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to the credit piled up on the reserves. Unless the downward tendency be reversed, according to all experience, the result will be disastrous. It is in order, then, to see what the prospect is of relieving the situation by large additions of cash.

II. The annual gold production of the world has increased from $202,000,000, in 1896, to over $400,000,000, in 1906, and the outlook is for a still greater production next year. But, sooner or later, the rising tide of prices is certain to cut off the less profitable production and lead to a restriction of output.

12. We turn, as a last source of temporary relief, to the other commercial nations in the hope that from them the United States may draw additional supplies of gold. The principal foreign banks. of the world are estimated to hold about $4,000,000,000 specie. including both gold and silver. The whole commercial world seems deluged with prosperity. No nation and no bank has too much gold. On the contrary, every one is reaching eagerly for more on which to base an enlarged issue of credit. American banks will seek in vain in foreign markets for sufficient additions to their cash reserves.

The experience of the last hundred years indicates that the forces now at work are driving us straight toward a crisis, and I mean by crisis not a Wall Street flurry, such as we have lately seen, which may come at any time from purely local influences, but a general, temporary break-down of industry. With credit everywhere expanded to the danger point, we are in a position from which only two means of escape are possible. One is a large and rapid increase in our gold reserves, which is out of the question. The other is a progressive restriction of credit, necessarily gathering momentum as it proceeds, which is another name for crisis. Just when or how the wave of credit withdrawals will start no one can tell. A big failure or a rash bit of legislation, or any one of a hundred incidents, which under normal conditions would do little harm, might set it going.

So long as the decisive incident does not occur,-and, of course, it may not come very soon, possibly not for two or three years.— prices keep on rising and credit keeps piling up. For that reason the longer it is delayed the harder jolt it is likely to give.

104. Industrial Conditions Preceding the Panic"

It did not take a prophet to foretell that, following the three months' decline in the price of stocks which culminated in the severe declines in March, a business depression would follow. The lessons

'Adapted from an editorial in Moody's Magazine, IV, 103–109. Copyright (July, 1907).

of history make it certain that industrial contraction begins soon after a great decline in stock prices occurs. A few long-headed men last fall saw plenty of trouble ahead and began to prepare for it by unloading stock at high prices. Not, however, until the middle of March were there plenty of bears in evidence. Although financial experts worked overtime in March to convince us that the decline was temporary, due to mischievous legislation, close observers noticed within a few weeks after the collapse that the demand for luxuries, like diamonds, automobiles, and pianos, began to decline. Soon the railroads began to curtail improvements; then manufacturers of electric supplies began to lay men off; then we read that the department stores of New York had discharged 2,000 employees, and expected to discharge 4,000 more; next we heard that manufacturers in various lines were curtailing output, and that many big wholesale merchants had instructed their buyers in Europe to curtail purchases. A little later there appeared statistics of many kinds that indicate a shrinkage in business. Bank clearings, railroad earnings, smaller volume of business, and unsuccessful strikes are some of the evidences of the depression already upon us.

Because of the destruction of old capital and new issues of securities calling for more and more new capital as well as the unparalleled construction of buildings and permanent improvements, turning circulating into fixed capital, the banking situation is now about the worst ever known. Never were liabilities so great and cash reserves lower in proportion to liabilities. Gradually conditions appear to be growing worse instead of better. The forced liquidation in bonds and stocks had not this year been sufficient to improve the credit situation.

The depreciation in shares is due to the rise in the price of capital. The development of industrial enterprise has recently been too rapid for available capital. The one great cause is the lack of capital to carry on the world's business on the scale now planned. The industrial and financial world has overreached itself. Although new capital is being created faster than ever before, the supply is not equal to the demand, and the business of the world must slacken for awhile.

That the cash reserves of the world are low, as compared with banking liabilities, is beyond question. In this country the surplus reserve, as shown by the New York bank statement of July 6, was $856,250. This is the first time since 1893 that the surplus reserve has fallen below $5,000,000, for the first week in July. Even more significant is the fact that loans have been increasing steadily in proportion to deposits, and that they now exceed deposits by 3.4%.

In 1905 deposits exceeded loans by about 4%. These figures indicate an unstable equilibrium in the business world.

If these statistics are a fair index, the business world is today insolvent, under panic conditions. It owes more than it can pay, except by further borrowing from the banks. All that is necessary. to precipitate a panic under such conditions is for the solvent portion of the depositors to become frightened and to withdraw their bank deposits. The banks will then be compelled to call loans and to demand payment from the insolvent portion. Since only 5.6% of the resources of the banks are in cash, it is probable that many national banks are in a weak condition. Possibly the brakes will yet be applied in time to prevent serious trouble and to enable us to pass through the coming financial ordeal with a very slight reaction.

105. The Arrested Crisis of 190710

BY EDWIN R. A. SELIGMAN

The crisis of 1907 is on the whole not comparable in magnitude to that of 1857 or that of 1873. The reasons for this may be classified under five heads.

