 50 per cent, bringing the following Fall sharp upward reaction in prices to the extent of 80 per cent. After it is apparent that the bottom has been reached prices will start an up- ward climb, bringing a feeling of hopefulness and activity. Buyers will not buy on a falling market for more than im- mediate demand, but they will buy liberally on a strong or rising market, because of the speculative chance to make more than a normal margin on the purchase. Falling prices are also brought about by the recurring necessity for adjustments of credits. When the cycle of HISTORY OF BUSINESS DEPRESSIONS 259 liquidation comes manufacturers and merchants hasten to turn stocks into money in order to meet loans coming due. Many times these stocks, if held and marketed in an orderly way, would bring normal prices, but when loans are called money must be secured and stocks are sacrificed at re- duced prices. This has a tendency to break the market. Forced credit liquidations are an important factor in pro- ducing falling prices and consequent depression. Banks are, however, more and more willing today to carry the borrower until such time as he can market without too great a sacrifice. It has been calculated that the loss on industrial stocks during the depression of 1903 exceeded $3,000,000,000. The depreciation of securities of 1907 and 1920 was much greater, and if stocks or raw material and merchandise were taken into consideration the total would be very greatly increased. It was too much inflation in flush times that brought conditions where falling prices were inevitable. Exports of Gold. Gold is, of course, being more or less constantly exported to settle balances, but a large and con- tinuous outflow of gold denotes an unhealthy condition back of it. It is likely to mean a money crisis ahead and probably- ensuing depression. When the export of gold is attended by a scarcity of money and a marked increase in the rate of discount, it is a decidedly unfavorable indication. Un- less the flow stops and the tide turns it may be taken for granted that a crash will follow. The big financial centers watch the gold situation very carefully, and money condi- tions are very sensitive to the gold situation. Financiers who are in a position to watch gold movements often have the inside track, so to speak, and are able to cover before a crisis. It is these "gold sharks" who are invariably found to be the men who profit from depressions. In other words, they are experts in buying cheap and selling dear. Gold has a close bearing upon our business life and the 260 HISTORY OF BUSINESS DEPRESSIONS average business man should watch its trends closer than he does. Bad Banking. This should properly come under the head of speculation. Unsound banking has caused a great deal of difficulty for business, and this is not altogether the fault of the banker. On the whole he is generally con- scientious in desiring to aid in the development of the country. Newspaper files of our periods of depression show that almost invariably the public press attacked the banks as the cause of all the difficulties. In 1920-21 business men claimed that they were left to shift for themselves while the bankers watched and preserved their own in- terests. In times of prosperity men become optimistic beyond reason and enter into transactions far beyond their means. The mania of taking a chance becomes widespread. Then the banker finds out that notes are not being met and a large portion of his customers have been borrowing for speculative purposes. Often they are found dividing profits with the banker himself. The situation reveals itself the country over and contraction sets in. Then is the time for business men and investors to sail close to shore, to sell, if possible, keep stocks low and quit taking chances for a while. We have read a great deal about bad financing during the Nineteenth Century. The early part of the present century has seen great strides made in halting the destruct- ive pendulum swing back and forth from extravagant prosperity to panic. In former days when any financial center got into difficulty it was left to its own resources. Now, even its enemies come to its rescue because it is well understood that a run on a bank's neighbor is likely to lead to its own disaster if allowed to go its full course. Down through the years of history, as every cycle of depres- sion is examined, we find the same old story of bad bank- ing. It is found that the banker has invariably dipped HISTORY OF BUSINESS DEPRESSIONS 261 his finger in the attending over-speculation. The promoter is smooth enough to arrange a division of the excessive profits with the banker and the banker often makes injudi- cious loans when this division is hung out as a temptation. Then when the bubble bursts the banker goes to the other extreme and his tendency is to be parsimonious, often from a very narrow viewpoint and against his own interests. Poor Crops. While crop conditions have a certain effect on business, it is often localized and does not affect the entire business system to the extent generally believed. Let us take the year 1900. Statistics of the Department of Agriculture show that we had an area planted amounting to 83,320,872 acres, producing 2,105,102,516 bushels at a farm value of $751,220,034 an average of .357c per bushel or $9.04 per acre. The following year, 1901, a greater area was planted, 91,341,928 acres, but production was less than the year before, being 1,522,519 bushels, but with a greater farm value, $921,555,768, a per bushel value of .605c and a yield per acre of $10.09. That is a usual instance because the law of supply and demand insists that in a year of short crops the price is higher, bringing as much money to the farmer as a big crop with lower prices. Foreign Exchange. Foreign exchange is a barometer of world trade conditions. It is a study in itself, and all that could be written about it would fill an ordinary library. Every business man and investor should study the question, because as we progress in our commerce and it becomes more interlocked with that of other countries conditions in those countries will more and more affect our every day business life here. This subject is one of growing import- ance. We do not carry on our foreign trade the same as we do the business among ourselves. Within our own borders a simple check and draft system suffices, because funds in Elaine, Washington, are on a par with funds in Key West, Florida. But when a merchant in one country trades with 262 HISTORY OF BUSINESS DEPRESSIONS a merchant in another country, there must be a medium through which payment is cleared. This is known as for- eign exchange. In principle foreign and domestic exchange are the same, the difference is in the value of the money of one country as against another. Where the value of the standard money in one country is high it brings a premium, whereas the money of another country may have depreciated for various reasons and it is penalized. Where exchange is steady money in the leading countries is around par, as during the normal times preceding the World War. Then trade flows fairly evenly and there is little to fear from difficulties in that direction, outside of the ordinary business hazards. But in times of distress in different countries, brought about by political or economic reasons, foreign exchange has an important bearing on the study of business depressions. Foreign trade is done on a basis of payment in London or New York exchange, or between bankers themselves in gold specie. If by watching the daily newspaper quotations it can be seen where money of a certain country that buys a large portion of our prod- ucts is depreciated, there is almost certain to be a falling off in demand from that country and, unless some other country is taking the difference, depression in those com- modities will likely result. Sometimes this condition may be general. For instance, in 1920-21 the American dollar became so high that foreign countries could not afford to buy dollars in order to pay us in our own money, which we demanded. This augmented the depression because we were unable to ship our surplus out of the country to as large an extent as formerly. In normal years when trade flows back and forth in its regular channels and exchange is around par, trade balances tend to adjust themselves in the same manner that a local clearing house clears checks through a system of debits and credits, one against another. We are going to be more affected by foreign exchange in the future than ever before, because New York is now the HISTORY OF BUSINESS DEPRESSIONS 263 world's financial center. To the extent that we are called upon to finance the world we are going to feel the reflection in our own business life, and foreign affairs are going to more largely enter into our trade revivals and depressions. Exchange between two countries is at par when a de- mand draft on either country sells in the other at its face value. For instance, an English pound sterling in mint value is $4.8665. Exchange therefore at par would bring $486.65 on a draft of 100 pounds, less the small banking charge. If, however, conditions bring about a change in the par value of either standard of money, the exchange rates would immediately reflect that fact. If a business man is shipping goods to England, or is dependent on cus- tomers who ship there, and a dollar is quoted at a premium over the pound, then he can expect a slowing up of orders from England until the exchange is more favorable. Thus it will be seen that foreign exchange not only affects the exporter and importer, but all of us who are dependent more or less on them. When foreign exchange is continually against us, as in 1920-21, we may expect general depression to some extent. A premium on the dollar, as was the case in 1920-21, means that there is an abundance of gold in this country to back up the dollar, whereas a depreciating pound sterling or German mark would mean that gold reserves were either depleted in proportion to the depreciation or there was an over abundance of fiat money in circulation in those coun- tries. Another element that enters into the trade situa- tion is the fact that when the exchange rate is against us, that is, when the dollar is at a premium, we are likely to not only export less but to import more, because countries with depreciated money will make extraordinary efforts to export in large quantities in order to establish a trade balance and get the gold flowing back to them. Ordi- narily, if we loaned a great deal of money to France, for instance, or purchased their securities, there would be a 264 HISTORY OF BUSINESS DEPRESSIONS great outflow of gold from this country to France. But during the recent war period when we loaned heavily to Europe we loaned through a process of giving bank credits in this country with the understanding that credits were not to be transferred to Europe but were to be used for purchases of supplies in this country. Thus the exchange later worked against us, whereas had we sent the gold it would have been in our favor. In this way also we became a creditor nation and at the same time kept the gold here. The question of discount rates also enters largely into the matter of foreign trade, but does not necessarily bear directly on trade depressions in this country. When there is a panic in one country it will immediately be reflected by the exchange rates. With distrust growing in one coun- try and reserves depleted banks will raise their discount rates, which will be followed by like action by banks in commercially related countries. In such times the banks of a country in distress draw to the limit on their reserves in other countries, and those countries are often taxed to meet them. It is through this medium that one country is directly affected by panic in another. It does not follow that all countries are to be affected by a panic in some one country, but only those groups of commercially related countries which depend largely upon one another. Even then, with a good banking system, one country need not necessarily be greatly af- fected by a crisis in another, no matter how closely related. In 1920-21 people in necessitous countries hoarded large amounts of foreign money, due to the huge profits they saw accumulating daily through the continuous deprecia- tion of their own currency. Depression can only be rem- edied by finding a means of stabilizing exchange. This may be done by making loans to countries whose exchange is depreciated and help them to restore confidence, or to buy sufficient of their goods to give them a favorable trade balance, causing the flow of gold into that country. Most HISTORY OF BUSINESS DEPRESSIONS 265 nations are not willing to import goods, because it destroys home industry. But they are more willing to make loans if certain of payment at maturity. These loans simply help in the transition stage, and in time the situation will work itself out. Unfavorable exchange prolonged for more than a short time will cause the creditor country to feel the effect as much as the debtor country. When exchange is stabilized the vicious cycle is broken and economic conditions, all other factors being satisfactory, will quickly return to normal. In times of war some countries still resort to the mediaeval practice of prohibiting the export of gold. This causes a still wider fluctuation in exchange. Exchanges are af- fected by the constant flow of gold and goods. This has its effect on trade in this country because exchange being against other countries they naturally can afford to buy only as little as possible, whereas the premium on our money makes it favorable for us to buy what we like. All this causes the agitation for American valuation in the tariff. The tariff schedules enacted in normal times be- come a mass of confusion and have effects far from their original intention in times of abnormal exchange. Exchange can be brought to par by the simple expedient of shipping gold. But in times of stress some countries do not have the gold to ship or, as a matter of self -protec- tion, do not wish to ship what they have. In such a case foreign exchange must be carried on through the draft system, which is generally used between countries that have a very even balance of trade. All countries do business through New York and London drafts, and these drafts can be cashed above or below par according to the gold situation and the trade balances in the different countries. The high price of drafts in Germany would encourage and stimulate the sale of American goods in Germany and would encourage buying in Germany. Likewise, high prices of drafts in the United States would encourage and stimulate the sale of German goods in this country and 266 HISTORY OF BUSINESS DEPRESSIONS discourage them from buying from us. It is evident then that a favorable trade balance, such as we experienced during the war, could not keep up indefinitely. The tide must flow out, and this is often accomplished by a period of depression. Mr. Frank Vanderlip has proposed a billion dollar inter- national bank for the twofold purpose of regulating foreign exchange and promoting international trade. This idea is undoubtedly good, and if put into execution would go a long way toward solving the knotty problem of foreign ex- change. Strain of Credit. Through the agency of credit a great number of obligations payable in money are created. It would, of course, be impossible to redeem them all at one time. Against these credits there is kept a certain amount of gold as reserve. If demands for redemption lessen the quantity, it must be replenished. These demands now arise mostly from foreign sources. It can be replenished only by curtailing credits. Such a process does not lessen in any degree the amount of existing wealth, but none the less it may necessitate painful readjustments in business. Those who had counted upon the continuance of credit accommo- dations are forced to curtail or even abandon their oper- ations. "If the demand for a liquidation of outstanding credits is widespread, panic and business depression ensue. Wealth is not destroyed. But the control of wealth passes more and more into the hands of those who own the wealth, and its activity is lessened. Capital or wealth used in production is diminished, and with the decrease in capital the creation of new wealth slackens. On the other hand, in times of re- viving business, the prospect of gain lures wealth into pro- ductive uses and through credit the available capital is in- creased." Thus back of all the alternate periods of pros- perity and depression lies the question of credit. No plan has yet been found effective which will prevent these fluctu- HISTORY OF BUSINESS DEPRESSIONS 267 ations, nothing which will give credit freely when credit is most wanted. But through a wise adjustment of credit agencies much can be done to mitigate the severity of pe- riods of stress and strain. A time must come when there must be a contraction of over-expanded credit. At times we find the capital of the nation largely tied up in the hands of speculators who have practiced the unbelievable process of borrowing the peo- ple's money in order to increase the prices of their own necessities. As the periods come along when we work out of depressions into good times the speculator gradually starts to borrow money because he is smart enough to know that things are on the upward grade. He picks commodities on which prices are well declined and are bound to rise with greater demand. As time goes on he makes fair margins, thus encouraged he increases his holdings through greater borrowing. This continues for several years, all the time the rising tide of prosperity increases the fury of specula- tion when finally the peak is reached. Some unforeseen in- cident brings sharp reaction or a revolt on the part of the public against the ever increasing prices. Bank reserves become low from the large borrowing and then the banker becomes wary and begins to call loans. When this time comes great sums of money are found in the hands of specu- lators. Some of them hurry to unload if possible, taking a small loss out of their already large gains and laying low until the depression blows over. Others have to be carried by the banks until the security can regain its value and passed on to others. Thus speculation is not only responsi- ble in bringing on our crises and depressions, but it inva- riably prolongs them because of the long, painful spell that is required to get conditions back to normal. During all this time we hear the constant cry : "Liquidate ! Liquidate !" and the average legitimate borrower and business man and far- mer are forced to liquidate many times at a sacrifice while the capital of the country and their own deposits are used to hold up speculators, non-producers, who have over-borrowed 268 HISTORY OF BUSINESS DEPRESSIONS and if allowed to fail would often endanger the solvency of the banking institutions themselves. An English View. Mr. J. M. Keynes who was in charge of all loans made by Great Britain during the war and author of "The Economic Consequences of Peace," gives a view on the world wide depression from the British stand- point. "The causes of these 'cyclical fluctuations' are va- rious and disputed. Like its predecessors, the recent de- pression has been of complex origin. But a bad season in Asia and the miscalculations of merchants have played the biggest part. No doubt the war has been indirectly respon- sible, because the severity of the crisis has been due to the exceptional range of miscalculation, which the terriffc fluc- tuations in prices consequent on the budgetary policies of governments have brought about, and also by the inapplica- bility of pre-war standards as a guide to what was normal. These helped business to lose its bearings and to drift far out of its course. If we look back eighteen months, it is obvious how greatly the troubles of traders have been due, not so much to the intrinsic situation as to grave miscalcu- lations about it. The crisis commenced, not in Europe, but in Japan. Thence it spread to the United States; next to England and last of all to continental Europe, which has not, at any time, experienced its full severity. What upset British business was the sudden drying up of the Overseas markets, India, China, Australia, South Africa and South America; and it was the collapse of the exchanges between London and many of these centers, rather than of those be- tween London and the continent of Europe, that threw out the calculations of the business world. There were two other factors also which multiplied the stream of commitments. Many markets had been starved by the war of their usual supplies, and were replenishing stocks. But it was difficult to know how much current de- mand represented such replenishment and how much of it was covered by current consumption. Lastly, the abnormal demand stimulated by all these influences was yet further HISTORY OF BUSINESS DEPRESSIONS 269 exaggerated, because merchants, experiencing an unusual difficulty in obtaining deliveries began placing orders on an even larger scale than they really wanted, in order to make sure of obtaining at least a proportion. For all these reasons merchants and middlemen in all quarters of the world over-ordered enormously. That is to say, they en- tered in advance into commitments on a scale greatly in excess of the current rate of consumption and at a price level above that which the currency systems of the world could support, hugely inflated though they were, when once the actual goods were coming into existence and needing finance. This necessarily resulted in an excess of stocks and, when the value of the stocks exceeded the amount of wealth which the world was voluntarily prepared to set aside in this form, the bubble burst." Political Uncertainty. H. Gordon Selfridge, in his ad- mirable book "The Romance of Commerce," says: "There are enough mistakes made and poor judgment shown, as we all know, in that field of activity called Commerce; but if one-tenth of the foolishness had been employed there that has been exhibited by those who have undertaken to govern, all commerce and everyone connected with it, would have been bankrupted many times over and have sunk long since in the seas of oblivion." Political uncertainties often retard industry. The states- man (a dignified name for politician) is often unmindful of the injury he is doing in bickering and delay. How many times has trade been halted waiting the leisurely action of the legislators! The old bugaboo that we cannot change political administrations without accompanying depression was long ago exploded. Time has proven that depressions come under the administration of one political party as well as another and it would be a sad and evil day for the Ameri- can Republic if the threat were constantly held over us that we had to vote one way or have our bread and butter taken away from us. 270 HISTORY OF BUSINESS DEPRESSIONS Presidential Elections. It is rather old-fashioned now to ascribe business depressions to presidential election years. That has been so overdone in the use of politics and proven to be so utterly without foundation that it is worth but little space. By way of information, however, the accompanying table will show the presidential election years since 1800 and the years of depression, showing that only five depressions have occurred in our history during presidential