Chapter 382: , Laws of 1889, to read as follows (12)

(1) A huge surplus reserve at the New York banks, reaching in
August a height only four times exceeded in the country’s
history, and as a result a 1 per cent. call money market
during two-thirds of the year;

(2) The largest gold export movement in the history of the
country;

(3) A midsummer recovery on the Stock Exchange, with large
investment buying;

(4) A Presidential campaign, which hardly affected business;

(5) Substantial, but not very rapid, trade revivals, without
any of the extravagant optimism of 1908;

(6) Famine prices for cotton during half the year, followed by
a new crop unparalleled in history, and by a heavy fall in
prices;

(7) Virtual disappearance of our export trade in wheat, with
the smallest harvest since 1900, the highest prices since
1898, and the smallest shipment to Europe since 1872. The
Russian war, which began in February, affected our markets
only indirectly.

{264}

" 1905.
This year’s history is better understood to-day than it has
been before. The testimony of the whole financial and
commercial world now is, that the exploiting of capital in
trade and speculation, which eventually brought about the
recent panic, and the abnormal enhancement of cost of living,
which lifted the average price of commodities as much in two
years as it had risen in the eight preceding years, began in
the middle of 1905. These were the salient incidents of the
financial year:

(1) Rapid and vigorous trade revival, with industry and
production probably more active than at any previous period,
and with profits and dividends enhanced;

(2) Exposure of the use of life insurance funds by promoting
and speculating millionaires, an exposure which ended in
legislation preventing such use of them in future
speculations;

(3) World-wide money stringency, with the New York bank
surplus twice exhausted, London’s bank position the weakest
since 1890, and Berlin’s the weakest since 1897;

(4) Excited stock speculation for the rise, in this country
and in Germany, which in New York almost wholly disregarded
the abnormal strain on money.

"1906.
Neither the $400,000,000 loss at San Francisco in April, nor
the Treasury’s efforts to relieve an overstrained New York
money market in September, was a fundamental cause for the
events of 1906. They were a true sequel to 1905, and may be
summarized as follows:

(1) Enormous Volume of trade, the whole world over, with rapid
rise in price of goods, but equally rapid rise in cost of raw
material and labor;

(2) Grain harvests, as a whole, never paralleled in Volume,
and wheat crop second only to 1901;

(3) Wild speculation by all classes of the community,
particularly in land, mining shares, and Stock Exchange
securities, but not as a rule in produce, the wealthiest
capitalists in the country entering into stock speculation in
the late summer, and using most unscrupulously their power
over company finance to help along their purposes;

(4) Overstrained bank resources as a result, with five
deficits at New York, occurring in spring, autumn, and winter,
two of these deficits being the largest since 1893;

(5) Abnormally high money rates all the year, with the highest
September rate for call loans ever reached in New York, and
the highest rate for time loans and merchants’ paper reached
at that time of year since 1872;

(6) Sudden decision by Europe that American credit was
unlimited, and the consequent placing of foreign capital
unrestrictedly at our disposal;

(7) Struggle between London and New York for possession of new
gold arriving in London, resulting in our import of
$40,000,000 gold from Europe in the spring, and $45,000,000 in
the autumn, and leading to a rise of the Bank of England rate
to 6 per cent. for the first time since the Boer war panic,
and to an energetic effort on the Bank’s part to stop the
wholesale equipping of the American speculation with London
bank money.

"1907.
The panic year’s story may be told without further
introduction, summing up thus its characteristic events:

(1) Withdrawal by Europe of the capital loaned to us in 1906,
leading, early in the year, to $32,000,000 gold exports to
Europe, of which $25,000,000 went to France:

(2) Partial withdrawal of their capital from Wall Street by
interior markets, which were said to have had $400,000,000
outstanding in New York during 1906;

(3) Distress of the immensely wealthy capitalists who had tied
themselves up in the Wall Street speculation of 1906, their
forced liquidation on an enormous scale, and consequent
demoralized Stock Exchange markets in March and August;

(4) Very abnormal crop weather throughout the spring and over
nearly all the world, with a resultant shortage of the whole
world’s wheat crop, the deficit of supplies below expected
requirements being probably the largest since 1890.

"(5) Revelation of unsound banking practices at New York in
October; leading to the failure of the Knickerbocker Trust, a
formidable run on the banks, adoption of Clearing House
certificates in all the larger cities and issue of emergency
credit currency in many; to restriction of cash payments to
depositors throughout the country, to a premium on currency,
to complete demoralization of interior exchange, and to
insolvency of several large industrial companies and numerous
banks—neither, however, reaching the number which shortly
followed the panic of 1893;

(6) Import of $100,000,000 gold from Europe during November
and December, most of it bought at a premium and some of it
engaged with sight sterling at 4.91;

(7) As a result, large inroads on the Bank of England’s gold
reserve, rise in the bank rate from 4½ to 7 per cent., rapid
advance of all continental bank rates, and loan of large sums
of gold by the Bank of France to the Bank of England.

"(8) Precarious position of financial Germany throughout the
year, important failures at Hamburg, minor financial panics in
Holland, Egypt, Italy, and Chili, many of them before our own;

(9) Intervention of our Treasury, which wisely placed all its
surplus on deposit with the banks in October, and most
unwisely undertook to issue $150,000,000 bonds and notes in
November to provide basis for new bank-note circulation;

(10) Recovery in markets late in November, with slow return of
the bank situation to normal, the currency premium at New York
lasting longer than in either 1893 or 1873;

(11) Discharge of laborers from employment all over the
country, and the beginning of severe trade reaction—all this
in spite of the largest annual gold output in the history of
the world.