In the first place, the very magnitude of the country's resources has been a favorable factor. The unparalleled prosperity of the last decade has made possible the accumulation of vast reserves, not only by great corporations, but also by average business men. This reserve has acted as a buffer to the shock of reaction and has softened the impact through a speedy restoration of confidence in the excellence of the country's assets and in the real solvency of business.

Secondly, the crops have been large and valuable. It must be remembered that, notwithstanding all recent developments, this country is still primarily agricultural and that upon our great crops depends in large measure the effective demand which sets and keeps in motion the wheels of business activity. By a fortunate coincidence the crisis was attended by a phenomenon which in ordinary times would have spelled prosperity, and which helped to bring back normal conditions.

In the third place, the overcapitalization of values was somewhat less conspicuous than hitherto in transportation. Some former crises

10

1o Adapted from "The Crisis of 1907 in the Light of History," in The Currency Problem and the Financial Situation, xx-xxv. Copyright by the Columbia University Press (1908).

have been brought on primarily by the speculative building of railroads. During the past five years the annual increment of construction has been only four or five thousand miles. The consequence has been that with the rapid upbuilding of the country the railways have grown up to their capitalization. For some time there has been scarcely any overcapitalization. A striking proof of the absence of any real discrepancy between normal values and capitalization of earning capacity is afforded by the congestion of traffic a year or two ago.

Fourthly, the crisis was preceded by a period of gradual liquidation. General prices of commodities, with a few notable exceptions, like that of copper, were indeed high until well-nigh the outbreak of the panic. But the price of securities had for some time undergone a marked shrinkage. This was caused chiefly by the rise in the rate of interest. In fact the one phenomenon is really the other; for where earnings remain unchanged, the capitalization of the earnings depends upon the rate of interest.

The rise in the interest rate was due in part to the increase in the gold output; for an increase in the supply of standard money raises not only the price level of all commodities, but the price of the use of capital, which we call the general rate of interest. In part the increase was due to the relatively smaller amount of capital available for investment. The fund of free capital has been diminishing for the last few years. Hundreds of millions were destroyed by the Boer and Japanese wars; hundreds of millions more disappeared through the destruction of San Francisco and Valparaiso; and countless millions in addition have been utilized to finance the more or less dubious schemes which have sprung up in all countries during the years of prosperity. Despite the lack of general overcapitalization, the discounting of the future was not ample, and the capital was invested more rapidly than the immediate returns would warrant. The replacement fund, in other words, was neither quite large enough nor quite active enough; and with the gradual exhaustion of the available free capital, interest rates necessarily rose and security values as a consequence fell.

The period of liquidation was thus a fortunate event. By checking the movement of exaltation, and preventing the level of prices from being so extreme, it kept the reaction from being so great. Where the crest of the wave is lower, the shock of the break is less. Had the ascent of prices and values gone on unhindered, the convulsion would have been far more severe.

The fifth and final cause of the lesser magnitude of the crisis is the development of trusts. As against the undoubted perils associated with the newer type of business organization, we must put

at least one countervailing advantage. The modern trust is likely to exert an undeniably steadying influence on prices. Precisely because of the immense interests at stake, and the danger of a reaction, the ably managed trust tends toward conservatism. As compared with the action of a horde of small competitors under similar conditions, it is likely during a period of prosperity to refrain from marking up prices to the top notch, and to make a more adequate provision for the contingencies of the market. With this is likely to be associated a greater prevision, which succeeds in a more correct adjustment of present investment to future needs. drift of business in its newer form is thus toward a relative checking of the discrepancy between estimated and actual earnings, or, in other words, toward a retardation in the process of overcapitalization. The influence of trusts in moderating crises and in minimizing depressions will doubtless become more apparent with each ensuing decade.

D. THE COURSE OF A CRISIS

106. The Course of the Panic of 189311

BY ALEXANDER D. NOYES

The public mind was on the verge of panic. During a year or more, it had been continuously disturbed by the undermining of the Treasury, a process visible to all observers. The financial situation in itself was vulnerable. In all probability, the crash of 1893 would have come twelve months before, had it not been for the accident of 1891's great harvest, in the face of European famine.

The panic of 1893, in its outbreak and in its culmination, followed the several successive steps familiar to all such episodes. One or two powerful corporations, which had been leading in the general plunge into debt, gave the first signals of distress. On February 20th, the Philadelphia and Reading Railway Company, with a capital of forty millions and a debt of more than $125,000,000, went into bankruptcy; on the 5th of May, the National Cordage Company, with twenty millions capital and ten millions liabilities followed suit. The management of both these enterprises had been marked by the rashest sort of speculation; both had been favorites on the speculative markets. The Cordage Company in particular had kept in the race for debt up to the moment of its ruin. In the very month of the company's insolvency, its directors declared a heavy cash dividend; paid, as may be supposed, out of capital. In January, National

"Adapted from Forty Years of American Finance, 182-206. Copyright by G. P. Putnam's Sons (1909).

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