election years, two of them being minor depressions. Presidential Election Years 1800 1816 1832 1848 1864 1880 1896 1912 1804 1820 1836 1852 1868 1884 1900 1916 1808 1824 1840 1856 1872 1888 1904 1920 1812 1828 1844 1860 1876 1892 1908 Depressions falling in these years are : 1808 1848 1860 1884 1920 In one of these, namely, 1884, the depression was an issue in the campaign. In none of the others was there much connection between politics and business, although the de- pression of 1860 was obviously from political causes on ac- count of the threatening Civil War. Excessive Taxation. High taxes are going to be more and more a cause of depression in this country in future gener- ations. In our early history the government was rich be- yond compare because of the enormous amount of public lands. From the sale of these the Federal treasury not only received sufficient to run the government, but divided great sums between the States. Following this period un- der the protective regime we collected sufficient from that source together with such internal revenue taxes as were obtained from tobacco and liquor to run the government. Then as we went into the Twentieth Century our expenses were so enormous that we began to devise means of direct taxation and the income and corporation taxes resulted. HISTORY OF BUSINESS DEPRESSIONS 271 Under our present laws, on incomes of $200,000.00 and over we exact fifty per cent. All of this, no doubt, has its effect because the incentive is taken away to some extent for large capitalists to make an effort because half of the effort, they feel, goes for naught. Let us turn to the history of the Roman Empire and examine into the causes of its decline. We will find that "the pressure of public burdens was an in- creasing disability that ate the very heart out of the capi- talist and the labourer alike; there was no hope to inspire energy or encourage enterprise and the gradual decay cul- minated in an utter collapse." The exorbitant taxes col- lected to maintain an expensive government started the decline of the commercial life of Rome. Will history re- peat in Europe and America? Money spent for taxation does not reproduce and unless we can keep money in pro- ductive channels we are bound to have depression in trade. Dumping. This subject is one of the utmost importance during depressions. After the Revolution when we had no organized central government, our trade was severely de- pressed by dumping of English goods on our market. Our infant manufactures had to close down and the trade bal- ance was enormously against us. Our great depression of 1819 was brought on as a direct cause of dumping European goods in this country. It was then that Lord Brougham made his famous speech in Par- liament : "It was well worth while to incur a loss upon the first exportation, in order, by the glut, to stifle in the cradle those rising manufactures in the United States which the war had forced into existence, contrary to the natural course of things." While a protective tariff law had been enacted in 1812 which gave some protection during the war, it was entirely inadequate and when peace came in Europe in 1815 followed by very terrific depression and low prices in 1816, this country became flooded with their surplus which was dis- posed of by the well-known "auction" system. European ex- porters were willing to sell at almost any price ; first, to get 272 HISTORY OF BUSINESS DEPRESSIONS cash ; second, to destroy the rising American manufactures. Considerable agitation swept over this country against the "auctions ;" yet they multiplied and in one year $14,685,399 worth of merchandise was auctioned in this country, which was double the normal needs of the people. No wonder prices in this country fell swiftly. Imported goods were drawn into every nook in the country, causing stagnation to the American manufacturer. Merchants and farmers bought these goods eagerly, because they were cheap, but in doing so they undermined the prosperity of their own country. The dumping of this period of "auctions," as it was called, was a nightmare to American merchants and manufactur- ers for many decades. Prices fell so low that merchandise brought little more than the duties. Auctioneers increased in number, wealth and influence. It was a common custom, and one well understood by merchants, that many foreign importers residing here, and who sold their goods mostly by auction, were in the constant habit of receiving two in- voices for each parcel of goods. One of these was made out at a very low rate and was used to enter the goods; "the other contained the actual cost." Of course, the government was injured by losing the revenue justly due it, while Amer- ican manufacturers and importers suffered materially. Of the many industrial enterprises which had been launched during the war with so much confidence, only a few had had a prosperous history. Many had been hopelessly wrecked ; while others were thumping against the rocks and threatened with speedy ruin. After the Civil War we were saved because of protective duties against dumping and naturally this subject is re- lated to the tariff. Traders of all countries do this. We are as guilty as the others. For years our manufacturers have sold the surplus abroad at less than in the domestic market. But practically all countries are now providing against it. Following the World War our rich market and high prices were prey for the foreign trader with a sur- HISTORY OF BUSINESS DEPRESSIONS 273 plus. Everything was dumped on our market that could be found in foreign countries, particularly food stuffs, affecting the farmer very adversely. This was one of the primary causes of the 1920-21 depression. Had we a protective tariff or even an anti-dumping law our commodities would have been given a chance to seek their normal level gradually. When our farmers and manufacturers cannot have their home market it is bound to mean depression, unemployment and far-reaching distress. In 1920 we were as thoroughly at the mercy of foreign cheap labor as we were in 1819. The American valuation plan is now agitated as an anti- dote to dumping, but this plan is not new. It was first known as the "Home Valuation" principle and was advanced by John Quincy Adams when he was a member of Congress in 1832. Hoarding Money. In former years the practice of hoard- ing money no doubt augmented depressions to a large extent. It is said that French peasants in the 19th century uni- versally hoarded their savings, many times causing severe stringency. Hoarding was also practiced in America during the 19th century, particularly in the rural communities. As late as the panic of 1907 a representative of the house of J. P. Morgan & Co. gave as one of the causes of the money stringency and panic that of money being hoarded away in private places and kept out of circulation. As the intelli- gence of our people has advanced, this practice no doubt de- creased, although it is yet to be reckoned with. In the 1920- 21 depression the average citizen liked to carry a "bank- roll" of much larger proportion than formerly. In the flush times of the war people became used to it and this practice has taken the place of the pot of coin hidden under the floor or the stocking stuffed full of money and hid in the bureau. The worst feature of hoarding is that it is more likely to be practiced in times of stress or depression when it is most harmful. The use of money as a store of value diminishes its efficiency for the purpose for which it is intended. It therefore increases the demand for money since an ineffi- 274 HISTORY OF BUSINESS DEPRESSIONS cient instrument does less work. Conversely, whatever in- creases the efficiency of money lessens the demand for it. Whatever increases the rapidity with which money circu- lates therefore diminishes the demand. It is one of the ad- vantages of the introduction of banking habits that men carry less money in their pockets and thus money acquires a greater rapidity of circulation. At the time of the Mississippi Bubble, 1720, under a paper currency regime specie money was hoarded to such an ex- tent that France was practically bare. Yeats' description of this period was: "Under the belief that coin was being hoarded, people were forbidden to keep at home a sum in coin exceeding 500 livres, or to use any medium of payment for amounts over 100 livres except bank notes. Still money disappeared. The resources of charitable institutions, or- phan schools, hospitals and almshouses were demanded by the state and exchanged for paper. Finally, the penalty of confiscation was proclaimed against all who should, from the date of the proclamation, keep gold or silver in their houses, whether coined or uncoined, instead of exchanging it for paper money. With nothing left to confiscate, even arbitrary power was at a loss. The precious metals ap- peared to have left the country. Foreign merchants could not be compelled to take paper instead of gold, nor could they be prevented from paying in French notes for the goods they bought. Discontent and fear led to hoarding, in spite of proclamations. The medium of exchange was at length reduced entirely to paper. Trade, both foreign and domestic, became paralysed." Preceding and during the panic of 1893 large sums of money were withdrawn from the banks and hidden away. This was because the treasury had an over abundance of sil- ver certificates and treasury notes and fear spread that the treasury would never be able to redeem them in gold if it were called upon. In this case confidence not only in the banks but in the Treasury itself was shaken. War. The United States has been particularly fortunate HISTORY OF BUSINESS DEPRESSIONS 275 as regards serious foreign wars which often threaten the foundations of a nation's economical system. Only once have we been invaded in the war of 1812 and that was by a surprise and entirely a fluke. In no other instance have we even been threatened by invasion by a foreign country. Our wars, on the other hand have been beneficial to our economic interests in the long run. In our Mexican War we gained great territory, including vast gold fields. In the Civil War we preserved the Union perpetually, preventing two nations instead of one. After the Spanish-American war, trade again followed the flag. It stands to reason that business distress accompanies the outbreak of a first rate war and brings depression in countries who have trade relations with those at war. It may even cause suspension of gold payments. The after- math of war has peculiar effect on economic conditions. After 1870 France, the defeated, with big indemnities was more prosperous than Germany, the victor. This situation was reversed following the World War when Germany, the defeated, was more prosperous than France, the victor. While wars have caused many depressions, yet on the other hand quite a number of wars have been caused by commercial selfishness. In the Middle Ages when commerce began to take hold of the people as an economic science one country would suffer a period of depression while, per- haps, its neighbor prospered either because of discrimi- nating tariffs or favorable natural conditions. This led to quarrels and war. War, while it always stimulates business, really makes the rich richer and the poor poorer. Nations are coming to find that war no longer pays and it is admitted now that had Germany continued her peace-time course she would have conquered the commercial world, whereas she failed to conquer the political world. Eventually the fiddler must be paid by both victor and vanquished and many times their economic difficulties as an aftermath spread to involve the neutrals. While France staged her revolution amid streams 276 HISTORY OF BUSINESS DEPRESSIONS of blood and flame, England silently and peacefully under- went her industrial revolution, increasing her wealth ten- fold and putting her a half century ahead of her commer- cial competitor. To prosecute a war naturally calls out the resources of a nation. Currency is inflated. Great quantities of money are put into use. This money is still out at the end of the war and overlaps for the period of two or three years, keep- ing conditions good during that time, as was the case fol- lowing the Revolutionary War, the Civil War, the War of 1812, the Spanish-American War and the World War. Off- setting this is the overproduction in some lines. This ma- terial including food-stuffs having been put in warehouses in anticipation of war uses is held back for a while before being thrown on the market. Returning soldiers are paid off, thus putting money into circulation, helping the times immediately following war, but when this money is spent and the men have to get back into production and the sur- plus material begins to be sold, then follows trouble. The worst effects of after-war depressions could be avoided if the same skill, energy and resourcefulness was used in that direction as was used to prosecute the war. The depression of 1920 could have been prevented in a large measure had administrative ingenuity been properly used for a longer period after the war. When the armistice was declared and war industries stopped, throwing great numbers of men out of employment, the government of necessity got back of the situation and the weight of our financial structure was thrown back of peace industries that were languishing. The men were put back to work in these industries and the re- turning soldiers absorbed as fast as they returned. In fact, there was such a demand for labor that the Government was urged to speed up the return of the men. Great prosperity ensued until April, 1920, when the depression set in and gradually spread over the country, growing worse as the months went by. The presidential campaign was coming on, the President had been afflicted with paralysis, the Sec- 277 retary of the Treasury, Mr. McAdoo, had resigned and there was no head to the Government. When various local crises sprang up as a result of after-war readjustment, there was no head to the government to help straighten things out. Cabinet members refused to take any step, fearing the con- sequences that happened to Mr. Lansing. Had there been an active executive at the head of the Government who was am- bitious and willing to help solve the problems arising, the depression could have been averted or at least largely miti- gated. We bemoan war, as we should. We raise a great outcry against economic loss from it, as we should. But it is a little known fact that the loss sustained by securities and stocks of raw materials and merchandise during years of depres- sion and forced liquidation is greater than the cost of car- rying on the greatest military campaign in history. A recent speaker at a bankers' convention said that our national wealth had increased 30 per cent during the war, during which time we grew to be by far the wealthiest nation in the world, but that our entire gain had been wiped out dur- ing the depression of 1920-21. His statement is obviously only partly true but is of sufficient import to set us think- ing. CHAPTER XXIX SPECULATION, THE OUTSTANDING CAUSE OF DEPRESSIONS The word "speculation" comes from the Latin "specu- lor," meaning to do or to contemplate. Defenders of the speculator call him a business look-out or economic fore- caster. There are those who claim that speculation is neces- sary, as there were those of the old school who claimed gambling on the grain exchanges in imaginary transactions was a real benefit to the farmer. Modern forms of specu- lation grew up with the Stock Exchange. The first reported stock exchange was in Antwerp in the Fifteenth Century. A pamphlet published as early as 1542 described the "mon- strous thing that the Antwerp merchants had devised ; they bet with each other on the course of foreign exchange, one saying it would be 2 per cent, one 3 per cent, etc., and after- wards they settled by paying the differences." This is sub- stantially the same operation as that which is carried on regularly today. In the Sixteenth Century speculators on the stock exchanges used the same methods still in vogue. They would set rumors afloat to depress the price of securi- ties and then buy in. Day tells in his "History of Commerce" that "One day during the reign of Anne in England a well- dressed man rode furiously through the street proclaiming the death of the Queen. The news spread and the funds fell ; the Jew interests on the exchange bought eagerly, and were suspected later of being responsible for the hoax, though it was not proved against them." We have speculated ever since we have known what money was. In the year 1697 Professor MacLeod declared that "The frightful convulsions and collapses of public credit which have taken place during the last three-quarters of a century are chiefly due to this great wrong." In 1719 the HISTORY OF BUSINESS DEPRESSIONS 279 word "stock jobbing" originated in a pamphlet put out by an Englishman named Child. In another chapter I have described the relation of money to depressions, taking the stand that confidence really enters into the question more than money or forms of money. His- tory indisputably proves that we have prosperity when we have confidence, and depression when we lack confidence. What brings about this lack of confidence ? The speculator who buys cheap to sell dear, who gains control of certain commodities and pushes them so high that suddenly there springs up a lack of confidence in such values, resulting in a crash. If we could, by sane and lawful process, eliminate the worst of speculation we could retain normal confidence so as to eliminate the worst of depression. This does not mean that there should be a curtailment of the credit system, but that credit should be more properly used so that our prosperity, while it might not reach such great heights, would be more lasting and permanent. Jay Gould said to the United States Senate Committee : "People will deal in chance. Your minister, doctor and barber have all the same interest in speculation." Gould, while partially right, was judging his neighbors by himself. Figures do not lie and the blackboards in the stock exchange tell an interesting tale. They amply show the difference between speculator and investor. Let us take the figures of the New York Stock Exchange, during the year 1906, which was a normal year, and note the fluctuations in a single day : American Smelting Company Atlantic Coast Line 1906 High Low 174 138% 167^ 131% 198% 135% 240 192 181$4 130% 348 275 184% 164 136% 106& 147% 122% 164 112 1907 High Low 155 56% 133% 58 157% 93% 205 126 140% 74 189^ 107% 172 116 92% 44% 141% 103% 139% 70% Chicago, Milwaukee & St. Paul Common Chicago & Northwestern Consolidated Gas Great Northern Preferred Illinois Central Missouri Pacific Pennsylvania Railroad Readme 280 HISTORY OF BUSINESS DEPRESSIONS Can any one look at these figures, knowing the history of these corporations and their long record of regular divi- dend payments without default, and say that this is any other than gambling? Is it possible that legitimate invest- ors would consider Pennsylvania railroad stock worth 147 Vk at one hour in the day and 122 1/ 2 at another hour at a time when its solvency was unquestionable and had been unques- tioned over several decades? Members of the New York Stock Exchange explain that the actual value of the stock, as based on dividend payments, does not enter into these fluctuations, but they are caused by the necessities of the buyer or seller. The buyer having certain uses for more stock, such as for control of the direct- orate, would pay a heavy price for voting stock. On the other hand, the seller, pressed urgently by the need of money because of some tight situation he is in, will sacrifice. Cer- tain conditions, it is explained, sometimes cause a group of men to have the same object at the same time, thus these wide fluctuations. It was a group of important financiers which became involved at one and the same time that caused the selling orgy and brought about such panics as 1903. Henry Clews describes speculation as follows: "Specu- lation is a method for adjusting differences of opinion as to future values, whether of products or of stocks. It regu- lates production by instantly advancing prices when there is a scarcity, thereby stimulating production, and by depress- ing prices when there is an over-production." If the speculator alone suffered from his own misdoings there would be very little objection to the practice, but the entire public is buffeted about on the winds and waves of the depressions which are of his making. As we gain ex- perience in government the general public will become awakened to the havoc wrought by the professional specu- lator who usually leaves his victims to pay his losses. Another evil of speculation is the large amount of capital that is tied up that would otherwise go into legitimate chan- nels of production. As an example of the evil influences of HISTORY OF BUSINESS DEPRESSIONS 281 speculations on borrowed capital, let us go back to the days preceding the 1907 panic. In August, 1907, an offer by the city of Boston of $4,000,000 in 4 per cent bonds brought bids for only $200,000. Three days later an offer by the city of New York of $15,000,000 4 per cent's brought bids of only $2,713,815 at par. Think of such a situation when at that time individual deposits in national banks alone were $4,322,880,141. Remember this does not include the money in state banks, trust companies and savings banks. Imag- ine then, if one's mind is capable, of the enormous sums of money that must have been tied up in speculative enterprises that were neither liquid nor dividend paying. This situ- ation was brought about by just such methods as were de- scribed by a writer in Van Norden's Magazine, December, 1907: "Mr. Morse first, and then the Thomases and the Heinzes, had, after securing one bank, hypothecated the stock of that bank in various financial institutions, not only here but all over the country ; had taken the money obtained by a loan on the stock of one bank to buy stock in another, had mortgaged that and bought into still another, and so on and on. ... Furthermore, after securing control of banks, they had made loans to themselves for the flotation of promotion schemes and for the conduct of operations in the stock market." Though our currency may contract or expand to take care of our needs without shaking the structure as a whole, and while we now have the best and strongest financial system we ever had, yet we still have with us the root of most of our troubles, and that is the all powerful desire on the part of our people to speculate, to get rich quick. If we can stop speculation with other people's money we can absolutely stop business depressions, outside of world catastrophe, or defeat in war. I do not go so far as to say that we will ever stop speculation entirely, admitting that the difficult feat of legally defining speculation could be over- come. The speculator is a person of evil and unworthy in- tent. He is nothing more than a dignified crap-shooter or 282 HISTORY OF BUSINESS DEPRESSIONS race-horse tout. He wants to play for big game at the other man's expense. He has a burning desire to obtain the world's goods without work, either mentally or physically, and, incidentally, is usually an individual endowed with shrewdness and cunning. In his transactions he uses the people's bank balances in order, in turn, to rob the people. Taking a homely