"1908.
Now comes the present remarkable after-panic year, of which
the salient phenomena may be thus summed up:

(1) Spasmodic and irregular recovery in trade activity,
starting from a very low level, with merchants rushing in
suddenly with orders—in February, in July, and in
November—when their shelves were almost depleted, these buying
impulses ceasing as suddenly as they had begun, leaving trade
stagnation again;

(2) Slow increase in consumption of merchandise, here and
abroad, the ratio being below 30 per cent. of normal at the
beginning of the year, and 60 to 75 per cent. on the average
at its close;

(3) Sudden shrinkage of our international commerce,
merchandise trade in eleven months falling $478,000,000 from
1907, a decline of 15 per cent., of which $326,000,000 was
imports and $152,000,000 exports, experience of European
nations being similar;

(4) Enormous increase in the unemployed, leading, at the
Atlantic ports, to an emigration 250,000 larger than
immigration;

(5) Severe contraction of railway earnings, resulting in
twenty-four railway insolvencies, involving the largest
capital of any receiverships since those of 1893, and causing
many dividend reductions, but followed, after the middle of
the year, by such enormous reduction in expenses that, in some
cases, autumn net earnings actually increased over 1907;

{265}

"(6) Sudden rush of currency into the banks, as a result,
first of removal of restrictions on depositors and next of
idle trade, with resultant change from a $20,000,000 New York
bank deficit at the end of 1907 to a surplus of $40,000,000 at
the end of January and of $66,000,000 on June 27—the latter
being second only to the $111,000,000 maximum of 1894;

(7) As a consequence, abnormally low rates for money, call
loans going at 2 per cent. before the end of January, at 1 per
cent. in eighteen weeks of the present year, and at less than
1 per cent. in three weeks;

(8) Export of $73,000,000 gold, the largest (except for 1904)
since 1895, and net export of $45,000,000, the largest in
thirteen years;

"(9) In spite of the above recited facts, a constant spirit of
optimism throughout the year, expressing itself, first in the
organization of ‘Prosperity Leagues’ which held conventions
and proclaimed that if people would only decide to be
prosperous, they would be prosperous, and second by a series
of extravagant speculative movements on the Stock Exchange, in
the course of which it was declared in February, in July, and
in November, that we were not only destined to get back into
the boom of 1906, but that we were there already;

(10) A wheat harvest which in midsummer promised to be the
second largest on record, but which turned out only of average
Volume, the quality and price for this and other cereals,
however, being so good as to enhance very greatly the wealth
of the agricultural West;

(11) A Presidential election, the result of which the markets
and all experienced people foresaw from the beginning, but of
which it was alleged, for two weeks in November, that its
outcome had totally changed for the better the entire aspect
of American business affairs."

1909.
The following, from the New York _Evening Post_ of
December 31, 1909, continues the review:

The noteworthy characteristics of "the year which ends to-day,
… so far as they can now be discerned, have been as follows:

(1) Rapid industrial recovery, beginning with the steel
trade’s reduction of prices, leading in September to the
largest monthly output of iron and steel in the history of the
country, and to heavy demand from consumers, but contrasting
singularly with the copper market, where signs of
overproduction were visible throughout the year;

(2) Very rapid increase in cost of necessaries of life,
affecting chiefly food, clothing, and rent, leading in the
autumn to bitter complaint and to numerous strikes for higher
wages, notably on the railways;

(3) Along with reviving trade, a speculation of great
magnitude on the Stock Exchange, ascribed to the initiative of
very powerful finance houses, and converging in a most
peculiar way on United States Steel common shares, whose
dividend was twice advanced, notwithstanding the fact that
quarterly earnings had not recovered to the magnitude of 1906
or 1907, when the dividend had been maintained at the old
rate;

(4) Largely as a result of the tying-up of capital in this
speculation, severe autumn strain on bank reserves, turning a
New York surplus of $34,000,000 on July 10 into one of only
$1,600,000 on October 2, driving Wall Street to probably
unprecedented borrowings from interior banks and from London,
which latter market, under the influence of the Bank of
England, threw back great amounts of these New York loans
during October;

"(5) Call money rates kept down by such expedients, 6 per
cent. being the maximum up to the two closing days of
December;

(6) a wheat corner in June, in the course of which the New
York cash price rose to $1.51 in June, the highest price since
the Leiter corner of 1898, followed by a new wheat crop
unsurpassed in magnitude except for 1901, yet with high prices
continued in later autumn, despite an abundant crop in Europe
also;

(7) A very short crop of cotton, driving the price from 9½
cents a pound, early in the year, to 16 cents in December, the
latter being the highest December price since paper inflation
days, and less than one cent below the highest price in the
corner of 1904;

(8) Import of foreign merchandise wholly unparalleled for
magnitude in our history, causing, in June, July, and August,
an excess of imports over exports for the first time since
1897, and resulting, in the eleven first months of the year,
in a total excess of exports over imports $340,000,000 less
than in 1908, and very much the smallest of any year since
1897;

(9) As a partial consequence, the largest export of gold of
any year in the country’s history, and the largest net export
except for 1894 and the paper money days.

"The prolonged tariff debate in Congress, which high financial
authority declared would hold back financial activity, but
which gave no evidence of doing so, can hardly be classed as a
fundamental influence of the year. Whether Mr. Harriman’s
death in September, with the resultant realignment of forces
in high finance, deserves to be so classed, is a question
which can hardly be passed upon as yet."

FINANCE AND TRADE:
America: Proposal of an International American Bank.

See (in this Volume)
AMERICAN REPUBLICS.