example : He borrows money to buy real estate which he sells, many times at an enormous profit, and at an ever increasing figure, until prices soar beyond reason. He sells the property, taking a small payment and carries it by borrowing the people's money from a banking institution, one of whose depositors he robbed in the transaction. Even at that, so long as man is created with shortcomings evil is bound to exist in the world, and it might be necessary to per- mit speculation, with its attending profiteering, if the specu- lator's own money is used in the transaction. A remedy might be found through a Federal law requiring that no national bank be permitted to loan money to any individual or corporation without an accompanying affidavit that the money was to be used for the strict promotion of legitimate production and not for speculative purposes. While there will be criticism directed against this plan on the grounds of our inability to define speculation, yet it is undoubtedly feasible and practicable. To be effective, this would have to be followed by state laws, but when once put into operation, one state would follow another as they have in the case of "blue sky" laws. We all know the arguments in favor of the speculator. Speculation is supposed to prevent sharp fluctuations and soften their intensity by anticipating events. Speculation is supposed to enforce present economy in the face of probable future want and so is claimed to prevent famine ; it is sup- posed to even up supply and demand ; it is supposed to create a market and reflect the present and the future. It is doubt- ful if it is necessary to any of these, but if it is, let it be carried on by men who use their own money and keep the credit of the nation in production channels. When men HISTORY OF BUSINESS DEPRESSIONS 283 borrow other people's money through public banking insti- tutions, the public has a right to demand that it be used to make legitimate profits on production, giving employment to people, and allowing the public as a whole to satisfy their wants through the use of their own money. The credit sys- tem is wrongfully used when it is tied up in channels where it is used, not to make a legitimate profit by production, but to make a profit by raising prices. It is obvious that the speculator can profit in no other way except by a continual increase in price. Yet billions of dollars of capital and credit are used for this purpose. Then when prices have been driven up until the public rebels, depression must neces- sarily follow. When we consider speculation in its broadest sense, we do not refer simply to the activities of the stock exchange operators, but to a general class who buy in order to make a profit on an increase in price. If he does it with his own money and loses no one is affected as a rule but himself, but when he does it on other people's money he undermines the very foundations of our financial system. What remark- able laws we have when a poor man is forced to give sixty days' notice to draw his savings at a time when the wealth of the country is tied up in the hands of speculators who are robbing that very depositor ! The stock and grain exchanges are beneficial if properly conducted, because they act as an instantaneous reflector of future as well as present conditions. They act as a preven- tion of serious overproduction. Furthermore, if we did not have exchanges in this country, such as cotton, sugar, grain, stock, etc., we would be left to the mercy of exchanges in foreign countries. Our own exchanges many times have been found to act as a balance against wild and unfavorable fluctuations in the exchanges abroad. "In an ordinary market there are millions of securities purchased and held on speculation," says a financial writer. "While these securities are regarded as belonging to the speculator who has bought them, they are in reality in pos- 284 HISTORY OF BUSINESS DEPRESSIONS session of the banks which hold them as collateral for loans they have made upon them. The money lenders and bank- ers, therefore, have the largest amount of money invested in speculative securities, and the greater proportion of this money, it must be remembered, is the surplus funds of the country banks." If a portion of this money was taken out of speculative channels and tied up in legitimate production and merchandising channels there would be more general prosperity, a greater distribution of wealth and less liability of destructive depressions. Such crises as those of 1903 and 1907 were brought on from absolutely no other reason than that an unreasonable amount of the country's capital was tied up in speculative channels. When we have stringency investigate specula- tion and there you will find the cause. In 1903, particularly, Mr. Frank Vanderlip, then Vice-President of the National City Bank of New York, predicted the trouble a year ahead and warned against ever-increasing speculation. In specu- lative periods there is often not an actual increase in values to justify extreme prices, but only imagination buoyed up by false ideas of prosperity which later burst and we are brought to earth facing stern realities. "Its excesses, when inspired by reckless men of great wealth," says another writer, "often are the source of national damage. Thous- ands of men, ignorant of the pitfalls of speculation and un- aware of the gigantic odds against them, are annually ruined. Fascinated by the stories of great fortunes made by speculators, they blindly 'plunge' in markets where only the wisest, shrewdest and best-informed of the professionals stand a chance of winning a profit." Speculation in government securities in England is il- legal. In the United States we have a weak law prohibiting contracts made with a view to obtaining a "corner" on the market. England also has a splendid law, only partially enforced, but which acts as a deterrent, prohibiting the en- hancement of stocks to the damage of the purchasing public. In France there is little speculation ; the people are thrifty, HISTORY OF BUSINESS DEPRESSIONS 285 and they have had fewer disastrous panics and depressions than any other commercial nation. Public sentiment in France severely condemns a man who acquires the name of bankrupt for any reason, and it is known that a French family will submit to the most excruciating poverty to keep this stain from the family name. Through the pages of history we find minor depressions caused by bad harvests, uncertain conditions of currency, political uncertainty and other causes, but practically every major panic and depression which marks a distressing epoch in the commercial and industrial history of the world has been a direct result of speculation. It is high time that we curbed this monster. How long will we stand by and witness our banks fail, business men in bankruptcy, invest- ors ruined, workmen in despair, all for the profit of a hand- ful of speculators? The speculators runs prices up until he reasons they have reached the limit that people are going to pay. Then he gets out from under and waits for the crash to come. When things start down it frightens people. They begin to curtail. Money becomes tight. Commercial failures start and the depression is on. It is the break in values, pushed up beyond reason by speculation, that startles the business world. When prices are down again and "liquidation" is complete the speculator again starts buying to sell later at enhanced prices. Various remedies have been proposed to curb speculation one by requiring that "when a bank shall permit its money reserve to fall below 20 per cent it shall not increase its liabilities by making new loans other than by discounting or purchasing bills of exchange payable at sight, and would also during such a period forbid the payment of dividends." Another would forbid a national bank from "incurring de- posit obligations in excess of ten times its capital and sur- plus, also limiting speculative loans to the amount of a bank's capital and surplus." In rare cases, however, are bank deposits against capital and surplus shown to be so excessive. 286 HISTORY OF BUSINESS DEPRESSIONS Every sane business man knows that there is a well de- fined demarcation between legitimate buying and speculative buying, and that line can soon be established through a prac- tical trial of the system. Legitimate business men and home builders will thus be able to obtain reasonable sums for their needs when the need comes, instead of finding it loaned out to speculators. The Blue Sky Laws of the various states have helped to curb flotation of the schemes of irresponsible promoters, and yet these stock jobbers know that they use the United States mails to sell stock that the individual states would prohibit. To show what little progress we have made in a century of time, let us quote Henry English, a writer who had a full grasp of the boom of 1824 and 1825, and who indulged in some criticism at the time which it is interesting to recall as being applicable to the present day. He pointed out that prior to that period of inflation the companies formed were "of such description that individual capital could not be sup- posed to be adequate for the completion of the object for which the company was formed. A majority of these, formed during 1824-1825, were of a nature adapted only to individual enterprise. The deceptive practices resorted to, to obtain a price far exceeding the real value of the property (in various Mining Companies), can only be explained by the guilty participation of the parties in the spoils. To acts of a similar nature is to be attributed the sacrifice of char- acter which, in too many instances of late, has been the re- sult of the proceedings of joint stock companies ; when, by the connection of honorable men with a class of designing projectors, the innocent have been implicated with the guilty. It is, however, to be hoped that the lesson thus taught the public, and more particularly men holding high stations in life, will be the means of preventing a recurrence of the events of 1824 and 1825." After a century of time how little progress we have made! Is there a single sen- tence in this man's story that would not be applicable to the present day? HISTORY OF BUSINESS DEPRESSIONS 287 It is well known that the spirit of the Federal Reserve Act has been violated to aid and encourage speculation. "It was not intended that the paper presented for rediscount should have been drawn to carry stocks, bonds, etc., or goods in warehouses held for higher prices ; nor to aid in securing capital for fixed investment in irrigation, water-power, street-railway, manufacturing plant, or similar purposes. On the other hand, it was intended to encourage loans based directly or indirectly on the movement of goods from the producer to the consumer." But many instances have been shown where money secured through the Federal Reserve has been used for speculative purposes and to obtain higher prices. There are so many ways to get around the letter of the law that the only preventive is a closer supervision by the Board over the member banks and by the member banks over their correspondent banks. Almost every theory advanced as a direct cause of de- pression is proven untenable except that of speculation. Those who have advocated bimetalism and paper legal ten- der as a cause are forced to admit that depressions occur in countries on a strictly gold standard basis. They occur alike in high tariff or free trade countries, in nations of stable and unstable political governments, in times of stable and unstable foreign exchange. When we have had de- pressions that could not be attributed to speculation, they have resulted from known and obvious natural or political causes. CHAPTER XXX THE LABOR QUESTION IN DEPRESSIONS As a whole organized labor has now reached a high pin- nacle. It has helped the struggle of the masses upward to better living conditions. Whether from now on it will be of real service to the working man and to the world, or whether it will be self-seeking, short-sighted and destructive, depends upon its leadership. Certainly its influence is going to be felt in commerce and industry more than ever before. Now that we have strengthened our financial system, labor is going to be the big problem entering into the causes of future depressions. It will be principally up to labor to make or unmake industrial peace and prosperity. Work is elevating, and it is neither socialistic nor idealistic to assume that if man wants to work he has the right to a chance to work. To fill one's time with profitable production is to take part in the world's onward march of achievement. The backward races are adverse to work. In the early his- tory of our own race work was considered degrading, so that we should feel that we have reached an exalted state in our civilization when men universally have the will to work. Let us go back and review the past. Ptolemy Philadel- phus, a successor of Alexander, boasted that in his reign "No citizen was idle in Alexandria. Even the blind and lame were taught to labour." Labor certainly had not reached a high plane in the year 1526 when an ordinance by the king provided, "That the scullions in the royal kitchen should be furnished with proper clothing, and should not 'go naked, or in garments of such vileness as they now do.' " Women did the hard work, and it sometimes happened that if a man lost a horse or an ox he married a wife as the cheap- est plan to recoup himself. Previous to thirty years ago writers almost invariably HISTORY OF BUSINESS DEPRESSIONS 289 ascribed as one of the causes of depression the use of ma- chines, thus causing over-production and creating unemploy- ment. Lord Playf air, writing on this subject in 1888, says : "It matters not whether the countries were devastated by war or remained in the enjoyment of peace; whether they were isolated by barriers of Protection or conducted these indus- tries under Free Trade; whether they abounded in the raw materials of industry or had to import them from other lands ; under all these varying conditions the machine-using countries of the world have felt the fifteen years of depres- sion in the same way, though with varying degree of inten- sity." Labor has at various times been temporarily depressed by inventions of modern machinery. In times past the guilds and unions have fought the introduction of various machines, but time proved that they were really a boon to labor and unions now take a different course. In the Seventeenth Century working men protested vigor- ously when the large coaches were made, which carried as many as eighteen passengers, making the distance from London to York in four or five days. The workers pointed .out "the vast amount of employment those eighteen persons would give to grooms, farriers, innkeepers, hostlers, sad- dlers, etc., if each were to ride his own horse instead of adopting the revolutionary practice of clubbing for a com- mon conveyance." Depressions have always been a serious setback to the or- ganized labor movement. The first attempt to organize working men in this country was met by a counter organi- zation of New York employers in 1836, and while twenty striking tailors were convicted of conspiracy, yet the move- ment was growing in force until the panic of 1837 gave it the final blow. The crisis of that year put a complete stop to the work of internal improvements and left thousands of men out of employment. In those early stages labor or- ganizations could make no headway against unemployment. 290 HISTORY OF BUSINESS DEPRESSIONS As the decades went by labor was able to form again in bat- tle array, but time and again it was hurled back by the de- pressions that periodically swept the country. At the outbreak of the panic of 1857 labor had four na- tional unions, together with a considerable number of scat- tered local unions. These practically were wiped out of ex- istence during the depression of that year. The demand for labor during the Civil War which followed, and the rising cost of living with which wages had not kept pace, gave the labor organization new impetus. Labor severely felt the panic of 1873 because of the large influx of laborers who came from foreign shores. During the period of business prosperity preceding the panic there was a great demand for labor and thousands were brought over. Aliens to the number of 460,000 came in the year pre- vious, under a system whereby their wages were pledged to repay their transportation. This great surplus was thrown on the labor market, and in the panic of that year caused untold suffering and gave the young labor organizations a sharp setback. The unions were not strong anyhow, be- cause of the strike of 1872, brought about by an organization known as the "Grand Eight Hour League." These strikes, with the exception of the building trades of New York City, were unsuccessful, and the unions went into the panic of 1873 already in a weakened condition, suffering at that time further reduction in wages to offset the decline in business which brought increased dissatisfaction. Two important strikes occurred, namely, on the Baltimore and Ohio and the Pennsylvania Railroads, in which violence was used and property destroyed, and armed conflicts took place between troops and strikers. Some European newspapers printed that there were "three million tramps in America out of a population of forty million." After this depression labor again made headway, secured increased wages, and reached a higher point than ever be- fore. In that period wages steadily advanced, with the ex- ception of a short period during the depression of 1884. The HISTORY OF BUSINESS DEPRESSIONS 291 presidential campaign was on during the depression of this year and the expression, "pauper labor," was heard on every hand, the unemployment situation being a paramount issue of the campaign. During this year a million men were re- ported idle, but the depression passed without serious conse- quences to labor, and further upward strides were made during the years that followed. The depression of 1893 was marked by the great Debs Strike and Coxey's Army. Less prominent leaders followed Coxey in raising armies of unemployed, among them Ran- dall, Browne and Kelley. Returns made to Bradstreet's, the results of which were published December 23, 1893, show that in 119 cities 801,055 men, with about 1,956,110 persons dependent upon them, were out of employment. In the min- ing industry labor had made headway, built up a strong or- ganization, and had favorable contracts with the operators prior to the depression of 1893. Then all the agreements were broken because of the viciousness of the times and the workers received a severe setback. The crisis retarded the steady progress labor was making during the rather dull times preceding. Idle farm hands tramped the country in search of work. Unemployed oper- atives crowded the streets of factory towns demanding work or food, and laborers abandoned the mining districts and flocked to the cities. Unskilled labor was prostrated and the ranks of skilled labor were badly shattered. Special committees were organized in nearly all of the large cities to provide food, and in many places relief work by public bodies was instituted. In the Spring of 1894 general want and distress led to labor strikes and riots, as in Chicago, and even to more abnormal outbreaks. In 1907 wages of the cotton mill operatives in New Eng- land were reduced 10 per cent. Many mills closed down, others ran part time. The railroad companies proposed either to reduce wages or increase the freight rates, prom- ising to give employment to thousands more men if the in- crease was granted. Wages were not generally reduced 292 HISTORY OF BUSINESS DEPRESSIONS among the skilled operatives, but thousands were laid off. Later, the increase in rates was granted despite the strong protests of business men, but the promised return of pros- perity was slow in coming. During the depression of 1914, when the nations of Europe were tearing at each other's throat, business stagna- tion in this country resulted from the shock of closed stock exchanges and stringent money. The United States Steel Corporation failed to pay dividends for the first time in its history, although wages were not cut. Thousands of men, however, were laid off until war orders began to come from the other side. In the depression of 1920 organized labor was hard hit. Officials admitted that they had faced the worst crisis in their history. The American Federation of Labor, which had gloried in a position of supremacy in the labor move- ment of the world, suffered enormous losses of members. It was reported that between one million and one and a half million members dropped from their rolls after the depres- sion set in. At the peak of its strength the organization had approximately four million members. Financial stringency became so acute with the organization that it was necessary to furlough most of the paid organizers. Officials, however, made the prediction that labor would emerge from the storm stronger than ever. In these periods of economic distress, when misery reaches its limit and forbearance is no longer a virtue, mut- terings of discontent grow into clamor and tumult. They have changed the course of the economic world, often the political world, and their echoes reverberate through the chapters of 'history. Labor's greatest antagonist is busi- ness depression. Organized labor has overcome all obsta- cles, it has fought and, it may be truthfully said, has won against the lock-out, open shop and other deterrents, but it is absolutely at the mercy of industrial depressions. No ac- cusing finger has ever been pointed at labor as guilty of bringing about depressions and their resultant afflictions HISTORY OF BUSINESS DEPRESSIONS 293 until the depression of 1920. But labor's post-war greed was almost as great as that of capital. Since the previous depression labor had adopted new tactics. Their business agents delved into the records of the various industries. These records were becoming more and more open to the public as regulation of business came on. The labor repre- sentatives were able to ascertain just what industries were earning big profits and proceeded, through the strike, to gain for themselves all the traffic would stand. As a whole, labor acted very fairly during the war. While excessive de- mands were made in many cases, labor, under the patriotic leadership of Samuel Gompers, loyally supported the war, and arbitration was in most cases easy to obtain. During the inflation period brought on by the war labor profiteered probably to an equal extent with all other profiteers in every line of endeavor. Probably this statement would not be in order but for the inexcusable lowered efficiency, which was as bad as the utter lack of service on the part of capital. Business men, as a rule, were willing to pay the high wages demanded at the time had they been given efficient labor in return. This is the first depression in our history that labor must rightfully bear its part of the blame for bringing on. We shall have to wait until a decade or two have passed before American business interests will realize what they es- caped in the post-war period. With radical leadership we would undoubtedly have experienced the same troubles as happened in Germany, Austria, Italy and England. It may be a long time before labor again has the same able leader- ship as it has had under the trying times of the