FINANCE AND TRADE: Asia; A. D. 1909.
Disturbance of Trade by the Fall in Silver Exchange.

The following is a Press telegram from Ottawa, Canada,
June 23, 1909:

"The serious check to American exports to the Orient resulting
from the great fall in the silver exchanges last year is
attracting increasing attention on the Pacific Coast. A League
which describes itself as the Fair Exchange league has been
organized in Ottawa to keep the issues before the Dominion
parliament. It advocates the adoption of the Goschen plan of
1891 jointly by the British empire and the United States with
open mints in India as before 1893. The new movement has
secured a qualified endorsement from J. J. Hill of the Great
Northern railway. Mr. Hill says: ‘We must await the proposals
of the monetary commission at Washington. The silver problem
is full of difficulties. I wish it were possible to ignore it.
But our consuls in Asia warn us that at the present rate of
silver exchange Asia has ceased to import our wheat or flour
or lumber; that the Shanghai merchants who eighteen months
since bought the sovereign or five gold dollars with five
taels, must now pay near eight taels; the result is disaster;
he no longer buys.’"

FINANCE AND TRADE: British Empire: A. D. 1909.
Imperial Congress of Chambers of Commerce.

See (in this Volume)
BRITISH EMPIRE: A. D. 1909 (SEPTEMBER).

FINANCE AND TRADE: England: A. D. 1909.
The Budget of Mr. Lloyd-George.

See (in this Volume)
ENGLAND: A. D. 1909 (APRIL-DECEMBER).

{266}

FINANCE AND TRADE: Germany: A. D. 1901-1902.
Industrial Crisis and Period of Depression.

The extraordinary industrial development of Germany between
1895 and 1900 had its usual sequel in a sudden collapse,
followed by a period of depression and slow return to
productive activity. According to Dr. Braun, writing in the
_Yale Review_ of May, 1902, "the cause of the crisis lay
undoubtedly in extreme overproduction, which had continued for
a long time without its significance having been discovered by
any one. Enormous quantities of commodities had been
accumulated, numberless new industrial undertakings had come
into being, or were about to be started, and every one was
counting on further development of production by leaps and
bounds. But a feeling of uncertainty, which should pass into a
crisis, was bound to arise the moment certain unhealthy
conditions of German economic life, which had been covered up
during the period of prosperity, made their appearance.

"The conditions which did arouse this widespread feeling in
German capitalistic circles lay far from the industrial market
itself. Great losses suddenly appeared in the field of
mortgage investments, whose securities had been accepted by
the public as, next to government bonds, the safest form of
investment, and the freest from speculation. These
developments caused a panic among the investing public. This
feeling of panic began, according to my view, at the time when
the authorities found themselves forced to arrest two
directors of the Pomeranian Mortgage Bank (Pommersche
Hypothekenbank), who occupied the highest social position. …
The extraordinary result of the action of the authorities
against the leaders of certain mortgage banks is explained
only by the facts that at the end of 1900, six and two-third
billion marks of mortgage debentures were in circulation, and
that within ten years the amount invested in such debentures
had increased by three billion marks. The great majority of
the small and middle-class capitalists, who wished to invest
their money in safe securities, had put it into mortgage
debentures of this kind. The greatest confidence had been
placed in them, and now, for the first time, the eyes of the
public were open to the fact that great losses could also
ensue from such investments. The five principal offending
banks had at the end of 1900, 692,670,950 marks of mortgage
debentures in circulation. Every one had invested in these,
from the smallest capitalist to the German Empress. The public
and pretentious piety of the directors of the Prussian
Mortgage Stock Bank, who were later placed under arrest, had
induced even church-building associations to place their money
in these debentures."

"Then came the failure of the Dresdener Kreditanstalt, which,
with a capital of 20,000,000 marks, had loaned a single
industrial company, the Dresden Electrical Company, 9,000,000
marks; and this failure was followed by that of the famous
Leipsic Bank, which had loaned 84,000,000 marks to a concern
which had used up its own capital, and was paying fraudulent
dividends of 50 per cent. These two failures frightened the
public into a general withdrawal of deposits from banks of
every class."

FINANCE AND TRADE: Japan: A. D. 1909.
State of the War Debt and its Payment.

See (in this Volume)
JAPAN: A. D. 1909 (JULY-SEPTEMBER).

FINANCE AND TRADE: Mexico: A. D. 1905.
Currency Reform.
Cessation of Free Coinage of Silver.

See (in this Volume)
MEXICO: A. D. 1904-1905.

FINANCE AND TRADE: United States: A. D. 1908.
The Emergency Currency Act.

What is known as the Emergency Currency Act was passed by
Congress in May, 1908, and received the approval of the
President on the 30th of that month. It is a temporary
measure, for exigencies that may repeat the monetary
experience of 1907 before an adequate reform of the banking
and currency system of the country is effected, and will
expire by limitation on the 30th of June, 1914. It does not
disturb the present National bank note currency of the
country, based on Government bonds, but provides a means by
which an additional Volume, amounting to a total of
$500,000,000, if necessary, may be issued by the National
banks in case of a currency stringency.

There are two ways in which emergency circulation may be
issued. A bank may make an application through the Currency
Association of which it is a member, or, where State and
municipal bonds are offered as security, the application may
be made directly. A Currency Association may be formed by ten
or more banks having an aggregate capital and surplus of at
least $5,000,000. Only one may be formed in any city, and no
bank may belong to more than one. It must be formed by banks
located in territory as contiguous as convenient.