Gompers' regime. Long after he is gone business will turn to pay him honor and point to his regime as an example of sanity in leadership. Labor will save itself from many setbacks by following its more conservative leaders. In 1921, at the height of the depression, the marine engineers who, as a result of war conditions, had built a powerful organization, were receiv- ing an extremely high wage scale. They struck, against the 294 HISTORY OF BUSINESS DEPRESSIONS advice of their president, William S. Brown, one of the ablest labor leaders in the country, and a member of the President's Unemployment Conference. They lost, of course. During the depression of 1920-21 the unemployed were placed on the auction block in Boston and their services sold to the highest bidder. The plan was attempted in other cities, but prohibited on the grounds that it accomplished nothing in the way of a permanent solution of the problem. The International Machinists Union, under President Wil- liam H. Johnston, sought to bring a revival in business by securing orders through their Union from foreign countries. The Mexican Government placed large orders for machin- ery in this country under the supervision of the Interna- tional Machinists Union. President Johnston also attempt- ed to go to Russia on the same mission, but was prevented by radicals who had gone from America to the Bolshevik country. In October, 1921, the International Labor Board gave fig- ures of the estimated unemployment as follows : United States More than 3,000,000. Canada Sixteen per cent, of organized labor. Japan 232,000, including 3,000 sailors in Kobe alone. Britain The European country hardest hit nearly 2,000,000 officially inscribed. Switzerland 22,000 wholly and 90,000 partially unem- ployed. Denmark Sixty-five thousand. Norway Seventeen per cent, of organized labor. Sweden 35,000 wholly and 42,000 partially unem- ployed. Holland Sixteen per cent, of organized labor. Belgium 153,000. France (Which was one of the countries least af- fected), 120,000 wholly unemployed. Italy 110,000 wholly and 300,000 partially un- employed. Czechoslovakia ___37,000. Germany The climax of unemployment was in Sep- tember, 1920; in 1921 only 3 per cent, of the workers were wholly unemployed. These figures are admitted to be low. They do not in- HISTORY OF BUSINESS DEPRESSIONS 295 elude unorganized workers. Some statisticians claim double the number given here were out of employment. The Idaho Legislature passed an act establishing the right of every person who has resided in the State for six months to ninety days' public work a year at 90 per cent of the usual wage if married or having dependents, otherwise at 75 per cent of the usual wage. Duluth, Minn., adopted the policy of building sewers throughout the winter in order to equalize the amount of unemployment. Detroit found the digging of sewers in frozen ground no more expensive than under the blazing summer sun. Business circles will respond more quickly to the disrup- tion caused by labor troubles than anything else. There may be a nation-wide strike, such as a railroad or miners' strike, and business will immediately feel the effects. Local strikes, of course, will not cause general depression nor will a general strike cause prolonged business distress, because neither side can afford to hold out long. If financial and natural conditions were sound, the effects would be over in a short time and business resume its nor- mal course, so that labor troubles cannot be ascribed as an underlying cause of business depressions, but an important contributing factor. It is the general exorbitant demands and inefficiency of labor that frightens capital and cause buyers' strikes. The average laboring man is, of course, not educated to the point where he can reason for himself from a scientific, economic standpoint. He feels many times that he has been crushed and that his employer has profited too greatly from his labor. That leads him to go to extremes when he gets the opportunity, which is not the right way to correct the evil of profiteering on the part of capital. He should not as- sume a right to profiteer just because another man does. "Two wrongs do not make a right." A case at point is found in English history beginning in 296 HISTORY OF BUSINESS DEPRESSIONS the year 1824, after the law passed by Parliament a quarter of a century previous which forbade combinations of labor : "Upon the repeal of the law against combinations the hopes of the workers soared. They had come to believe that by combination they might achieve everything for which they longed. A workman's paradise was to be instituted at once by the activities of unions, which were now at liberty to work in the open with no threatening shadow of imprison- ment hanging over their leaders. Trade-unions sprang up like mushrooms overnight. On all sides there were strikes for higher wages. Unfortunately for the hopes of the work- ers a business panic occurred in England which forced the manufacturers to close their mills. All the strikes failed of their purpose, and many of the workmen could find nothing to do and were saved from starvation only by charity. Many of the unions broke up and workmen lost faith in their organizations." As the years go by labor becomes more specialized. The modern workman when employment is scarce in his trade waits for it to pick up. When most of us were boys a work- man was more or less a "Jack of all trades." When he could not work at his own trade he was supposed to work at anything he could get. Outside of common labor that is not the rule these days. At a meeting of women workers held in New York during the depression of 1893 an appeal was being drawn up for their aid, and included in it was a request to the women of the wealthy class not to cut off their luxuries. There is a certain class of people who have an assured income which is affected only slightly in periods of depression. These people could do a patriotic service by buying liberally so as to give employment to those who are not so fortunately situated. They should keep in mind that they have incomes only be- cause others work and produce, so they themselves are de- pendent on the well-being of others. The labor leader of the future, however, must prepare to advise his followers along more correct lines. Labor is developing some splendid and able leaders, men who are paid salaries as high as the earn- ings of the average business man. President Stone, of the HISTORY OF BUSINESS DEPRESSIONS 297 Railroad Engineers Union, was recently voted $25,000 a year salary. It is these men the country must look to for proper guidance of the labor movement, so that the public will not have occasion to react against the abuses of labor, as well as the abuses of capital. My experience as an em- ployer is that the average business man does not object to paying a good wage. His experience teaches him that a good wage means money to spend beyond bare necessities, a portion of which will come back to him. Employers, too, have a right to demand an honest day's work for an honest day's pay. They have a right to expect willingness and per- sonal interest and co-operation on the part of the workmen, and if this is unstintingly given public sentiment will stand solidly behind labor for a round and healthy wage and reas- onable hours. Labor today is a big element in considering risks. The manufacturer who is advantageously situated as to low power and transportation costs, together with a lower wage scale or greater efficiency, has a distinct advantage over another manufacturer where the opposite conditions pre- vail. Where labor costs are high and efficiency relatively lower, the manufacturer will not take the risk of making up stocks in dull times, but will shut down awaiting definite orders, so that the buyer absorbs costs and lessens the risk. More co-operation on the part of labor in this direction would help to keep the factory going on part time even in the most serious depression. The manufacturer with high labor costs is first to suffer loss when the market for his article weakens, so that he cannot be expected to keep his employees at work making stock for the future when depression, either local or general, sets in. The American laborer should by all scientific standards be more proficient than those of other countries. He is the best off materially, has more of the comforts of life which should create an in- centive, and with the saloon gone, taking away the constant temptation to drink, he is physically and mentally in better condition. 298 HISTORY OF BUSINESS DEPRESSIONS Contrary to the general belief, labor has been growing more efficient. In the textile trade statistics show that the average production per man in 1880 was $1600 per annum, and in 1900 was $1700 per annum. The average of recent years would hardly be fair, because during the war period large numbers of new and inexperienced hands entered the factories. Some business men condemn labor as a whole, but they should not overlook the fact that the unions of skilled work- men under the American Federation of Labor kept the coun- try from a state that might have bordered on anarchy during the war period and immediately following, when labor had the upper hand and was very hard to control. Some thought the unions demanded excessive wages, and yet statistics show that they did not ask for anything like the increase that was demanded and given to the unskilled, itinerant workers of the Bolshevist type. For instance, the wages of unorganized labor more than doubled, while the organized unions estimated it at 40 per cent increase. The organized unions were far more reasonable in their demands and were always a restraining influence, without which we would un- doubtedly have had more or less of the anarchy which swept over all the European countries. When prosperity is general labor begins to fight for a share. In most cases business men must give in because they cannot afford to fight while there is a chance to make money. Labor wins. And then another group makes de- mands with the same results. This continues until the dis- putes become vicious. Then capital gets cautious, no new enterprises are undertaken, and if it happens that other ad- verse conditions come about at the same time the signal is automatically given and another depression sets in. Business depressions throw out of employment an average of one out of every five wage-earners, which is a great na- tional calamity. It is a loss to the nation in spending power of over four billion dollars per annum. What we lose in depressions could easily pay our national debt. HISTORY OF BUSINESS DEPRESSIONS 299 As early as 1856 Carroll D. Wright, special commissioner on American Trade Depression, reported that "if the em- ployers in any industry would combine under an organiza- tion that should have positive coherence, there would be no difficulty, so far as that industry is concerned, in regulating the volume of production in accordance with the demand." One of the early excuses given by those who formed trusts in America was that they would help regulate the law of supply and demand and avoid industrial depressions in the future. It may have helped some, but they have fallen far short of the promised goal. In the early days of trade unionism the unions took the stand that wages should be regulated by the price of the product, and they were willing to accept wages based on that principle. The coal miners of England went into an agreement of that kind with the employers, who formed an organization known as the "Coal Sales Association," but after the agree- ment went into effect, the Coal Sales Association for some reason went out of existence and the employers abandoned the idea. This plan was also tried in 1865 by a trade union of pud- dlers, known as the United Sons of Vulcan, in the steel works around Pittsburg, who made an agreement with their employers to base their wages on a sliding scale, according to the price of the product. They had a commission which had access to the prices made. With the change in the method of making iron this union later amalgamated with other organizations who discontinued that method of deal- ing with employers. As before stated the history of organized labor shows that they get their hardest knocks in periods of de- pression. It is, therefore, to their interest to help devise means of avoiding depressions. A simple and easy way would be to take up again the old sliding scale principle so that they can avoid violent reductions in wages, and at the 300 HISTORY OF BUSINESS DEPRESSIONS same time reap the profit to which they are entitled in pros- perous times. It seems that this would be a good method, both to halt strikes and to avoid the connection that trade unions have in bringing about depressions because of necessary read- justment. Under present conditions, when both prices and wages get too high, finance and employers get together to curtail pro- duction in order to force a lower wage. This is done with a very violent shock to business and the depression often times gets out of hand. There is no reason why it cannot be auto- matically done. There are, of course, objections to the plan. On the employers' side they claim that a certain part of the output is sold on contract at prices below the prevailing market, but certainly there can be an average arrived at by the simple process of mathematics. Along with that they should put in their agreements an understanding of uniform employment, so that the employer may not turn off large numbers of men, creating a great army of unemployed, but may reduce the hours per week when curtailment of produc- tion is necessary. In this manner everybody would have some kind of a job and it would simply be a case of adjust- ing his living conditions to the fluctuation of his pay and the hours per week that he can work. We can solve our problems best by recognizing that labor has a right to improve its condition. As Machiavelli said : "A free government, in order to maintain itself free, hath need, every day, of some new provision in favour of liberty." Ideas have also been advanced along the lines of unem- ployment insurance. If this plan is put into effect em- ployees must directly or indirectly pay for it, and experi- ence is that they will not do it. What they demand is a cer- tain amount of money to spend. What is put away for them is not appreciated. The average working man feels that he will take a chance on the future. The trouble is that when he gets a job he thinks there will never come a time again when he will not have one. People who do not think HISTORY OP BUSINESS DEPRESSIONS 301 and study cannot be made to see that another depression is ahead. We have never gone through one but what nine people out of ten are sure that we will never have another, and some who so think may refuse to prepare for it. Labor suffers so terribly from unemployment due to in- dustrial depression that it should be the first to take steps to avoid those conditions in the future. Mr. Halbert, Gen- eral Superintendent of the Board of Public Welfare, Kan- sas City, in "Persistent Public Problems," sets forth a good idea: "Perhaps, compulsory unemployment insurance for casual laborers is impossible, but if the opportunity for unemploy- ment insurance was universal to casual laborers, it would create a rather strong moral presumption against the man who refused to take advantage of it, and a certain stigma, such as belongs to vagrants, would tend to attach to him, and people who did not carry cards which indicated their standing in this regard would be at a disadvantage in get- ting employment." The labor leader of the future must not be of the type who creates hatred among employers by organizing men only to get wages, hours and conditions, but the duty of the labor organizer and business agent must also be to "sell" the union to the employer. He must not take an ar- rogant stand, but must be an emissary of conciliation to get the employer's good will and to show him how he can self- ishly profit, himself, by employing union labor at such terms and conditions as the unions think they should have. The employer cannot be blamed for dreading conditions that existed immediately previous to the depression of 1920. In those inflated years of great demand and scarce labor the employer many times had to submit to being cursed and abused by his employees. He saw their efficiency lowered, and their arrogance became such that it was no pleasure to do business. It is safe to say that thousands of business men, before they would go through such an experience again, would lock the door of their factory and go fishing. True, the employer many times was equally as guilty. He 302 HISTORY OF BUSINESS DEPRESSIONS mistreated and abused the public. He profiteered and gave no service. Such conditions are not good for anybody. Why is it that we lose our heads when we have prosperity? Why cannot we deserve prosperity ? All of this backs up the ar- gument of some that unemployment, depressions and hard times are a necessary evil connected with a larger good. If labor cannot profit by recent history it can go back to the Tudor period in England, when the guilds made such re- strictions as to apprentices and other conditions that they began to cramp the rising manufacturing industries which chafed under the vexations and began moving into the smaller and remote towns. The unemployed in the Sixteenth Century were indeed unfortunate, because a law was passed at that time in England providing that if an able bodied man was found "begging a second time he was to be mutilated by the loss of the whole or a part of his right ear." The question with us should not be what to do with the unemployed individual, but rather, why is he unemployed?" This will lead to wide study by the public of periodic indus- trial depressions. We must face the fact in the future that labor is going to demand the right to work, and they are likely to be in posi- tion to enforce it. Wise employers will begin to devise a sys- tem through which he can keep all of his employees under almost any condition. He must work out a plan of shorter hours and correspondingly shorter pay, or short layoffs by rotation. Unemployment affects not only the unemployed, but our whole economic structure, and we are drawing to a point in our civilization where we must find an orderly way outside of the precepts of socialism to give every family head the right and opportunity of steady work. If we neglect this, forgetting it during our prosperity, as we are wont to do, we are sure to invite further depressions, resulting in far greater costs than an equitable solution would entail. The dole system in vogue in England at the present time will never prevail in America. Our people do not believe in sup- porting non-workers. There is plenty of work to do entirely HISTORY OF BUSINESS DEPRESSIONS 303 outside of production which might at the time be all suffi- cient. How much better it would be if England would spend her millions by providing and requiring a reasonable amount of work. Certainly idle men can be used to beautify and improve public property so that their time is not wasted in idleness and they can be paid for making the world a better and prettier place in which to live. The old-fashioned employer liked to discipline labor by creating a condition of unemployment, but we have all come to realize that unemployment is a disease that undermines the health of the economic body. It stops demand and affects not only those who are thrown out of employment, but frightens others, causing the curtailment in demand of every kind. The Wisconsin Legislature has had before it an employ- ment liability law. Professor Commons, of the University of Wisconsin, in an article published in the Survey, says : "The theory of this proposal is that expansion of credit is a main cause of unemployment, and that an insurance liability should be placed on the manufacturer against the day when he lays off the workmen. It is assumed that a banker will not extend credit and a business man will not enlarge his force without taking into account this liability." There will be opposition to this plan, of course, but cer- tainly it is more nearly an American plan than the European system of accepting unemployment as inevitable and de- pression as necessary, endeavoring to arrive at a solution through philanthropy. The states of Pennsylvania and Cali- fornia are now making a provision for the control of public works to the end that this construction might be done dur- ing periods of depression as a safeguard against unemploy- ment. Business and labor, both of which suffer from depression, should find a common interest. On the one hand is the la- borer without employment, hopeless, with his last crust, willing to work and seeking not charity, perhaps with a family, and on his mind the dreadful knowledge of their 304 HISTORY OF BUSINESS DEPRESSIONS want; yet with the same status as the hobo, the tramp, or the bum. He vainly seeks employment, goaded to despera- tion by the thought of those who need his wages, until he feels that there is no spark of justice left in the world. Take then the business man. What stories many could tell, those self-made men who struggled for years through repeated discouraging periods, building up the institutions which give employment to men, assuming the burdens of all the economic world. To these men all of our millions look to provide the pay-roll. Little do we consider them, a comparatively small part of every community, who furnish the money for all the rest of us to spend. The sanitariums that dot the country attest the mental strain which they undergo, doubly so in times of depression when additional troubles are heaped upon them and their fortune and their life's work threatened to be wiped out. These two, the work- man and the business man, have felt the same dismay, the same tension of uncertainty. They ought to find a common ground where they can get together to eliminate these peri- ods of distress. " 'These are my jewels,' said the mother of the Gracchi, and she embraced her two sons." Why cannot capital and labor join in brotherhood? They are the jewels of humanity. CHAPTER XXXI. AGRICULTURE AND DEPRESSIONS The economic history of American agriculture has been a record of great forward strides and increasing prosperity, excepting in those periods when the hand of depression was laid upon her fair fields. The outstanding feature of eco- nomic history is that depression and prosperity have suc- ceeded each other, just as civilization and anarchy have fol- lowed each other for thousands of years. America is prob- ably the one nation in the world that has never had a fam- ine. Our farmers have always produced in one commodity or another, or in one section or another. In taking the crop statistics of the country as a whole over a period of years, it is surprising how evenly they run from year to year and how steady has been their growth. A certain school of econ- omists claim that the constantly recurring trade depressions follow the so-called cycle of agricultural prosperity. They argue that following a period of depression the output of agriculture is not at first sufficient to keep pace with con- sumption. The crops grown bring high prices because of scarcity. The farmer starts spending, marking an upturn in business. For a few years planting increases and greater prosperity results in a greater consumption until, finally, the agricultural output increases beyond the demand of con- sumers. As soon as this point has been reached, and a year of large carry-over is faced, prices decline sharply, bringing its blight to the farmer, who gets low prices for his over- production so that he is usually in debt and unable to buy when depression comes. "Ceres," remarks a writer, "is triumphant democracy in the prime divinity of the Republic." We are by far the great- est agricultural nation in the world. The last census showed that 48 per cent of our population derived its living from 306 HISTORY OF BUSINESS DEPRESSIONS the farm, so that agriculture is naturally important in the cause and effect of the trade cycles that revolve through the years of our history. The history of the Roman Empire records periods when agriculture ascended the hills of prosperity and then went down again through the valleys of depression. It is not known just how much American money a Roman sesterce was worth, but it is recorded that an ass sold for 60,000 sesterces. Whether they had profiteers in those days or de- preciated money is not recorded. There could not have been a depression, but rather an inflation of agriculture when Marcus Terentius Farro, a Roman farmer wrote : "So men buy cows with black horns rather than with white, large goats rather than small ones, and pigs with long bodies, provided they have small heads. The third point is the question of the strain to be desired. In this connection Arcadian asses are celebrated in Greece and those from Reate in Italy, so much so, indeed, that in my memory an ass went for 60,000 sesterces and a team- of-four at Rome were valued at four hundred thousand." Depressions in the early centuries were largely agricul- tural depressions caused mostly from over-production, while in other years there would be crop failures and famines. The lot of the agriculturist in the manorial period was at times very bad. The tenants were ill-treated and often con- victed on slight cause. The year 1381 records a general movement of the tenants toward greater economic and so- cial freedom. The hard feelings engendered took violent form in the Peasants' Revolt, known as Wat Tyler's Rebel- lion. In the early history of modern times in England agricul- ture particularly went through regular periods of distress. These depressions were a serious problem and later brought on regulatory measures, and were subject to numerous in- vestigations to determine the causes. Francis Austin Chan- ning, a member of Parliament, wrote a book in the Eigh- HISTORY OF BUSINESS DEPRESSIONS 307 teenth Century called, "The Truth About Agricultural De- pressions." Regarding the first period following the war of the Revo- lution, Roosevelt in his "Winning of the West" tell of agri- cultural conditions: "The prices of the agricultural prod- ucts of the West were absurdly low, a cow and a calf being given in exchange for a bushel of salt." Johnson, in his "History of Domestic and Foreign Com- merce," describes the agricultural conditions of that period : "The farmers of the grain-belt still found themselves in dis- tressing circumstances. The fertile soil of the great Ohio Valley was yielding a product far in excess of the demand that existed for it, and each year found an increasing amount of unthreshed or unmarketable grain left in the fields and granaries. Foreign nations that profited by ex- porting their manufactured products to America refused admittance to American grain and flour, and though the grain-producing capacity of the United States had increased six-fold since 1790, the annual exports of flour, beef, pork, and grain were but little more than the average for the five years from 1790 to 1795. Of that which was exported but very little went to Europe, the chief foreign provision mar- ket being, as in colonial days, the islands of the West Indies. The plantations of the South were drawing much of their subsistence from the northern farms, but they were unable to absorb more than a small fraction of the tremendous sur- plus of meat and flour that was seeking a market. In 1824 corn could be bought at Cincinnati in any quantity for 8 cents a bushel. Wheat yielded the farmer 25 cents a bushel ; flour sold as low as $1.25 per barrel. After the advent of low prices the high costs of transportation fell more heavily upon the farmer than before, a larger proportion of the value of agricultural products being sunk in the expense of carriage to market than of the value of any other commodi- ties." Drawing a picture of agricultural conditions in the de- pression of 1819, Congressman Martindale in a speech de- lievered in the House said : "While this process of waste and devastation was going on the provision-market was depressed also. There was lit- tle demand for the farmer's provisions, for his beef, pork, 308 HISTORY OF BUSINESS DEPRESSIONS and wheat. The price was greatly reduced. But the habits of the farmer and his family were formed, and suited to better times. The customs, tastes, and fashions of the country, and his immediate neighbors, imposed a kind of moral necessity upon him to measure his expenses by theirs, not by his means. His expenses were greater than his income. The consequences were inevitable: his cash was first ex- hausted, and next the produce of his farm ; his credit next, and (by a mortgage) next the farm itself. The expenses which produced the mortgage prevented the redemption. The farm is sold to pay for foreign goods, and the merchant becomes the purchaser. This is no unreal picture, which has no original in nature." In 1815 public land sales reached a million acres a year. During the period from 1816 to 1819 the income to the government from the sales amounted to nearly $30,000,000. Then during the depression, starting with that year, sales for the following three years hardly exceeded $4,000,000. The rise in the price of cotton from 26 to 34 cents per pound induced larger purchases of land; exceeding two million acres in 1817. By the decline of nearly half in the price of cotton in 1820, combined with other causes, land- purchasers were left in debt to the government more than twenty-two million dollars, and with a change from the credit to the cash system sales were reduced to much less than a million acres annually. In 1821 purchasers were so troubled to discharge their obligations that Congress pro- vided that instead of paying the balances due, they might acquire, if they desired, an absolute title to a portion of the land purchased, which should be determined by the price paid and the amount paid thereon, on condition of re- linquishing their ownership to the remainder. In our early history the West Indies were our best cus- tomers for agricultural products. The worst depressions our agricultural export trade has experienced were during the Revolutionary War and Civil War periods. In times of European wars and various European crop failures there has been unusual demand for our food-stuffs and cotton, only to be followed by slumps of more or less severity on HISTORY OF BUSINESS DEPRESSIONS 309 the return of peace or normal crop conditions. Agricul- tural exports rose to a high level in the years 1815 to 1818. The surplus cotton, flour, wheat, tobacco, rice, corn and pro- visions that had accumulated during the war of 1812 were released and flowed out of the country. In 1818 farm com- modity exports were valued at over $62,800,000. In the first few decades of our national history the price and demand for flour was considered the barometer of busi- ness. If flour was high business was good, because it de- pended almost entirely upon agriculture. If there were large exports of flour this meant the people could buy luxu- ries in return from Europe. The effect of inflation on values is shown by the follow- ing estimate of the values of certain lands in Pennsylvania on three different dates: 1809 $ 39 per acre approximately normal conditions 1815 160 per acre bank expansion, great prosperity 1819 35 per acre after the panic of that year In 1820, when the depression starting in 1819 was at its worst, wheat sold at 20 cents a bushel in Ohio and Ken- tucky. The United States Gazette of that period said: "Whiskey is dull at fifteen cents a gallon." The first speculative mania for agricultural lands west of the Alleghanies was after the war of 1812 and previous to the crisis of 1819, when people were swarming into that section. Over 20,000 people settled in Kentucky in one year and 12,000 in Tennessee, together with large numbers in other central western states. When the crash came on this new country was desperately hit. Thousands of mort- gages were foreclosed and their would-be purchasers left homeless. Still greater suffering would have ensued had it not been that in some states relief laws were passed staying the proceedings against foreclosure. The State of Kentucky attempted to establish a state bank to help the new settlers tide over on their land purchase, but the plan proved unsuccessful. 310 HISTORY OF BUSINESS DEPRESSIONS The period from 1818 to 1830 was an era of general trade recession in agricultural commodities, because of peace in Europe, which lessened the demand, and through readjustment of general conditions in America, following the panic of 1819. From 1830 to 1836 there was general improvement in agricultural conditions. The opening of the Middle West increased the surplus in flour, grain and provisions, and the ever expanding cotton section of the South furnished its share, exports rising in 1836 to over $90,000,000, and being 80 per cent of our total export business. The panic of 1837 followed, bringing irregular fluctuations in agricultural products. During this period cotton was the only farm crop that increased in export shipments, although falling prices decreased the value to the farmers by millions of dollars. A total of 17,600,000 acres of government land had been sold in 1836, a territory equal to Belgium and Holland combined, bringing into the national treasury $24,877,000. Then came the depression of 1837, and the sales fell to 5,601,103 acres. It was the large surplus which accumul- ated in the Treasury from the sale of these lands and de- posited in the state banks that brought on the over-expan- sion and speculation resulting in the panic of 1837. In the speculative times previous to the panic of 1837 "the farmers extended their acreage, pawned their growing crops for the money to increase their acreage and put up grist mills, cotton gins, etc. The Mississippi Valley north and south was heavily mortgaged to eastern bankers. Many of the "wild cat" banks were loaning irredeemable currency to land speculators, who attempted to use it in buying gov- ernment land in defiance of the law. An attempt was made to stop this practice and require payments for land to be made in gold and silver. It was halted by President Jackson, who directed his Secretary of the Treasury to require gold or silver from speculators, but in case of bonafide settlers bank bills should still be received." Another important contributory factor leading to trouble HISTORY OF BUSINESS DEPRESSIONS 311 was the failure of the American crops in the years 1835 and 1837, unfortunately continuing in 1838. This lessened the purchosing power of the farmers and crippled the merchants. The value of flour and grain imported into the United States as a rule was insignificant, while that ex- ported after 1830 was on the average about six million dollars annually; in 1837, however, the exports of grain fell off nearly a million dollars, while the imports of grain were increased more than four and a half million dollars. Previous to the depression of 1837 agriculture on the Atlantic seaboard had begun to decline. The New Eng- land farmers lamented the spirit of speculation which caused the migration of young men to the "back country," as it was called. Southern states also poured their surplus population westward, their sons going to the unexploited gulf states and into Alabama, Mississippi, Arkansas and Missouri. Large tracts were to be had of the land offices at wholesale prices, and these were bought up by men of means or influence and retailed to would-be farmers at suf- ficient advance to realize a considerable profit. The sales were made on credit, but the land was usually mortgaged to the full amount of the deferred obligation so that ultimate returns were guaranteed, provided the tract was so situ- ated as to be readily salable. The barren hill farms of Mas- sachusetts, Vermont, and New York afforded but a meager reward to labor by comparison with the government lands still available in the Mississippi Valley, and in consequence the young men of energy and ambition were drawn to the West, "to the fertile prairies of Illinois and Indiana and the alluvions of Ohio." In the short depression of 1848 agriculture suffered little because the English Corn Laws had been repealed in 1846, opening up a new market in that country. With the Mexi- can War stimulant agriculture took on new life, and for ten years experienced unprecedented prosperity. The for- eign exports rose to a hitherto unknown level and domes- tic demand was stimulated by the rapid settlement of the 312 HISTORY OF BUSINESS DEPRESSIONS Mississippi Valley, railroad construction and the gold dis- covery in California. At the same time came the potato famine in Ireland, bringing great demand for American ag- ricultural products. Then came the panic of 1857 and its resulting depression, lasting until the outbreak of the Civil War. During the ten years preceding 1857 the value of all farm property in- creased over 100 per cent, a growth that has never been achieved in any country or in any age. In the beginning of 1857, when prosperity reigned su- preme, the Governor of the Territory of Nebraska said: "We can boast of flourishing towns and prosperous cities, with their handsome church edifices, well regulated schools and busy streets. . . . The appreciation of property has far exceeded the expectation of the most sanguine. Busi- ness lots upon streets where the wild grass still flourishes are readily commanding from $500 to $3,000 each; lands adjacent to our most prosperous towns sell readily at from $50 to $400 per acre. Credit is almost unknown in our business circles; no citizen oppressed for debt nor crippled in his energies by the hand of penury and want; but all, encouraged by the success of the past, look forward to the future with eager hopes and bright anticipations." But this picture of prosperity was entirely changed by the succeeding depression and another Governor in a mes- sage to the Legislature in 1859 had this to say : "It is a mat- ter of bitter experience that the people of the Territory have been made to pass through the delusive days of high times and paper prices, and the consequent gloomy night of low times and no prices." The depression of 1857 was augmented by the finest har- vest ever known in the United States, which happened to fall with one of the best harvests in Europe, making wheat almost unsalable. Cotton exports increased from 1,667,000 bales in 1846 to 3,774,000 in 1860 and from a value of $42,767,000 to $191,- 806,000. Western grain, which had gradually entered the HISTORY OF BUSINESS DEPRESSIONS 313 foreign trade during earlier years, now for the first time became an item of real importance and caused a rapid rise in food exports. The maximum point in food shipments was reached in 1857, when 14,500,000 bushels of wheat, 10,250,000 bushels of corn and 3,712,000 barrels of flour, and breadstuffs of all kinds valued at $55,500,000 were shipped abroad. The panic and depression occurring at the end of the year, together with the bounteous crops in Eu- rope, then halted the great export movement for a time. Some years ago an English visitor, apparently with an ample imagination, wrote home the following description of an Illinois corn field : "Nothing but corn was in sight over the great level plain. I wandered among the immense stalks, some at least four- teen feet high; a heavy dew had been falling during the night, and the morning sun was now well up in the heavens. Crack after crack resounded like pistol shots. It was the corn bursting its coverings." Emigration received a setback during the depression of 1873, doubtless for the reason that prices were low and money to get a start in the West was not available. Land values had also declined seriously and speculative spirit was not in the minds of those going west. But in 1878-79 the western movement was resumed. Depressed times of that period in the East seemed to stimulate the western move- ment. The fall in prices of farm products had preceded the panic of 1873. Farming had its difficulties in the depression of 1873. The pioneers had borrowed heavily from eastern mortgage companies to improve their farms, and if they made the mistake of borrowing a small amount their farm was usually foreclosed, for payment was utterly impossible. Those who borrowed large amounts were better off because the mort- gage companies allowed them to stay and cultivate the land, hoping to get their interest, at least, until conditions improved. But in either event thousands of mortgages were foreclosed. Money was so scarce that farm products could not be moved to market. 314 HISTORY OF BUSINESS DEPRESSIONS Agriculture of the East has felt panics less than the West and South, obviously because that section was older and there were fewer mortgages carried, and the section was nearer the consuming markets. Eastern agriculture suffered worse in the depression of 1873 than in any other period. This for the reason that thousands of farmers went west on the prosperous tide previous to this year to open up new lands. This left the eastern lands with lesser de- mand, with the result of a greater falling off in their value. In the depression of 1878 agriculture was favored because of an abundance of cheap labor and cheap lands which en- abled the farmers to produce large crops at small cost. The demand in Europe happened to be good at the same time and great quantities of exports poured out of the country. While industry was suffering agriculture was in fairly good shape, although prices were low. Our exports in 1878 were more than three times as great as in 1876. They amounted to over $257,000,000 more than the total imports, the exports being almost entirely agricultural products. The good crops and large exports repeated again in 1879, thus pulling the country out of the depression. In the depression of the '80's farm mortgages were so tremendous that they were alarming. These mortgages were held by eastern and European capitalists and carried interest from 1 to 3 per cent per month. An idea of the situation of that time is given by Henry M. McDonald, president of the Traders' Bank, Pierre, South Dakota, and printed in the New York Times, in which he estimated that "the volume of western-mortgage business, confined chiefly to Kansas, Nebraska, Minnesota, and Dakota, has reached the sum of $150,000,000 yearly. It may exceed these figures. That it is of great magnitude is evident from the fact that in all eastern cities (and in most of the towns and villages) are located numbers of agents who make a living from the commissions paid them for securing loans. Boston numbers more than fifty agencies of farm-mortgage companies. It is computed that Philadelphia alone negoti- HISTORY OF BUSINESS DEPRESSIONS 315 ates yearly more than $15,000,000 on western loans. Kansas and Nebraska have 134 incorporated mortgage companies. The companies organized under the laws of other states, but operating in these two states, increase the number at least 200. In this reckoning no account is taken of firms and individuals, although a large amount of money is directly invested by lenders of this class. One feature of importance to be observed in this mortgage business, is the fact that the chief part of the power to put in bonds the lands of America comes not from the country, but from the city; while the country is gaining no equivalent power over the city interests of any kind." As to the oppressive nature of the western farm mort- gages of that period the Chicago Times said: "The syndi- cates that loan money at from 1 to 3 per cent per month are mainly made up of Scotch, English and New England capi- talists, who have their agents throughout the South and West. These mortgages are falling due, and soon an im- mense number of southern and western farms will be in the hands of foreign mortgagors. The territories are cov- ered with mortgages on new farms not yet patented. In many districts half the settlers borrow money at high in- terest to pay the small price required by the government in proving up. This is leading to wide-spread disaster. The object of the pre-emption law is perverted. Eastern and foreign capitalists get the land with such improvements as the settler has put upon it. The settler loses all by reason of the exorbitant interest he is compelled to pay." The wheat crop of 1884 was the largest that had ever been harvested, and the price fell to 64 cents a bushel, half that obtained three years before. This price did not cover the cost of production, and many farmers were ruined. The inability of the agriculturalists to meet their obligations to eastern mills and workshops extended and prolonged the industrial depression, and the glut of the market became general. With the preceding land boom and over-development dur- ing the big years of emigration a collapse was bound to ensue, and the progress of agriculture was greatly retarded 316 HISTORY OF BUSINESS DEPRESSIONS because of the heavy burden of mortgages and the instabil- ity of farm prices. After the first of August, 1891, a fortunate turn in the international grain situation brought about a radical change in the depressed conditions which had prevailed in the United States during the preceding eighteen months. The wheat crop of 1891 in the United States was the largest up to that time which had ever been grown. The returns showed a yield of 611,780,000 bushels in 1891 against 399,- 262,000 bushels in 1890. The same remarkable increase was also true of the corn and coats crop. Moreover, the cotton crop in 1891 was unprecedented. The most significant fea- ture in the situation, however, lay in the fact that this extraordinary increase in the production of cotton and cere- als in the United States was coincident with a shortage in European harvests. The Russian wheat crop, which, next to that of the United States, was most largely depended upon by European consumers, was almost a total failure. The grain shortage in France was one of the most serious in the history of the country. The Russian Government issued a ukase against the export of rye on August 10th, and another against the export of wheat on November 21st. A decree removing the import duty on wheat was also pro- mulgated in France. The market for American grain there- fore was broad and eager. On account of the small crops of the two years 1889 and 1890, the European demand for American cereals quickly developed, and the pressue of export grain from the United States during the autumn of 1891 was very great. The export of breadstuffs almost equaled the enormous outward trade during the year 1879, following the resumption of specie payments. Many writers insist that our 1893 panic would have come in 1891 had it not been for the inflated currency which post- poned it until another day. Gold was going out of the country in great sums during the three years, but in 1891 scarcity