All applications for emergency currency are to be passed upon
by the Secretary of the Treasury after recommendation by the
Comptroller of the Currency. The Secretary will also determine
whether business conditions in the locality warrant the
issuance of such circulation. The distribution of the notes is
likewise left to him. Where application is made through an
Association, the securities are deposited with it; where a
direct application is made, they are deposited with the
Treasurer or any Assistant Treasurer of the United States. All
the members composing an Association are jointly and severally
liable to the United States for the redemption of all
emergency circulation taken out by its members.

FINANCE AND TRADE: A. D. 1908.
Banking and Currency Questions in the Party Platforms.

See (in this Volume)
UNITED STATES: A. D. 1908 (APRIL-NOVEMBER).

FINANCE AND TRADE: A. D. 1909.
The "Wall Street Investigation."
Report on the Operations of the Stock Exchange and other
Exchanges of New York City.

In December, 1908, a Special Committee of nine experienced
gentlemen, having Mr. Horace White for its chairman, was
appointed by Governor Hughes, of the State of New York, to
investigate and report "what changes, if any, are advisable in
the laws of the State bearing upon speculation in securities
and commodities, or relating to the protection of investors,
or with regard to the instrumentalities and organizations used
in dealings in securities and commodities which are the
subject of speculation." On the 7th of the following June the
Committee submitted to the Governor an extended report,
describing and discussing the organizations, the
instrumentalities and the methods employed in the dealings
with which their inquiry had to do. The following excerpts
from this important report (known commonly as the "report on
Wall Street") may suffice, perhaps, to convey the main matters
of information afforded by it and the more valuable
conclusions at which the Committee arrived:

{267}

"In law, speculation becomes gambling when the trading which
it involves does not lead, and is not intended to lead, to the
actual passing from hand to hand of the property that is dealt
in. … The rules of all the exchanges forbid gambling as
defined by this opinion [of the New York Court of Appeals,
case of Hurd vs. Taylor, 181 New York 231; but they make so
easy a technical delivery of the property contracted for, that
the practical effect of much speculation, in point of form
legitimate, is not greatly different from that of gambling.
Contracts to buy may be privately offset by contracts to sell.
The offsetting may be done, in a systematic way, by clearing
houses, or by ‘ring settlements.’ Where deliveries are
actually made, property may be temporarily borrowed for the
purpose. In these ways, speculation which has the legal traits
of legitimate dealing may go on almost as freely as mere
wagering, and may have most of the pecuniary and immoral
effects of gambling on a large scale.

"A real distinction exists between speculation which is
carried on by persons of means and experience, and based on an
intelligent forecast, and that which is carried on by persons
without these qualifications. The former is closely connected
with regular business. While not unaccompanied by waste and
loss, this speculation accomplishes an amount of good which
offsets much of its cost. The latter does but a small amount
of good and an almost incalculable amount of evil. In its
nature it is in the same class with gambling upon the
race-track or at the roulette table, but is practised on a
vastly larger scale. Its ramifications extend to all parts of
the country. It involves a practical certainty of loss to
those who engage in it.

"The problem, wherever speculation is strongly rooted, is to
eliminate that which is wasteful and morally destructive,
while retaining and allowing free play to that which is
beneficial. The difficulty in the solution of the problem lies
in the practical impossibility of distinguishing what is
virtually gambling from legitimate speculation. The most
fruitful policy will be found in measures which will lessen
speculation by persons not qualified to engage in it. In
carrying out such a policy exchanges can accomplish more than
legislatures. …

"The New York Stock Exchange is a voluntary association,
limited to 1,100 members, of whom about 700 are active, some
of them residents of other cities. Memberships are sold for
about $80,000. The Exchange as such does no business, merely
providing facilities to members and regulating their conduct.
The governing power is in an elected committee of forty
members and is plenary in scope. The business transacted on
the floor is the purchase and sale of stocks and bonds of
corporations and governments. Practically all transactions
must be completed by delivery and payment on the following
day. The mechanism of the Exchange, provided by its
constitution and rules, is the evolution of more than a
century. …

"The Volume of transactions indicates that the Exchange is
to-day probably the most important financial institution in
the world. In the past decade the average annual sales of
shares have been 196,500,000 at prices involving an annual
average turnover of nearly $15,500,000,000; bond transactions
averaged about $800,000,000. This enormous business affects
the financial and credit interests of the country in so large
a measure that its proper regulation is a matter of
transcendent importance. While radical changes in the
mechanism, which is now so nicely adjusted that the
transactions are carried on with the minimum of friction,
might prove disastrous to the whole country, nevertheless
measures should be adopted to correct existing abuses.

"It is unquestionable that only a small part of the
transactions upon the Exchange is of an investment character;
a substantial part may be characterized as virtually gambling.
Yet we are unable to see how the State could distinguish by
law between proper and improper transactions, since the forms
and the mechanisms used are identical. Rigid statutes directed
against the latter would seriously interfere with the former.
The experience of Germany with similar legislation is
illuminating.

See (in this Volume)
GERMANY: A. D. 1908.

But the Exchange, with the plenary power over members and
their operations, could provide correctives, as we shall show.

"Purchasing securities on margin is as legitimate a
transaction as a purchase of any other property in which part
payment is deferred. We therefore see no reason whatsoever for
recommending the radical change suggested, that margin trading be
prohibited. … In so far as losses are due to insufficient
margins, they would be materially reduced if the customary
percentage of margins were increased. The amount of margin
which a broker requires from a speculative buyer of stocks
depends, in each case, on the credit of the buyer; and the
amount of credit which one person may extend to another is a
dangerous subject on which to legislate. Upon the other hand,
a rule made by the Exchange could safely deal with the
prevalent rate of margins required from customers. In
preference, therefore, to recommending legislation, we urge
upon all brokers to discourage speculation upon small margins
and upon the Exchange to use its influence, and, if necessary,
its power, to prevent members from soliciting and generally
accepting business on a less margin than 20 per cent.