of crops in Europe brought about large exports of American agricultural products and this had a tendency HISTORY OF BUSINESS DEPRESSIONS 317 to bring the gold back and even the balance of trade for that year. The next year, however, our agricultural exports fell and we had a balance of trade against us of $68,800,000. A widespread and far-reaching disaster for agriculture was that of 1893 and 1894, when the combination of crop failure and low prices ruined thousands of farmers. Riding through fertile sections of the states west of the Missis- sippi one could see farmhouse after farmhouse deserted, occupants having scraped together what money they could and returned east, where they could find refuge among friends and relatives. Others remained, eking out a bare existence, enduring privation and hardships described as almost beyond hope. Defaults were the rule, but the settlers who managed to survive the adverse times undoubtedly in later years were better off than the ones who returned east. The year 1894 was worse than 1893. This year wit- nessed the greatest crop failure of any single season. As figures clearly show, a small increase or decrease in crops does not affect business, excepting sentimentally; but "a great failure, such as was witnessed in 1894, gives the country a shock from which it may take several years to recover." In 1893 considerable agitation swept over the East against western farm loans. Eastern people felt the panic of that year and resulting depression as much as the west- ern people. With the prevalent stringency the eastern peo- ple began to look into their affairs, and it was thought that too much money had been sent west at high interest rates and sunk in farm loans of doubtful, value. It is indisputable that western loans were over-done and were particularly of a reckless nature. In previous years many of these loans made in selected fertile sections of the West had brought splendid returns which led to the general impulse to pur- chase this class of securities. Eastern money poured west in such abundance that the nature of the lands was not properly investigated, which brought loss to the investors. The mania was finally restrained with the panic. Today, 318 HISTORY OF BUSINESS DEPRESSIONS however, a western farm mortgage is considered the best kind of security, and eastern investors are not able to secure enough of them. Agricultural products were scarcely affected in the de- pression of 1903, as this depression was confined largely to stock issues, many of which found a lower level and the companies remained solvent. Agriculture, on the other hand, had its own years of depression entirely aside from depres- sions in the stock market. In such years as 1903 the money stringency affected farm commodities only by preventing loans and retarding somewhat the movement of the crop. The farming interests were less affected than any other in the short panic of 1907. Farmers in the West and South boasted that they were laughing at the discomfiture of the larger cities, and at New York in particular. It is quite true that the local banks which were known to be strong had little trouble in meeting the needs of their depositors, and country districts went along feeling the affects to some extent, of course, but in no degree panicky. The healthy condition of agriculture helped largely in speeding up busi- ness after the depression of 1907. The previous year agri- cultural products yielded $7,400,000,000 against a combined yield of mining and manufacturing of $3,000,000,000. If figures count for anything, agriculture did not feel the depression of 1907 in the least. Starting with the year 1900, the total value of farm products was a little over five billion dollars. It gained steadily each year, reaching six billion in 1904 and in 1906, $6,755,000,000; in 1907, $7,488,000,000; and in 1908 in which the worst of the de- pression was felt, it was $7,848,000,000; jumping next year, in 1909, to $8,622,000,000. Against those figures, production of pig-iron, a recognized barometer, starting at 13,789,000 tons in 1900, rose stead- ily to 25,307,000 tons in 1906 ; 25,781,000 tons in 1907 ; and dropping to 15,936,000 tons in 1908. Again, take also the total bank clearings which rose to $157,000,000,000 in 1906; $154,000,000,000 in 1907, the year HISTORY OF BUSINESS DEPRESSIONS 319 of the panic; dropping to $126,000,000,000 in the year of depression following. Agriculture was affected peculiarly and in spots at the outbreak of the European War in 1914. For instance, cot- ton went to six cents, 50 per cent below normal for the period, caused by a sudden halt in the demand from Europe. The "Buy-a-Bale" movement swept the South. Corn was stationary, perishable products depressed. Wheat and live stock went up because of an apparently increasing demand from the warring countries. Agriculture always profits from war, because food is a prime necessity, ranking equal with ammunition. Govern- ments make frantic efforts to get large supplies of food stuffs because a nation at war knows that famine is even more to be feared than the enemy. They eagerly buy great quantities of food stuffs at high prices. This stimulates production in strictly neutral countries. When the conflict suddenly ends agriculture naturally is demoralized because of the large production, many times competing with govern- ments that have laid by great storehouses of food. The depression of 1920-21 was peculiar in many respects. Abundant crops usually spell good times. In former years the announcement that bumper crops were harvested meant an era of prosperity ahead, but at this time we found severe depression and great suffering in the midst of abundance. It was purely a reflection from war conditions. Describing the adverse conditions of agriculture which prolonged the depression, Dr. Henry C. Taylor, Chief of the Bureau of Markets, United States Department of Agri- culture, said: "In the city there is unemployment, in the country there are products without any market both amount to the same thing. On the contrary, they simply can't help themselves. The ground there, it had to be planted, but the market had fallen off tremendously. The reason is that there is no fair price exchange between farm products and city products. To put it simply, the farmer has to buy on the basis of a 20-cent-an-hour wage, whereas the city man buys on the basis of a $l-an-hour wage. This condition causes depression all the way down the line. I 320 HISTORY OF BUSINESS DEPRESSIONS understand that many farm machinery factories have closed down entirely, and the remainder are doing very little business." He pointed out that althought there was an abundance of farm production, that fact was no indication of prosper- ity for the farmer. In the 1920 depression the movement was started to ship the surplus farm products to Europe, taking in exchange bonds of those countries, particularly Germany, which country was badly in need of supplies. It was pointed out that we had better have German bonds than rotten products. On the other hand the movement was opposed particularly by financiers, because they thought it best to let Europe work out its own affairs rather than lean too much on us. In some quarters over-production was given as the cause of the depression, but that was hardly true because, while we did produce more than our own needs, we always do so. It was not over-production so much as lack of proper international finances. What we over-produced could easily have been used in Europe, half of which was starving, and in China, where another great famine prevailed. The farmers suffered during the inflation period previous to the depression from constant strikes of railroad men. In many instances their produce was lying at the side of the railroad track instead of being in market while the railroad men were striking. This caused great loss in many cases to the farmers, who grew bitter against the labor unions, and this accounts to a large extent for the poor showing made by a group of radical labor men who attempted to form an alliance with the farmers under the name of the Farmer- Labor Party and put a ticket in the field for the presidential election of 1920. In 1920 America received its first agricultural setback on account of the importation of foodstuffs. The farmers made a stronger demand than ever in history for protective duties on products of the farm. Importations of Canadian and Ar- gentine wheat helped in the decline from $2.50 to around HISTORY OF BUSINESS DEPRESSIONS 321 $1.10. When the first Congress under the Harding adminis- tration enacted the Emergency Tariff Law, placing a duty of 35 cents a bushel on wheat, the market responded and wheat went up about 20 cents a bushel. For the first time, also, the cotton planters demanded a protective tariff, re- versing their years of tradition. The lowered price of cot- ton, which of itself was largely instrumental in bringing the general depression, caused the planters to look carefully into the underlying conditions. They soon discovered that the country was flooded with imported vegetable oils and awoke to the fact that cotton-seed had become a very im- portant factor in the cotton industry. During the war they had received $55 a ton for cottonseed, which years ago had been thrown away. The price declined to $12 a ton because of large importations of soy bean oil, cocoanut oil, peanut oil, etc., from the Orient, which went directly into competi- tion with cottonseed oil. They figured that had they re- ceived as much as $30 a ton, which they felt would have been a fair price, it would have meant about $400,000,000 to the cotton planters of the South. Hides were another commodity terribly depressed. Farmers claimed it would not pay to skin a cow, because often they were offered a mere pittance of 50 cents for a calf skin and up to $1.50 for a cow hide. The story went the rounds of the press that an Iowa farmer spent a year raising a calf which brought him, including the hide and meat, the sum of $3.00. He then went into a store and had to put $9 more on top of that in order to buy a single pair of shoes. Live lambs on the hoof brought an average of $1 in Texas. The farmers demanded duties to keep the cheap hides out, which came in from Mexico and Argentine, and to keep the cheap wool out from Australia and South Africa. It was pointed out that we have natural facilities for growing all the wool we use. Great expanses of land were still to be had in our western states for wool growing so that we could give employment to men and keep our wealth at home, and yet, through the low tariff, we imported 60 per cent of all the wool we used. 322 HISTORY OF BUSINESS DEPRESSIONS In 1920 the nation lost five billion dollars by the decreased value of its farm production, and six billion dollars in 1921. These figures are not arrived at by deducting the loss from the unduly inflated prices of the war, but from reasonable prices as against costs at the time. In recent years American farmers to a large extent joined the capitalistic class by payment of their mortgages, and what financing they have to do can easily be taken care of by the country banks, which can rediscount with the Fed- eral Reserve Bank. Until 1913 the national banks were pro- hibiting from loaning on real estate or accepting farmers' commercial paper for over ninety days. These provisions kept the national banks from being a great aid to agricul- ture. By the Federal Reserve Act of that year national banks not situated in Federal Reserve cities were permitted to make loans based on improved and unencumbered farms situated within their respective districts to amounts not ex- ceeding 50 per cent of the farm's value, nor for a longer period than five years. It also permits Reserve banks to rediscount paper issued for farm purposes or for certain farm products. This system has no doubt helped to stabilize agriculture through depressed times. Farm Loan Banks have also been a help, but not up to expectations; in fact, at the time of the enactment of the act authorizing these banks, the sponsors boasted that it would be the means of forever ending depressed conditions in agriculture. In the recent depression farmers complained that the farm loan banks did little to alleviate conditions and that in a large measure it had failed in its purpose. These opinions proved premature, as the Farm Loan Board did, late in 1921, after a favorable court decision, render valuable aid to the farmers. One of the principal aims of the Farm Loan System was to relieve pressure in time of depression. In former times mortgages coming due in bad years would find the farmer unprepared. His local bank, itself affected by the strin- gency, could be of little help, and after one or two exten- HISTORY OF BUSINESS DEPRESSIONS 323 sions, perhaps, the mortgage would be foreclosed. Farmers may now secure long-time loans at low interest rates. A loan bank must have a paid-in capital of $750,000. In the event of the entire capital not being subscribed by indi- viduals, corporations or state governments, the Secretary of the Treasury is authorized to subscribe the balance. Only stockholders can be accepted as depositors in the Farm Loan Banks and the banks are prohibited from doing a general banking business. Loans shall be for not less than $100 nor more than $10,000. A desirable feature of the Farm Loan measure is an arrangement by which the principal is paid by installments in not less than five or more than forty years. After a mortgage has run for five years payments of $25 or multiples of $25 must be accepted on the mortgage. The farmers have always contended that speculation on the grain exchanges had a tendency to affect prices ad- versely, and have repeatedly sought laws to curb these prac- tices, many of which have been enacted. No doubt the farmers are right, particularly in their opposition to the practice of selling imaginary commodities or transactions in which no actual commodity is involved. Legitimate grain exchanges are probably necessary in order to create an or- ganized market. Otherwise, we would probably place our- selves in the position of following foreign grain exchange quotations and be at their mercy. If the present grain ex- changes were put out of business, it is only a question of time until Winnepeg or Montreal would take the place of Chicago. In each depression this agitation has been re- newed, and each time certain progress is made in eliminat- ing evils that have been practiced to the detriment of the farmers. The farmers began organizing during the depression of the late sixties, and each period of distress marked further organization among them. "The Patrons of Husbandry" was the first great farmers' organization, which later be- came known as the "Grange." In 1880 the "Farmers' Alli- ance" was formed. "The Farmers' Mutual Benefit Associa- 324 HISTORY OF BUSINESS DEPRESSIONS tion" was also organized in the eighties and claimed a membership of 150,000. During this period the farmers first began to affiliate with the labor organizations. Later the "Farmers' Union" was organized and became strong. The depression of 1920 found the "American Farm Bureau Federation," claiming a million and a quarter members, to be the strongest farmers' organization. Some of the other farm groups have a working amalgamation known as the "National Board of Farm Organizations." The organized farmers were able to secure a great deal of advantageous legislation in 1921, which helped greatly to relieve the dis- tress in agriculture in the late depression. CHAPTER XXXII THE TARIFF AND DEPRESSIONS The tariff question has entered into every depression the country has had, without exception. It is a fact of history that we have invariably turned to the tariff as a means of relief in time of stress. Lowered tariff rates preceded almost every depression, obviously because the country became flooded with foreign goods, which eventually forced our factories to curtail and throw men out of employment. It is quite true, on the other hand, that we have enjoyed prosperity under low tariff laws. Several periods may be cited to justify this statement, and yet it must be admitted that those periods led up to the time of distress when we finally paid the fiddler. It is true, also, that high tariff cannot be claimed to be a panacea for the evils of depres- sion, but it has always helped us out of depressions. In de- pressions we have great armies of unemployed, and it is only natural that the argument arises that we can put these unemployed to work if we make what we buy ourselves, where possible, instead of buying the product of foreign workmen. We are prone to forget the benefits of protection in our years of prosperity, the same as we forget to save for a rainy day. The argument against protection is that if we do not buy from foreign countries we cannot sell to foreign countries. That is going against the natural flow of commerce. What we can produce and manufacture in this country within a reasonable cost of production we should so do, and we will still have ample commerce to carry on with foreign nations in such commodities as we cannot produce here. For instance, we will always be importers of such widely used commodities as coffee, rubber, burlap, tea, cocoa, spices, hemp, tropical fruits, and a long list of other articles which cannot be produced in America. If we 326 HISTORY OF BUSINESS DEPRESSIONS take the natural course we will protect and produce what nature has given to us and trade with those countries who cannot produce what we have to sell and who do produce what we must buy. It is quite true that our international bankers made loans to foreign countries that they are "sweating blood" to get back, and would like for us to let the barriers down and buy the products of their creditors so that they can collect their money. We may be influenced to let down the barriers for the benefit of the international banker and foreign trader, whose citizenship is often under foreign registry, but if we do we will bring about depression of American industries just as sure as night follows day. We have reached a certain plane of living in this country and we cannot go back. We can never produce as cheaply here as abroad, because we have reached a high standard of living, and as long as that fact exists we must have a reason- able protective tariff. But all that is an old argument and has no place here outside of the point that when we are smitten and in trouble economically we turn to the tariff for help, the same as we appeal to the doctor in sickness and to the Lord in grief. During our first depression in 1785 American manufact- urers, who had built up their industries during the Revolu- tionary War, found their trade both at home and abroad greatly diminished; they soon realized that their foreign trade was subject to greater restrictions than had prevailed prior to and during the war, and they found as well that it was impossible to hold the domestic markets for the man- ufactured goods that competed with imported products. At the close of the war the duties were made, at first for revenue only, but later for the twofold purpose of providing protection to home industries and trade, and raising much needed public funds. No federal government had as yet been established, and conditions had developed in the United States that caused the New England and most of the Middle States to adopt the principle of moderate protection to their own industries, and to make tariff laws accordingly. The HISTORY OF BUSINESS DEPRESSIONS 327 Southern States, not having manufacturing industries that suffered from foreign competition, and being large pur- chasers of foreign goods, did not, with the possible excep- tion of Virginia, change their tariffs along protective lines. A group of citizens presented a petition to the General Assembly of the State of Pennsylvania November 30, 1785, calling their attention to the adverse effect of importations on the iron industry of that State, and asked that duties be levied on such iron, claiming that the local industry was entitled to public protection and encouragement. These tariff laws were enacted by individual states, the State of Pennsylvania acting first by passing an act "to encourage and protect the manufacturers of this State by laying addi- tional duties on certain manufactures which interfere with them." Following peace in Europe in 1815 prosperity continued for a while because of an abundance of money, but manu- facturers began almost immediately to feel the pinch. Many were embarassed and others entirely abandoned their prop- erties. Those that were left petitioned Congress for assist- ance, and the tariff of 1816 was granted. Forty memorials from as many infant industries sent petitions to Congress. The tariff of 1816 did not provide for high duties and was passed more as an emergency measure, anyhow, because it provided for gradual reduction in the duties, but the crisis of 1819 brought about a stronger public feeling in favor of more protection for the struggling industries. In 1818 the iron interests were suffering so severely that a duty of 75 cents per hundred pounds, or $15.00 per ton, was imposed. With this advance, many of the iron-works in the country revived. During this depression the farmers first turned strongly to the tariff. There was no foreign market for their sur- plus, so they resolved to create a domestic market. By build- ing up extensive manufacturing industries at home it would give rise to a non-agricultural population that would con- sume their products. The English Corn Laws were still 328 HISTORY OF BUSINESS DEPRESSIONS in force, enacted as a prohibition against American imports in years of normal production there. The distress that followed the crisis of 1819 "brought out a plentiful promotion of domestic industry, of petitions and memorials to Congress for higher duties." The move- ment undoubtedly had deep root in the feelings and con- victions of the people, and the powerful hold which protect- ive ideas then obtained influenced the policy of the nation long after the immediate effects of the crisis had ceased to be felt. The notorious "auctions," or dumping of foreign goods, which caused the depression of 1819 caused the demand to go up for higher protective duties. Great quan- tities of imported goods were taken on credit and disposed of at auction. Henry Clay at that time was a protectionist. He pointed out that the foreign manufacturers after crushing the domestic manufacturers had immediately raised the prices. Clay and other friends of protection, as described by Bolles, had advocated the doctrine that, "while the imposition of a higher duty for a time might enhance prices to the con- sumer, competition at home would reduce them ; so that, in they end, they would be lower than if our dependence were wholly or chiefly on a foreign market." It was the protection given by the tariff of 1824 that no doubt kept us from having a serious depression in 1825 and 1826, during the years of the great European depression. As it was, we experienced a minor depression in that year and manufacturers were affected even then by the great quantity of goods pushed into this country by the force of the depression in Europe. Again, during the short depression in 1828 manufacturers and farmers urged protective duties which had gradually sagged off in order to help domestic industries and relieve the business stringency that existed. A national confer- ence was held in Harrisburg, Pa., which urged the protec- tion of all industries in order to give aid to American business. HISTORY OF BUSINESS DEPRESSIONS 329 The compromise tariff of 1833 provided a gradual reduc- tion tor ten years and Moore says, "While these changes were taking place a great many manufacturers were crowded out. Some, of course, were not progessive, and since they were not up to the times they could not compete with those who were. By far the greater part of the failures up to 1837, however, were due to the fact that lessening rates under the compromise tariff allowed many European goods to come in at a price that drove out American capital." It was during the tariff agitation following the depression of 1837 that the argument was first advanced that Amer- ican labor should be protected from competition of less highly paid foreign labor. A description of conditions during the depression of 1837 is vividly drawn by a contemporary: "The price of wool fell in the domestic market, the surplus wool clip was sent to England, and many of the costly me- rino sheep were killed for mutton and tallow. The iron man- ufacturers of the seaboard put out their fires. All but five of the forty plants of Morris County, New Jersey, were pros- trated, the works were sold at auction, and the employees scattered. Some furnaces and forges were kept running by isolated farmers, but the eastern industry as a whole was ruined. The iron foundries of Pittsburg were adequately protected by the expense of transporting these bulky goods across the mountains, where fifty miles of land carriage cost as much as the ocean freight from Sweden ; but the bag- ging industry of Lexington, Ky., was unable to cope with English competition, for imported cotton bagging flooded the country at prices far below the normal cost of pro- duction." Another report says : "The cotton manufacturers of Mass- achusetts, Connecticut and Pennsylvania petitioned for pro- tection against the low-priced goods from England and India ; the paper manufacturers and printers protested against the competition of Holland and France; the sugar planters of Louisana, the cordage manufacturers of Massachusetts, the hat makers of New York, the gun-smiths of Lancaster, Pa., and the proprietors of the hemp factories of Lexington, Ky., were no less insistent on protection." 