"‘Pyramiding,’ which is the use of paper profits in stock
transactions as a margin for further commitments, should be
discouraged. The practice tends to produce more extreme
fluctuations and more rapid wiping out of margins. If the
stock brokers and the banks would make it a rule to value
securities for the purpose of margin or collateral, not at the
current price of the moment, but at the average price of, say,
the previous two or three months (provided that such average
price were not higher than the price of the moment), the
dangers of pyramiding would be largely prevented.

"We have been strongly urged to advise the prohibition or
limitation of short sales, not only on the theory that it is
wrong to agree to sell what one does not possess, but that
such sales reduce the market price of the securities involved.
{268}
We do not think that it is wrong to agree to sell something
that one does not now possess, but expects to obtain later.
Contracts and agreements to sell, and deliver in the future,
property which one does not possess at the time of the
contract, are common in all kinds of business. The man who has
‘sold short’ must some day buy in order to return the stock
which he has borrowed to make the short sale. Short-sellers
endeavor to select times when prices seem high in order to
sell, and times when prices seem low in order to buy, their
action in both cases serving to lessen advances and diminish
declines of price. In other words, short-selling tends to
produce steadiness in prices, which is an advantage to the
community. No other means of restraining unwarranted marking
up and down of prices has been suggested to us. …

"A subject to which we have devoted much time and thought is
that of the manipulation of prices by large interests. This
falls into two general classes:

(1.) That which is resorted to for the purpose of making a
market for issues of new securities.

(2.) That which is designed to serve merely speculative
purposes in the endeavor to make a profit as the result of
fluctuations which have been planned in advance.

The first kind of manipulation has certain advantages, and
when not accompanied by ‘matched orders' is unobjectionable
_per se_. …

"The second kind of manipulation mentioned is undoubtedly open
to serious criticism. It has for its object either the
creation of high prices for particular stocks, in order to
draw in the public as buyers and to unload upon them the
holdings of the operators, or to depress the prices and induce
the public to sell. There have been instances of gross and
unjustifiable manipulation of securities, as in the case of
American Ice stock. While we have been unable to discover any
complete remedy short of abolishing the Stock Exchange itself,
we are convinced that the Exchange can prevent the worst forms
of this evil by exercising its influence and authority over
the members to prevent them. When continued manipulation
exists it is patent to experienced observers.

"In the foregoing discussion we have confined ourselves to
_bona-fide_ sales. So far as manipulation of either class
is based upon fictitious or so-called ‘wash sales’ it is open
to the severest condemnation, and should be prevented by all
possible means. These fictitious sales are forbidden by the
rules of all the regular exchanges, and are not enforceable at
law. They are less frequent than many persons suppose. … There
is, however, another class of transactions called ‘matched
orders,’ which differ materially from those already mentioned,
in that they are actual and enforceable contracts. We refer to
that class of transactions, engineered by some manipulator,
who sends a number of orders simultaneously to different
brokers, some to buy and some to sell. These brokers, without
knowing that other brokers have countervailing orders from the
same principal, execute their orders upon the floor of the
Exchange, and the transactions become binding contracts; they
cause an appearance of activity in a certain security which is
unreal. Since they are legal and binding, we find a difficulty
in suggesting a legislative remedy. But where the activities
of two or more brokers in a certain securities become so
extreme as to indicate manipulation rather than genuine
transactions, the officers of the Exchange would be remiss
unless they exercised their influence and authority upon such
members. …

"The subject of corners in the stock market has engaged our
attention. The Stock Exchange might properly adopt a rule
providing that the governors shall have power to decide when a
corner exists and to fix a settlement price, so as to relieve
innocent persons from the injury or ruin which may result
therefrom. The mere existence of such a rule would tend to
prevent corners."

Speaking in a general way, it may be said that the Committee
holds the directorate of the Stock Exchange responsible for
evils connected with the operations that are centralized by
it. "It has almost unlimited power over the conduct of its
members," says the report, "and it can subject them to instant
discipline for wrongdoing." As a voluntary organization it is
more free in the exercise of this power than it would be if
incorporated and brought under the authority and supervision
of the State and the process of the courts. Hence the
Committee refrains from advising the incorporation of the
Exchange; but it does so only on the assumption that it "will
in the future take full advantage of the powers conferred upon
it by its voluntary organization." In the past it has failed
to do so.

At the same time, the Committee corrects an erroneous public
notion that Wall Street and the Stock Exchange are one and the
same thing. "An investigation was made of the transactions on
the Exchange for a given day, when the sales were 1,500,000
shares. The returns showed that on that day 52 per cent. of
the total transactions on the Exchange apparently originated
in New York city, and 48 per cent. in other localities."