330 HISTORY OF BUSINESS DEPRESSIONS Some writers describe the depression of 1848 as resulting from the decreased duties under the bill of 1846. Also, ac- cording to Von Hoist, "it was argued at the time of the panic of 1857, and has been maintained since, that the crash was caused by the low tariff of 1846, which led to large exports of specie to make payments for foreign goods and drained the country of metallic money." Rhodes and other writers take the oposite view: "In this reasoning cause and effect are confused, and in part, at least, inverted. It was the ex- port of specie which increased the importations of merchan- dise and not the importations of merchandise which increased the export of specie." Dewey says : "The reason for the crisis of 1857 is still the subject of controversy; one alleged cause is the lowering of tariff duties in 1857; and some protectionists trace the collapse to the slow but poisonous workings of the tariff of 1846, the argument being that the reduction of duties stim- ulated importations, which had to be paid for in specie, and that this drain of specie inevitably caused the panic." It was hardly true, however, that we were drained of specie at that time. Gold from California furnished an abundance; but too much of it was sent outside instead of building up our own industries. Some of the leading statesmen of the time believed the low tariff was the principal cause leading to the panic as shown by remarks of Governor Pollock of Pennsylvania in his message to the Legislature the following year, in which he charged the troubles of the time principally to the tariff then in force. During the Civil War high tariff duties were laid on im- ports, the prime object being to raise money. Of course, this necessarily protected the manufacturers who, seeing opportunities for safer profits, invested in their business and built bigger factories, and for many years, when these tariff rates were left alone, our industries made great strides. Protection became a national policy, the Democrats lining up against it, and the Republicans taking the oppo- site view. The high protective tariff that had been enacted HISTORY OF BUSINESS DEPRESSIONS 331 during the Civil War was one of the main reasons why we did not have an industrial collapse immediately following the war. The tariff kept foreign goods from being dumped into this country with the coming of peace and helped to maintain a price level more in keeping with war conditions, so that deflation was gradual. In 1872 the tariff was revised downward, and while it cannot be said to be the direct cause of the crisis of 1873, it had a bearing on that catastrophe. That must be admitted, because in 1875 Congress put the duties back to where they had been before 1872 as a relief measure, which met with little opposition. The act of 1872 repealed the duties on tea and coffee, halved the duties on wool, and reduced the duties on imports generally. Friends of protection insisted upon the restoration of the tariff and the rates which were re- stored brought material prosperity to industry. The revision of 1882 was intended to produce greater rev- enue, but brought no benefit to the agricultural sections, which favored it, because it disorganized the domestic market. Some attribute the short depression of 1884 to the attempt of the Democratic administration to enact the Morrison bill providing for an average reduction of 20 per cent in the import duties with important additions to the free list. Britain was at this time in the throes of a tariff argu- ment. "The opinion expressed by the Royal Commission," says Curtiss, "in its report to Parliament in 1886, that the depression in trade and industries was due to no exceptional or temporary causes has been confirmed by the experience of recent years which have followed. That system of free trade, or free imports, which in 1885 was sapping the vitals of British industries, was the essential cause of the loss of profits, reduced wages, lack of employment and universal stagnation in business." Following the enactment of the McKinley bill in 1890 the business of the country was stimulated and the years 1891 and 1892 were fairly prosperous. Previous to the act of 332 HISTORY OF BUSINESS DEPRESSIONS 1890, in Harrison's administration, importations of foreign goods exceeded in value that of any previous year. The out- flow of gold, necessitated by the large trade balance thus created, caused severe money stringency and a panic among the banks of New York, Philadelphia and Boston which issued clearing house certificates. When the high tariff law went into effect the situation was almost immediately relieved. The Wilson Bill, enacted in 1894, did not please the people nor aid the Government in collecting revenues. The tariff was blamed for the prolonged depression during the Cleve- land administration. The election of 1896 returned the Republicans to power and a new protective measure was passed, which again started the hum of industry. The duty on sugar had always been a source of large revenue for the Treasury, and when all these were lowered and taken off of sugar entirely the Treasury was practic- ally empty following the 1893-94 depression. So depress- ing was the Wilson tariff on business that many Democrats favored higher duties. The panic of 1907 so disturbed business conditions that a new adjustment was desirable, and the Payne-Aldrich Bill was enacted, revising the tariff to needs existing at that time. The results of the tariff enactment of 1913 were just beginning to be felt when the European War broke out. Both sides made counter-claims; protectionists that busi- ness would have been ruined, and the free traders that time would have proven the benefits of the measure. However, after the war our markets were left exposed to the great surplus caused by stimulated production in all the non- warring countries. We well know how the silk industry of MacClesfield, Eng- land, decayed and pulled that once flourishing city down with it when silk manufactures were admitted to England free. We also know how Patterson, N. J., sprung from nothing to a great industrial center under protection of HISTORY OF BUSINESS DEPRESSIONS 333 silk manufactures. Again, we know that Liverpool once had a flourishing watch-making industry, which was ruined by free importation of watches into England, and the work- men who had spent a life-time in their trade clung on with constantly lowering wages until they died in poverty. And, on the other hand, we see in America a great and flourish- ing industry making American watches because they are protected from the cheap workmanship of Switzerland and Germany. A great many economists fail to see the connection be- tween protective tariff and prosperity. They claim that tariff benefits monopoly only and holds up the price to the consumer, but the practical business man knows that the opposite is the case. The trusts and monopolies invariably want low tariff. That is proven by the activities for low duties on the part of such so-called monopolies as the Sugar Trust, the Leather Trust, the Woolen Trust, etc. These corporations have found out in their business experience that the consumer will pay only to a certain amount for a commodity, and above that consumption falls off. There- fore, in order to make huge profits, the trust must devise means of buying cheaper and they, therefore, favor a low tariff so that they can be in a position to tell the American farmer that if he does not accept their price for his product they will import the product. It is well known that these so-called trusts have banking facilities, shipping connec- tions, etc., to control 90 per cent of all the imports in their particular line. How could the ordinary independent busi- ness man import these commodities with his obvious lack of facilities to do so? Political agitators have given the un- posted American public a wrong idea of this question. When it is admitted tint we need higher tariff both for revenue, which must be raised by some kind of taxation, and for protection of our labor as long as our people have a higher living standard than most foreign countries then the only argument against the protective policy is that it increases the cost of living, and that is true only in a very 334 HISTORY OF BUSINESS DEPRESSIONS slight degree, if at all. The cost of living is secondary, any- how, to steady work and good wages and prosperous busi- ness conditions. What do we gain by trying to cut the cost of living a little and destroy or cripple our industries? We are driving along the wrong line. If we want to cut the cost of living, we cannot do it by opening our markets to cheap labor and undermining our prosperity, but we can do it by enacting laws against the profiteer, by keeping too many middle men from handling our necessities of life, and by prohibiting speculation in such necessities. Every wise importer should realize that there is nothing to be gained by low duties on articles that can be produced here. He soon finds that he cannot do business if the buy- ing power of the American public is destroyed. How can he import if there is no demand and if our people are out of employment and our business depressed? It stands to reason that the importer will suffer along with the rest of us. He should realize that in most cases high duties are no insurmountable drawback if conditions are favorable through good times and a resulting demand. As has been said before, figures do not lie, and statistics indisputably show that there have been more failures among importers during periods of low tariff than of high tariff. Admittedly, we cannot sell to foreign countries unless we buy from them, but where nature has given us the material and con- ditions to build an industry we should protect that indus- try, and we can still buy from foreign countries unnum- bered commodities that nature has so ordained cannot be produced in this country. We can always sell to the for- eigner our food products, iron and steel, cotton, implements, automobiles, etc., and in return buy such articles as are al- ready enumerated. That is letting things take their natural course; it is going along the lines of least resistance. We cannot think of any policy other than a protective tariff as long as our American labor must compete with Hindu or Chinese labor, for instance, which works for seven or eight cents a day. People have an idea that distance itself is a HISTORY OF BUSINESS DEPRESSIONS 335 protection against foreign competition, but the rate across the Pacific Ocean is less than the freight rate from San Francisco to Denver. The rate on potatoes from Hastings, Fla., to New York is 85 cents per hundred, while from Denmark to New York it is 35 cents per hundred. Whatever may be said pro and con on the tariff question by advocates of protection and free trade, it is admitted on all sides that the constant tinkering has been the cause of unsettled business conditions during many periods. Who- ever may not be willing to agree that the different tariff laws have been the direct cause of depressions will have to admit that the lack of a definite and settled policy has many times retarded the progress of business. The act of 1897, which lasted for twelve year, until 1909, is the longest period in our history that we have let the tariff alone. The next rival to this period was that of 1846, when the tariff remained undisturbed for eleven years. Tom Reed said about these word: "Some day will come the brotherhood of man and we will all speak the same lan- guage; workmen around the world will be paid the same wage with the same money ; when there are no nations, but we are all one people. Then free trade will be both practical and glorious, but not before." We need nothing more than to look back to our periods of depression under low tariffs and find armies of poor and dependent workmen who became transformed into indus- trious and enterprising citizens under the stimulous of pro- tection to our domestic industries. CHAPTER XXXIII DEPRESSIONS AND FOREIGN TRADE Business revivals following depression have often been prompted by a keen foreign demand for our goods. Such was notably the case in 1848, in 1879, in 1885, in 1891, in 1897, and 1915. We now have a larger foreign trade than ever, most of which we are going to hold. That is shown by the fact that the Baldwin Locomotive Company recently received orders to the amount of $16,000,000 from the Ar- gentine National Railroads in competition with large foreign concerns. We could export a great deal more if the finances of foreign countries were stable and the exchange rate more favorable. However, economists rightly point out that we are capable of being prosperous by trading among our- selves. Foreign trade is not absolutely necessary to our national welfare. It averages only 5 per cent of our total business. In colonial days the exports consisted mainly of furs, cereals, provisions, lumber, whale oil, tobacco, indigo, and naval stores. The imports were manufactured goods and the necessities of life. At the close of the Seventeenth Century Great Britain had gained the commercial leadership of the world and her colonies in America achieved a commercial and maritime success even more notable than the triumphs of the mother country. Foreign trade of the original colonies was carried on by chartered companies that operated the ships to carry both colonists and commerce. The progress or decline of our foreign trade was largely affected by regulations promul- gated in the old country, such as bounties, preferential duties, drawbacks, etc. The most drastic of these was the Molasses Act of 1733, which depressed the important trade HISTORY OF BUSINESS DEPRESSIONS 337 that had started with the French, Dutch, Spanish and Danish colonies in the West Indies. At that time foreign trade was done entirely on the mercantile theory, the prin- ciples of which were that, "Trade must be so conducted that the money value of the commodities exported from the country exceeds the money cost of the goods imported, so that there is a 'favorable balance of trade,' with a steady flow of coin or bullion into the country." Immediately following the Revolution our foreign trade had to be reorganized. The greatest chaos and disaster existed after the war which made it doubly hard to make headway in the shipping industry. Great Britain had put into force the Navigation Act. British subjects were for- bidden to purchase American built ships, and as the ceceding territory was treated as thirteen separate and distinct states, American vessels were excluded from British ports unless their cargo consisted of the products of the particular state where her owners resided. Under these regulations American merchants forfeited a trade worth $3,500,000 a year. America had a big trade with Jamaica and with the Bahamas which was now ruined. Separation from England brought serious depression in such products as indigo, naval stores and hemp, most of which were exported. Moreover, the prohibitory duties of the Corn Law were imposed upon all agricultural products, bringing like depression to all agricultural industries. Attempts to negotiate more favor- able commercial treaties with Europe so as to relieve the shipping depression failed because, as Washington said, "We are one nation today, thirteen tomorrow; who will treat with us on these terms?" For twenty years following the Revolution American traders had to take the risk of being captured by privateers from the Barbary States or by warships from fighting Euro- pean countries, but in spite of severe depressions coming at intervals during this period by the year 1815 the United States held the position in the world's trade second only to Great Britain. 338 HISTORY OF BUSINESS DEPRESSIONS When the European wars were raging American shipping was prosperous. In 1802 and 1803, during a brief period of peace, it suffered an immediate decline ; when the wars were renewed prosperity returned for a time, until after 1807, when Napoleon Bonaparte, refusing to recognize that there were any neutrals, inflicted his "continental policy" upon the commercial world, and England enforced her Orders in Council with men-of-war. Had the peace proved perma- nent there would have been, without doubt, a further de- cline in American commerce, as the European countries resumed . their former commercial relations. With the reopening of war, however, the Americans enjoyed the ad- vantages of their previous position; the exports of 1806 and 1807 exceeded a hundred millions in value, and marked a height which exports did not again reach for nearly twenty years. TOTAL FOREIGN TRADE OF THE Domestic Year Exports 1790 $19,666,000 1791 18,500,000 1792 _ 19,000,000 1793 24,000,000 1794 26,500,000 1795 39,500,000 1796 40,764,000 1797. 29,850,000 1798 28,527,000 1799 33,142,000 1800 31,841,000 1801 47,473,000 1802 36,708,000 1803 42,206,000 1804 41,467,000 1805 42,387,000 1806 41,253,000 1807 48,700,000 1808 9,433,000 1809 31,406,000 1810 42,366,000 1811 45,294,000 1812 30,032,000 1813 25,008,000 1814 6,782,000 1815 45,974,000 1816 64,782,000 1817 68,313,000 UNITED STATES Total Imports $ 23,000,000 29,200,000 31,500,000 31,100,000 34,600,000 69,756,000 81,436,000 75,379,000 68,552,000 79,069,000 91,253,000 111,364,000 76,333,000 64,666,000 85,000,000 120,600,000 129,410,000 138,500,000 56,990,000 59,400,000 85,400,000 53,400,000 77,030,000 22,005,000 12,965,000 113,041,000 147,103,000 99,250,000 HISTORY OF BUSINESS DEPRESSIONS 339 Imports dropped from a value of $121,750,000 in 1818 to $87,125,000 in the following year, and exports of domes- tic products fell from $73,854,000 to $50,977,000 during the trade year. VALUE OF EXPORTS AND IMPORTS OF THE UNITED STATES, 1819 TO 1830 Exports, domes- Year tic products Imports 1819 $50,977,000 $87,125,000 1822 49,874,000 83,242,000 1825 66,945,000 96,340,000 1827 58,922,000 88,509,000 1830 59,462,000 70,877,000 An idea of the effect of the depression of 1809 on foreign trade may be gained from the following story told by an English trader who visited New York during this ruinous regime : "The port, indeed, was full of shipping; but they were dismantled and laid up. Their decks were cleared, their hatches fastened down, and scarcely a sailor was to be found on board. Not a box, bale, cask, barrel, or package was to be seen upon the wharves. Many of the counting houses were shut up, or advertised to be let; and the few solitary merchants, clerks, porters, and laborers that were to be seen were walking about with their hands in their pockets. Instead of sixty or a hundred carts that used to stand in the street for hire, scarcely a dozen appeared, and they were unemployed ; a few coasting sloops, and schooners, which were clearing out for some of the ports in the United States, were all that remained of that immense business which was carried on a few months before. . . . The streets near the waterside were almost deserted, the grass had be- gun to grow upon the wharves, and the minds of the people were tortured by the vague and idle rumors that were set afloat upon the arrival of every letter from England or from the seat of government." When the embargo gave way our foreign trade quickly recovered, shippers taking advantage of their opportunity, and in one year we had recovered 91.5 per cent of our trade. We surpassed in ship building in the early days because 340 HISTORY OF BUSINESS DEPRESSIONS of the abundance of oak and hard pine, and the best ship- wrights in the world. We reached the height of our prestige in 1810. Following that came a long period of normalcy until 1846, when we passed the previous high water mark, and the next fifteen years were very prosperous for Ameri- can shipyards. At this time the construction of a schooner of 500 tons cost $37,500 in the United States and $42,000 in England. Today the reverse obtains and probably with a greater difference. The advance which began in 1831 and ended in 1837 car- ried the foreign trade to a higher level than it had reached during the abnormal rise of the years 1815 to 1818. The exports of domestic merchandise rose from $59,462,000 in 1830 to nearly $107,000,000 in 1836, or to a point over $33,000,000 in excess of the previous maximum of the year 1818. VALUE OF EXPORTS AND IMPORTS OF THE UNITED STATES, 1830 TO 1836 Domestic Year Exports Imports 1830 $ 59,462,000 $ 70,877,000 1831 61,277,000 103,191,000 1832 63,137,000 101,029,000 1833 70,317,000 108,118,000 1834 81,034,000 126,521,000 1835 101,189,000 149,896,000 1836 106,917,000 189,980,000 According to figures by Conant, in 1837, "the excessiye purchases of foreign goods, which did not have to be paid for in either merchandise or bullion, is shown by the fact that the imports from Europe increased from $62,893,883 for the year ending September 30, 1833, to $127,511,020 in 1836, and even the imports from other countries increased from $38,154,060 to $49,068,134. This great increase in consumption was offset only partially by the increase in exports of American merchandise to Europe, which rose from $56,556,837 in 1833 to $96,413,449 in 1836, while other exports slightly fell off. The reaction was striking after the breaking out of the crisis. Imports fell during the year end- ing September 30, 1838, to $62,017,575, while exports from the United States to Europe fell only to $79,849,768." HISTORY OF BUSINESS DEPRESSIONS 341 The panic of 1837 was not the result of abnormal foreign trade, as the panic of 1818-19 to a large extent had been, but when the business reaction came a setback in imports and exports occurred. In one year the value of the imports shrank nearly $49,000,000 and that of the exports over $11,000,000. VALUE OF EXPORTS AND IMPORTS OF THE UNITED STATES, 1836 TO 1846 Domestic Year Exports Imports 1836 $106,917,000 $189,980,000 1837 95,564,000 140,989,000 1840 113,896,000 107,142,000 1845 99,300,000 117,255,000 1846 102,142,000 121,692,000 The value of the exports of merchandise from the United States for the fiscal year 1847 was $156,741,598, an in- crease of more than 40 per cent over any preceding year; the excess of exports over imports was $34,317,249, a bal- ance never again attained until 1876. The depression of 1857 gave our shipping a serious set- back. In 1845 it had become apparent that we would lose our foreign trade carried in American bottoms unless we- quickly turned from the sailing craft to the new steam ves- sel. Congress came to the aid of shipping with a subsidy. The Pacific Mail plying around Cape Horn to California was subsidized for $250,000 a year and the Collins line from New York to Liverpool for $858,000. Other important lines received large subsidies. With the reaction of this year and sudden reduction of revenue, Congress proceeded to limit all subsidies to the amount of sea and land postage on the mails actually carried. Our shipping from that time gradu- ally fell until in a few decades the American flag was prac- tically off the seas. The decline of American shipping was marked by the depression of 1857. Our foreign trade suffered severely during the Civil War. While the South did not win the war, she put the nation out 342 HISTORY OF BUSINESS DEPRESSIONS of the shipping business until its revival in the recent world conflict. We came out of the Civil War with about a million tons of shipping less than we had at the beginning, and by 1900, over a period of forty years, we had not increased our tonnage. The increase of our foreign trade helped to bridge over the short depression of 1878-79. Our large exports as a result of crop failure in Europe in 1891 quickly pulled us out of the depression of 1890. In the six months ending June 30, 1893, the balance of trade against the United States was $68,- 800,000. In the depression of 1893 on up to and including 1914 our own shipping was little affected because of our lack of ton- nage. In previous years, from the time of the founding of the Republic until after the panic of 1873, our shipping had been an important factor in all depressions, because we were then one of the leading, and sometimes the leading, shippers and carriers of the world. Our foreign trade expanded rapidly from the good times that started with the McKinley administration up to the depression of 1907. Exports of merchandise in the fiscal year 1896 amounted to $882,606,938, and rose by 1906 to $1,743,864,500. Imports of merchandise in 1896 were $779,724,674, and in 1906 they rose to $1,226,562,466. In 1907 came the willingness on the part of American business to sacrifice goods for money, and in a few months our exports exceeded our imports two to one. The accom- panying table will show how the quick expansion of exports brought gold into the United States : *FOREIGN TRADE MOVEMENT, AUGUST 1 TO DECEMBER 31, 1907 Imports of Exports of Excess of Month Merchandise Merchandise Exports August $125,806,043 $127,270,447 $ 1,464,404 September ___ 106,365,180 135,318,342 28,953,162 October 111,912,621 180,256,085 68,343,464 November 110,942,916 204,474,217 93,531,301 December 92,288,771 207,179,436 114,890,665 "Table by Conant. HISTORY OF BUSINESS DEPRESSIONS 343 In Europe there is a great deal of agitation at this time urging the cancellation of debts among nations. Some claim it will help our foreign trade if we cancel the foreign obliga- tions owing us. One British writer claims that Great Britain will not demand cancellation of the debt, but that America will be forced to take the step voluntarily in order to retain her foreign trade. It is a certainty that no American admin- istration that even proposed such procedure could survive and it is a peculiarity that as long as two-thirds of the world was in debt to Great Britain no proposal of that kind came from her. Yet the instant she became a debtor nation she starts a cry for cancellation. The world in time will pay its debts. This is not the first time we have heard the cry of repudiation. At different periods since the beginning of modern times word has gone out that the world was bank- rupt, and yet, with few exceptions, in the case of smaller states, every nation has paid its debts. During the distress in Great Britain in 1816 Lord Broug- ham said in urging exports to this country that, "Ultimately the Americans will pay, which the exhausted state of the continent renders very unlikely." Yet the continent paid. In 1920 we again had a merchant marine, rating probably third, and the shipping situation was an important factor in the depression. Two-thirds of our steel ships and all the wooden ships we had built during the emergency were laid up and thousands of seamen that had been trained to operate them were out of employment. While world shipping was adversely affected, yet there was considerable cargo, but foreign shipping took it away from us because of lower operating costs and consequently lower rates. It was early foreseen that if we could carry American products in Ameri- can ships event at a loss, it would, in the final analysis, be a gain, because it would give employment to our seamen and operators and help us out of the depression. The balance of trade between nations is sometimes mis- understood. In the long run the exports of merchandise from any country must equal its imports. Any difference 344 HISTORY OF BUSINESS DEPRESSIONS or so-called balance in any year must be offset by invisible items, such as securities and credit extensions between banks. We like to boast of greater exports than imports, showing the balance of trade in our favor. An influx of gold must naturally follow to meet these trade balances. We were very proud when, in the eighties, we began exporting more than we imported for the first time in our history, and again during the war period when we passed from debtor to creditor nation. Yet, in the early days, when we imported far more than we exported, we prospered tremendously be- cause of the fact that the money made by European nations from their exports to us was handled by their agents, de- posited on this side and loaned out to us for the development of our new country. It was this capital, that we did not have ourselves, that largely helped to develop America. Up until the world war great shipments of American securi- ties were held in Europe, most of which drifted back to our hands through the stress of war necessities. Taking the second phase of it the imports of gold necessary to pay the trade balance in our favor we cannot help but reflect on the Biblical quotation, "What profiteth it a man if he gain the whole world and lose his own soul?" The trade balance during the war period was so enormously in our favor and the influx of gold so tremendous that it was a severe handi- cap to us. It was one of the primary causes of the depres- sion. We had so much gold that the exchange rate worked decidedly against us. Dollars became so high that other nations could not afford to buy them in order to pay us in our own money, which we required. In 1920 had we been good gamblers, and luck proved to be with us, we could have made much money by selling our surplus to European coun- tries that needed it, taking their money, backed by bonds, and waiting for it to rise to normal value. Some advocated this procedure on the grounds that we had better havts European money than rotten products. In one case this was done very advantageously in the case of the rice crop. In 1920 we had produced the largest crop ever grown. The HISTORY OF BUSINESS DEPRESSIONS 345 price was badly depressed and the producers suffered great loss. The Louisiana State Rice Milling Company, under the direction of Mr. Frank Godchaux, arranged to export large quantities to Europe, his company taking their securi- ties in payment. Thus the surplus rice was exported and the balance left on hand brought very satisfactory prices, so that in a few months the trade was again in favorable condition. Thus it can be seen that there are many phases to trade balances between nations, and it is a fact that one nation cannot permanently profit at the expense of another. Temporary advantage may be gained, but a depression is bound to follow until the other nation catches up. It was thought by traders in the old days that when we bought from foreign countries we sent just so much money out of the country, and that when we exported we enriched our- selves and pauperized the purchasing country. That has proven to be a fallacy because, although we might export a great deal to one certain country from whom we buy but little in return, yet that same country may, in turn, have large exports to another country in a different part of the world from Whom she also in turn buys but little, and so goes the cycle of trade until it evens itself up, as it is neces- sary to do. Another phase affecting America's trade balances is the money spent by our tourists. For a period before the war our trade balance in exports as against imports showed largely in our favor, yet an important item was ordinarily overlooked, and that was the money taken abroad and spent by our tourists. For a period of years our tourists spent abroad sufficient to make up the difference shown by the trade balance in our favor, so that after all the influx of wealth was negligible. In fact, during the depression of 1907 terrific cries went up that the money stringency was largely due to the enormous amounts of American money being spent in Europe by wealthy tourists. Since our pros- perity, starting in 1897, this complaint has been made in every period of financial crisis or stringency. A further 346 HISTORY OF BUSINESS DEPRESSIONS offset in previous years against our favorable trade balance, and which was not shown in the figures was the payments to foreign nations for carrying our products. Had these payments entered into the figures in many cases a different tale would have been told. We never had a real trade bal- ance in every way until the last years of the war and the prosperity immediately following the war, when we car- ried cargo in our own bottoms, paying ourselves for the services, when we sent little or no money abroad in interest payments on investments, and when the tourists' trade was stopped and little money went for that purpose. Then, really for the first time in history, did we have an actual trade balance, and that was offset by the loans we made to Europe which she still owes us, including the interest. International traders set up the argument in every period of depression that we must increase our foreign trade in order to relieve the stringent conditions. They also are becoming more insistent that we must import in order to export. In the years of depressions our imports have in- variably fallen because of our lack of buying power; for instance, in 1858 following the panic of the year previous, our exports for the first time exceeded the imports, unques- tionably on account of our lack of buying power. This hap- pened again in 1874, following the year of the panic pre- ceding, and in 1893 caused by the panic of that year. In giving these figures it will be remembered that during the entire period we were a debtor nation. In other words, we normally imported more than we exported. In recent years, however, we have become a creditor nation, exporting to a larger extent than importing. No depressions have been brought about by the falling off of our foreign trade in recent years, although it was a contributing factor to the depression of 1820. Japan's panic of 1920 was brought about principally by the stoppage of foreign demand for her commodities. That panic which smashed prices of Oriental goods caused many failures and great distress among American importers on the Pacific Coast and in New HISTORY OF BUSINESS DEPRESSIONS 347 York, and was the forerunner of our industrial depres- sion which followed. In the depression of 1857 imports fell off $85,087,688 in twelve months. In 1861 they fell off $100,000,000, although this was an abnormal condition because of the outbreak of the Civil War. In the 1873 depression they declined $75,- 000,000 in twelve months; the 1884 depression recorded a $90,000,000 decline ; in the 1893 depression, when our com- merce began to assume larger proportions, imports declined $212,000,000 in one year. In the 1907 depression they fell off $240,000,000 in the following year, 1908. In 1915, the year following the outbreak of the World War, they drop- ped $219,000,000, and in 1921, while full statistics are not yet available, it is common knowledge that there was a tremendous falling off. All of this goes to show that in times when there is a lack of buying power in this country the lot of the importer is hard, so there is nothing to gain for him, in the long run, by a desire to import foreign goods to such an extent that the prosperity of our people is undermined. CHAPTER XXXIV THE RAILROADS IN TIMES OF DEPRESSION The history of American railroads has been closely en- twined with the history of depressions. The panic of 1837 was helped in the making by building railroads beyond the needs of the country and taking capital away from enter- prises which were necessary to support railroad develop- ment. The modern industrial corporation came into exist- ence about the time railroad building started in the year 1830. As we saw our ocean shipping decline for various reasons, the money was taken from that industry and put into the development of the West, in which the railroads were the most important factors. The London Financial Times some years ago said that were it not for the railroads "many of the richest agricul- tural states in the Union might still have been in the pos- session of the buffalo and the red Indian." We have now had one hundred years of railroad history, which is divided into three periods ; the first, the pioneer or experimental stage, the years from 1820 to 1850; the sec- ond period marked the development of the trunk lines, in the years from 1850 to 1890, and the third a period of con- solidation into vast systems, from 1890 to the present time. Railroad building started as a means of solving transporta- tion problems, and in the early years they were given State aid to a large extent. The year 1837, however, with the panic that came at the time, brought an end to state aid, and the works that had been created with such anticipation on the part of the states were sold by them to private cor- porations. By that year the different states had appropriated $6,618,- 868 for helping to build railroads, although at the same time $42,871,084 had been granted for building canals. HISTORY OF BUSINESS DEPRESSIONS 349 These public improvements to an excessive extent, so it was judged, helped to bring along the panic of that year. Thereafter the states withdrew more and more from active participation in railroad construction and it became in this country a distinctly private enterprise, unlike most of the European countries where there are still many state-owned railroads. After that year both state and national govern- ments confined their encouragement of railroad construc- tion to land-grants and bonuses in "the form of bond issues. In these subsidies to the railways Congress made in all seventy-nine grants, amounting to nearly 200,000,000 acres of public domain. This aggregate was subsequently re- duced to 158,286,627 acres, of which more than 108,000,000 were actually patented. The intention was to occupy and possess the new lands in advance of settlement and secure the strategic places that would mean control and power over shipments and markets later on. The effect of this premature and, in many in- stances, needless construction was shown in 1873, as was also the case in 1893, by the wrecking of many lines and the plunging of others into receiverships. Such speculation had resulted as a consequence of the land subsidies and of the promotion that went on that each com- munity wanted a railroad at any price. "The railway mile- age built in the United States in 1856 was 3,642 miles, and the construction for the nine years ending with 1857 was 21,000 miles. This construction, forming seven-ninths of the entire mileage of the country, had absorbed $700,000,- 000, largely in foreign capital." Commodore Vanderbilt, who founded the great Vander- bilt fortune, made much money out of railroads, and was mixed up in several of our early panics. As wise and far- seeing a man as he was it is a peculiar coincidence that about the time of the 1837 depression, when the few railstocks could be bought for almost nothing, the Commodore re- marked : "I'm a steamboat man, a competitor of these steam contrivances that you tell us will run on dry land. Go ahead. 350 HISTORY OF BUSINESS DEPRESSIONS I wish you well, but I never shall have anything to do with 'em." In 1857 important railroads reaching into undeveloped sections of the West went into bankruptcy, among them the Illinois Central, the New York and Erie, and the Michigan Central. The railroad statistics for the period preceding 1857 are interesting: English Cost in Cost per Miles Dollars Mile "United States (1856) ___ 24,195 846,825,000 $ 35,000 Great Britain (1855) ___ 8,297 1,487,916,420 179,000 France (1856) 4,038 616,118,995 152,000 Germany (1855) ___ 3,213 228,000,000 71,000 Prussia (1855) ___ 1,290 145,000,000 63,000 Belgium (1855) 1,005 98,500,000 30,000 Can we believe our eyes today? It is little wonder that our people went wild. What man could have withstood temptation under such alluring conditions? Nearly three- fourths of the railroads defaulted in their interest and other payments and went into the hands of receivers. Some of the best railroad stocks declined to three to five dollars a share, including Michigan Southern and Harlem. A thousand shares of the Illinois Central stock, sold to wind up an estate, appraised at $800,000 before the panic, went at auction for $50,000. The New York Herald that year blamed the banks for locking up $15,000,000 in rail- road securities which were not worth forty cents on the dollar. In 1860 only three of our present great systems were in existence and prominent, namely, New York Central, Illinois Central, and Delaware, Lackawanna & Western. In times of money stringency, crop failures, and business depressions, rail bonds became a terrible burden to the people. In the late sixties the question of transportation rates, elevator charges, etc., began to be agitated and out of this came an organization known as the "Patrons of Hus- *Figures by Hyndman. HISTORY OF BUSINESS DEPRESSIONS 351 bandry," which in those early days undertook to build and control elevators and other commercial enterprises where it was claimed abuses had crept in from the operation of the railroads. The railroads were run recklessly, with a short- sighted point of view, and a great many favors were given to shippers as compared with the farmers and producers. Jay Gould testified in 1872 that "the Erie Railroad had four states to look after, and it switched its politics to cir- cumstances. In 1868 more than one million dollars was spent by the Erie Railroad for 'extra and legal services,' to control elections and to influence legislation." In 1873 railroads were again involved and the principal causes of the panic was over-speculation in railroad securi- ties. New York banks previous to that time had made un- warrantable advances to the railroads and were forced to close their doors. The New Haven and Willimantic Rail- road pulled down the Brooklyn Trust Company; the Mis- souri, Kansas & Texas took with it the Mercantile Security Company. The Canada Southern bankrupted Kenyon, Cox & Co. The Vanderbilt roads involved the firm of Fisk & Hatch, and the Northern Pacific bankrupted Jay Cooke & Co., the failure of the latter being the general signal for collapse. By the close of 1872 it had dawned upon investors that railway construction was being overdone. Lowering prices threatened a curtailment of agricultural production and diminished the prospect of freight receipts. The high cost of operation, at prices and wages then prevailing, com- bined with unsettled conditions in Europe, checked the flow of capital westward. Funds could not be obtained for the fulfillment of contracts, and construction was brought to an abrupt stop. By 1873 a fairly complete network of railroads had been built from the Atlantic Seaboard to the Missouri River, with some extensions beyond, one of which reached the Pacific Ocean, all built by capital drawn from Europe or the East- ern States, by the offer of exceptional rates of interest. In some cases the promoters had invested nothing themselves 352 HISTORY OF BUSINESS DEPRESSIONS beyond the incidental expenses of organizing a company. All these roads were mortgaged for their full cost. In this depression the new roads were affected by a panic that swept Europe and were unable to market their securities in those financial centers. There was universal suspension of work on new roads. It threw tens of thousands of men out of work. During the three years following the crisis of 1873 railroads defaulted bonds in the amount of $789,367,655. In 1872 a series of widespread strikes occurred among the railroads, but the strikers were finally beaten by the depres- sion which came on and their union was disorganized and broken up. Even the better established roads in the most populous sections of the country suffered reverses in this depression, particularly because of competition. For instance, at that time five trunk line railroads were competing for the trade from Chicago to New York. These were the Grand Trunk, New York Central, Erie, Pennsylvania and the Baltimore and Ohio. These roads had not received the large land grants that had been given to new roads to the Pacific Coast, and it was up to them to finance themselves from their ac- tual carrying trade. This was the cause of too much compe- tition for the traffic in those times so that some of these roads naturally could not weather the financial crisis. The crisis of 1884 was brought about by the too rapid and speculative railroad building in the years immediately pre- ceding. Railroads were forced to curtail construction and practice the most rigid economy in management. Coman attributes the crisis of 1884 to over-investment in railroads. "The mileage built in 1882 and 1883 (18,314) exceeded the construction of 1870 and 1871 by 5,000 miles. In 1884 and 1885 eighty-one railway corporations, holding 19,000 miles of track, were placed under receivership, and thirty-seven smaller railroad properties were sold under foreclosure. Owing to the waging of rate wars between competing rail- road lines during the two years, 1884-85, and the diminu- tion in the volume of traffic because of the depression in HISTORY OF BUSINESS DEPRESSIONS 353 O g 2 B" CTQ \ 5t si iflo (I 4