The operations of the various other trading exchanges in New
York,—the Consolidated Stock Exchange, "the Curb," so called,
and the several "commodity exchanges," where dealings in
produce, cotton, coffee, etc., are centered,—are discussed in
the report, with disapproval of some. The abuses which find
their opportunity in the unorganized Curb market,—carried on
within a roped-off section of Broad Street,—are set forth with
distinctness, and are traced clearly to the tolerance and
encouragement afforded to them by the Stock Exchange. "About
85 per cent, of the business of the Curb," says the report,
"comes through the offices of members of the New York Stock
Exchange, but a provision of the constitution of that Exchange
prohibits its members from becoming members of, or dealing on,
any other _organized_ Stock Exchange in New York.
Accordingly, operators on the curb market have not attempted
to form an organization. The attitude of the Stock Exchange is
therefore largely responsible for the existence of such abuses
as result from the want of organization of the curb market.
The brokers dealing on the latter do not wish to lose their
best customers, and hence they submit to these irregularities
and inconveniences. Some of the members of the Exchange
dealing on the curb have apparently been satisfied with the
prevailing conditions, and in their own selfish interests have
maintained an attitude of indifference toward abuses. We are
informed that some of the most flagrant cases of discreditable
enterprises finding dealings on the curb were promoted by
members of the New York Stock Exchange. The present apparent
attitude of the Exchange toward the curb seems to us clearly
inconsistent with its moral obligations to the community at
large."

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On the much debated question, whether dealing in
"futures,"—the selling of agricultural products for future
delivery,—should be prohibited or otherwise interfered with,
the report of the Committee is strongly in favor of letting it
alone. It says, "The subject was exhaustively considered by
the Industrial Commission of Congress which in 1901 made an
elaborate report (Volume VI.), showing that selling for future
delivery, based upon a forecast of future conditions of supply
and demand, is an indispensable part of the world’s commercial
machinery, by which prices are, as far as possible, equalized
throughout the year to the advantage of both producer and
consumer. The subject is also treated with clearness and
impartiality in the Cyclopedia of American Agriculture, in an
article on ‘Speculation and Farm Prices’; where it is shown
that since the yearly supply of wheat, for example, matures
within a comparatively short period of time, somebody must
handle and store the great bulk of it during the interval
between production and consumption. Otherwise the price will
be unduly depressed at the end of one harvest and
correspondingly advanced before the beginning of another.
Buying for future delivery causes advances in prices; selling
short tends to restrain inordinate advances. In each case
there must be a buyer and a seller, and the interaction of
their trading steadies prices. Speculation thus brings into
the market a distinct class of people possessing capital and
special training who assume the risks of holding and
distributing the proceeds of the crops from one season to
another with the minimum of cost to producer and consumer."

FINANCE AND TRADE: A. D. 1909-1910.
The "Central Bank" Question.

In Boston, at the outset of President Taft's tour of the
country in the fall of 1909, he made a speech on financial
subjects which touched the old question of the need in the
country of a Central Bank of Issue, as an instrument for the
automatic or natural regulation of its currency, in quantity
and distribution. This gave the opening to a revival of
discussions which have been seldom heard since Jackson’s time.
A clear, succinct statement of the banking conditions which
have revived this question, with explanations of what it
involves, appears in the following, borrowed from a monthly
financial letter sent out in November by the National City
Bank of Chicago:

"The creation of a Central Bank of Issue as a cure for the
defects of our financial system is of such importance that a
brief review of the proposition may be of interest to our
clients:

"The business of banking is probably as sound in this country
as in any other. Our individual banks are, as a rule,
prudently, honestly and capably managed. During normal times
they deserve and enjoy the confidence of the public which they
efficiently serve. Yet only two years ago they practically
suspended because the system—that is the relation of one bank
to all the others—had collapsed. This occurred while there was
more gold in the country than existed in several of the other
leading commercial nations combined, and while nearly all of
the twenty or more thousand banks in the United States were
sound, solvent, and in normal condition. With over
$900,000,000 of gold in the United States Treasury, and
several hundred millions more in the country, we imported at
great cost about $100,000,000 chiefly from the coffers of the
Bank of England, which itself only held $105,000,000.

"The loss on investments and to general business by such a
panic as that of 1907 is beyond computation. When we consider
that we have had several such panics within the memory of
living men, and that other and poorer countries possess the
means of avoiding such conditions, we naturally ask what is
wrong or lacking in our financial system as compared to
theirs?

"In times of trouble our reserves scatter. Theirs are massed.
Our currency is rigid and cannot be quickly expanded to meet
an emergency. Their currency is capable of instantaneous
expansion. Our chief gold reserves are in the United States
Treasury unavailable as a basis for such expansion. Their
reserves are in great central banks—immediately available for
currency expansion. Besides, under our national banking
system, a bank in a non-reserve city with deposits of, say
$1,000,000, keeps six per cent, or $60,000 in its own vault,
and nine per cent, or $90,000, to its credit with a reserve
city bank. In the reserve city bank, however, the $90,000 is
merely a deposit against which it keeps an actual reserve of
about $20,000. When trouble comes, therefore, and the bank in
the non-reserve city decides to increase its cash reserves
from six to eight per cent it calls upon its reserve agent for
$20,000 cash, and when the reserve city bank has forwarded
that amount, it has parted with all the actual reserve it has
belonging to the non-reserve city bank, and it still has a
deposit liability on its books of $70,000 against which it
holds no reserve whatever.

"As it is a very natural and prudent thing for banks in
non-reserve cities to increase their cash reserves by at least
two per cent when trouble threatens, nearly all try to do so
at the same time, and the result is that the threatened
trouble becomes a reality. In short, when financial trouble
threatens in any other great country the _system_
provides relief and the danger is avoided, whereas,
unfortunately, with us every step we take increases the
trouble and helps it along until it is beyond control.

"Financial stringency existed in all the leading countries in
1907. Suspension of specie-payments and actual panic occurred
only in the United States. They stopped abruptly at our
borders, and Canada and even Mexico knew nothing of them.
Manifestly, we need something! There is little difference of
opinion on that score. But when we begin to discuss the remedy
we have a wide divergence of views.

"Many favor asset or credit currency similar to that
prevailing in Canada. The Canadian System of asset currency is
excellent when joined to the branch banking system. But it is
felt that it would be almost impossible to apply it to a
system containing thousands of individual banks. The
difficulty is that of providing adequate redemption
facilities, without which the danger of currency inflation
could scarcely be avoided. Several schemes to meet this
difficulty have been suggested, but the best of them seem
rather unwieldy.

{270}

"The proposal which seems to be gaining most ground is to
establish a great semi-government bank to be added to our
present system. To this bank would be transferred at once the
government deposits now in national banks, and later a large
part of the reserves of the banks in the central reserve, and
possibly also the reserve cities. Like everything else, the
bank would have to be an evolution. Years would pass before it
would work into its proper position and exercise its full
powers. Gradually, it is hoped, the United States Treasury
could be done away with, and the government taken out of the
banking business. Then all government funds would be deposited
with the Central Bank. Its branches would take the place of
our Sub-Treasuries. It would be a bank of banks, where other
banks could re-discount their bills, or borrow on securities,
receiving therefor currency to be issued by the Central Bank.
This currency would be partly secured by a gold reserve, and
partly by the general assets of the bank.

"If the $900,000,000 gold in the United States Treasury in
1907, held against an equal amount of notes, had been in a
Central Bank it would have formed a sufficient basis for the
issue of an additional $900,000,000 of currency, for fifty per
cent reserve against currency would be ample. For such
additional issue the Central Bank would, of course, receive
acceptable banking assets. A far smaller amount, however, than
$900,000,000 would have averted the panic. It seems clear that
such an institution would provide the elasticity to our
currency which we so much need, not only in times of stress,
but every crop-moving season.

"There are many details which would require careful study, but
to many competent to judge, the Central Bank idea seems to be
the correct solution of the difficulty. The fact that all the
other important countries of the world have adopted it ought
to give it weight. Even little Switzerland came to it four
years ago, and Japan, after adopting a system copied from
ours, has established a Central Bank patterned after the
Imperial Bank of Germany.

"Most of the objections raised seem to be largely based on
sentiment rather than on argument. It is said to be
‘un-American,’ or that it would be ‘used by Wall Street.’ or
that ‘it would get into politics.’ It would seem to us that if
the system is the best, it should not be ‘un-American’ to
adopt it, and that an illegitimate use of it by ‘ Wall Street’
could easily be guarded against in its organization. To say
that we cannot trust our government to properly use, and not
abuse, the powers of a Central Bank is to say that it is
inferior to the governments of Europe which have wisely used
such powers for generations.

"There seems some danger that the bank would not pay unless it
entered into competition with existing banks for regular
commercial business; but we must remember that Central Banks
are not expected to earn large dividends.

"We predict a long campaign of discussion before the right
course appears clear to the American people; but it seems to
us that the arguments advanced for a Central Bank are well
worthy of the most earnest study."

FINANCE AND TRADE: A. D. 1909-1910.
Powerful Combination of Banking Interests by J. P. Morgan & Co.

Early in December, 1909, the powerful banking house of J. P.
Morgan & Co. obtained control of the Guaranty Trust Company
and the Equitable Life Assurance Company, which latter
controls the Equitable and Mercantile trust companies. In the
former case it purchased the holding of the Harriman estate,
and in the latter that of Thomas Ryan. At the beginning of the
following month, by another deal with Mr. Ryan, the same firm
acquired the Morton and the Fifth Avenue trust companies. The
combined assets of the Guaranty, Morton, and Fifth Avenue
trust companies were reported to be $259,000,000. Joined to
the vast resources of the Equitable Life Assurance Company and
to those previously controlled by the Morgan Company, the
financial combination seems overpowering.

FINANCE AND TRADE.

See,(in this Volume),
TARIFFS, AND COMBINATIONS.

----------FINANCE AND TRADE: End--------

FINLAND: A. D. 1901.
The Russianizing of the Finnish Army.
Resistance to the Violation of Constitutional Rights.
Despotic measures of the Tsar.
M. de Plehve’s defence.

The shameful overthrow, in 1899, by the present Tsar of
Russia, of the ancient constitution of Finland, which had
preserved its distinct nationality ever since it came, in
1809, under the Russian crown, is related in Volume VI. of
this work. Among the measures then undertaken for Russianizing
Finland—reducing it substantially to the status of a Russian
province—the most serious was the practical incorporation of
the Finnish army with the Russian, the law for accomplishing
which had not been fully carried through when the account of
events in Volume VI. was closed. It was opposed very
strenuously by M. Witte, then rising to influence in the
councils of the Tsar, and seemed not unlikely to be put aside.
But the worse influences prevailed in the end over the wiser,
and the proposed measure became law on the 11th of July, 1901.
It placed all Finnish troops under the orders of the Russian
commander in Finland, authorized the putting of Finnish
conscripts into the Russian regiments stationed in Finland,
and subjected Finnish regiments to service, when required,
outside of Finland, from which service they had been
constitutionally exempt hitherto.

The resistance to this gross violation of time-honored rights
was universal and determined. Conscripts refused to answer the
call to military service, subjecting themselves to the
penalties for desertion, and practically the whole population
stood ready to protect them. Extensive movements of emigration
to America and elsewhere were begun. At the same time the
Tsar’s authority, as the common sovereign of Finland and
Russia, was used in many ways as autocratically in his
constitutional realm as in that where his absolutism knew no
bounds. The powers of the Russian Governor-General of Finland
were enlarged; the Finnish archives were removed to St.
Petersburg; Cossacks were sent into the abused country with
their knouts to quell resistance to the army law; but the
resistance went on, taking presently a more passive form.
Communes refused to elect the conscription boards which the
law prescribed for carrying out the levy of recruits, and
heavy fines were imposed on them without effect. In November,
1902, a convention of delegates from all parts of Finland,
composed largely of peasants and workmen, resolved to
"continue everywhere, unswervingly, and until legal conditions
are restored to the country, the passive resistance against
all measures conflicting with, or calculated to abolish, our
fundamental laws."

{271}

An elaborate defence of these Russianizing measures in Finland
was addressed, in August, 1903, by the Russian Minister of the
Interior, M. dePlehve, to Mr. W. T. Stead, editor of the
_English Review of Reviews_, by way of reply to an "open
letter" to himself on the subject, by Mr. Stead, published in
the _Review_ of that month. Concerning the military law,
M. Plehve wrote:

"This law, in its application to the new conscription
regulations, has alleviated the condition of the population of
Finland. Contrary to the information you have received, the
military burden laid on the population of the land has not
been increased by 5,000 recruits annually, but has been
decreased from 2,000 men to 500 per annum, and latterly to
280. As you will see, there is in reality no opposition
between the will of the Emperor of Russia as announced to
Finland in 1899 and his generous initiative at The Hague
Conference." At the end of a long exposition of the principles
of Russian imperial policy, which left it far from clear, the
Minister said: "I shall give the following answer to your
entreaty to put an end to the present policy of Russia in
Finland, which you are pleased to call the policy of General
Bobrikoff. First of all, it is incorrect to connect the
present course of Russian policy in Finland with the name of
the present Governor-General of Finland alone, for, as regards
the fundamental purpose of his labors, all the advisers and
servants of his Imperial Majesty who have to do with the
government of Finland are at one with him in their firm
conviction that the measures now applied in Finland are called
for by the pressing requirements of our state. With regard to
the essence of the question, I repeat that in matters of
government temporary phenomena should be distinguished from
permanent ones. The incidental expression of Russian policy,
necessitated by an open mutiny against the government in
Finland, will, undoubtedly, be replaced by the former favor of
the sovereign toward his Finnish subjects, as soon as peace is
finally restored and the current of social life in that
country assumes its normal course. Then, certainly, all
repressive measures will be repealed. But the realization of
the fundamental aim which the Russian Government has set
itself in Finland,—i. e., the confirming in that land of the
principle of imperial unity,—must continue, and it would be
best of all if this end were attained with the trustful
cooperation of local workers under the guidance of the
sovereign to whom Divine Providence has committed the
destinies of Russia and Finland."

FINLAND: A. D. 1904.
Assassination of Governor-General Bobrikoff.

On the 15th of June, 1904, Governor-General Bobrikoff, who had
been the executor of the Russianizing policy in Finland, and
was hated accordingly, was shot by a Finnish member of the
Parliamentary opposition.

FINLAND: A. D. 1905.
Successful Revolt against the Russianizing Oppressions.
The Tsar’s Concessions.
Restoration of Ancient Liberties.

Taking advantage of the situation in Russia, which tied the
hands of the Autocrat (see (in this Volume) RUSSIA: A. D.
1904-1905), the Finns, by a sudden general rising, drove out
the Russian officials in their country, took possession of the
military posts and Government building, and forced the
Governor, Prince John Obolenski, to send to the Tsar their
demand for a restoration of their ancient constitutional
rights which he had taken away (see, in Volume VI. of this
work, FINLAND: A. D. 1898-1901). The helplessness to which
their Russian master had been reduced was signified by the
prompt amiability of his response, in successive manifestoes,
the first of which bore the following command:

"By the grace of God, we, Nicholas II., etc., command the
opening at Helsingfors, December 20, of an extraordinary Diet
to consider the following questions.

"_First_.
The proposals for the budget of 1906-1907, provisional taxes,
and a loan for railway construction.

"_Second_.
A bill providing, by a new fundamental law, a parliament for
Finland on the basis of universal suffrage, with the
establishment of the responsibility of the local authorities
to the nation’s deputies.

"_Third_.
Bills granting liberty of the press, of meeting, and of
unions."

A subsequent manifesto announced:

"We have ordered the elaboration of bills reforming the
fundamental laws for submission to the deputies of the nation,
and we order the abrogation of the manifesto of February 15,
1899; the ukase of April 15, 1903, concerning measures for the
maintenance of public order and tranquillity; the imperial
ukase of November 23, 1903, according exceptional rights to
the gendarmerie in the grand duchy; Article 12 of the ukase of
July 13, 1902, on Finnish legislation; the ukase of September
21, 1902, on the reform of the Senate and the extension of
powers of governors; the ukase of April 8, 1903, on
instructions for the governor-general and the assistant
governor of Finland; the law of July 25, 1901, on military
service; the ukase of August 13, 1902, on the duties of civic
officials in Finland; the ukase of August 27, 1902, on the
resignation of administrative officials and judicial
responsibility for offenses and crimes of officials, and the
ukase of July 15, 1900, on meetings.

"We further order the Senate to proceed immediately with the
revision of the other regulations enumerated in the petition,
and we order the immediate suppression of the censorship.

"The Senate should prepare bills granting liberty of speech,
of the press, of meeting, and of union; a national assembly on
the basis of universal suffrage, and the responsibility of the
local authorities as soon as possible, in order that the Diet
may discuss them.

"We trust that the measures enumerated, being dictated by a
desire to benefit Finland, will strengthen the ties uniting
the Finnish nation to its sovereign."

An article quoted from a Danish magazine tells in a few words
how the bloodless revolution was accomplished: