CHAPTER XXV.

THE CRISIS OF 1907.

Industrial Progress after 1893 in the United States and Europe— Economic Waste of the Wars in South Africa and the EastGreat Output of Corporation Securities-Effect of the Increase in Gold Production-Bank Troubles in Germany-Weaknesses of the American Financial Organization-The Stock Market Reactions of 1901 and 1903-"The Silent Panic" of March, 1907— The Bank Failures of October-Suspension of Currency Payments and Issue of Clearing-House Certificates—Treasury Measures of Relief-Conditions at the close of 1908.

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ECOVERY from the crisis of 1893 was delayed in the United States by the uncertainty attending the Presidential election of 1896. The declaration of the regular Democratic convention of that year in favor of the free coinage of silver caused such anxiety among business men, who desired to adhere to the gold standard, that practically no new enterprises were undertaken or projected until, a few weeks before the election, it became certain that the Republican candidates, who stood upon a platform in favor of the existing gold standard, would be elected.

After the inauguration of President McKinley on March 4, 1897, confidence was gradually restored, and presently began a revival of business activity. Exports of merchandise, which amounted in the fiscal year 1896 to $882,606,938, rose in 1898 to $1,231,482,330; in 1900 to $1,394,483,082; and finally, in 1906, after only moderate changes in intervening years, to $1,743,864,500, and in 1907 to $1,880,851,078. Imports of merchandise, which in 1896 were only $779,724,674, did not feel the impulse of reviving prosperity until the

movement of expansion was well advanced, but in 1900 the amount was $849,941, 184; in 1903, $1,025,719,237; and finally in 1906, $1,226,562,446; and in 1907, $1,434,421,425. The ratio of imports per capita, which in 1898 had been as low as $8.05, rose for 1907 to more than double this ratio, or $16.54. Internal trade also increased in great proportions and banking operations expanded in harmony with the expansion of business. Clearings at New York, which were $29,350,894,000 in 1896, and $51,964,588,000 in 1900, increased in 1907 to $95,315,421,000 while for the country at large they increased from $51,935,651,000 in 1896 and $81,582,450,000 in 1900, to $154,662,515,000 in 1907. The volume of money in circulation rose from $1,506,434,966 in 1896 to $2,055,150,998 in 1900, and $2,772,956,455 in 1907. Individual deposits in national banks increased from $1,668,413,507 in 1896 to $2,458,092,737 in 1900, and $4,322,880, 141 in 1907.

In other commercial countries also progress was rapid during the ten years ending with 1907, but was checked in several cases by war and other special circumstances. Among the most conspicuous of these influences were the effects of the war in South Africa upon Great Britain, from 1898 to 1902, and the effects of the war between Russia and Japan, in 1904-1905. The war in South Africa cost the British Government nearly $800,000,000 and resulted in loans to the amount of nearly $600,000,000.' The effect was severely felt in the money market in restricting the supply of capital for other classes of investments. Especially was the issue of large quantities of new securities felt upon the price of British consols. Quotations had been as high in 1896 as 1144. The reduction of the interest rate from 234 to 22 per cent. took effect in 1903 and had some influence in depressing prices, but the influences which were most potent in carrying down consols to a minimum price of 91 in 1901, and 8034 in the autumn of 1907, were the great demands for capital and the increase in the amount of consols on the market.

Vide Bulletin de Statistique, April, 1902, LI., 485.

The war between Russia and Japan over the control of Manchuria began in February, 1904, and hostilities practically ceased in June, 1905. The attack of the Japanese upon the Russians was followed by a serious break in the markets of Paris and Berlin, but partial recovery soon took place. The estimated cost of the war to Russia was about $840,000,000, but this did not represent the disbursements. after the peace.' The cost to Japan, up to the close of 1906, was officially calculated at about $1,000,000,000. The war between Spain and the United States in 1898, though of minor importance, cost the United States about $165,000,000,* and for a time seriously impaired Spanish credit. Thus, in these several conflicts in arms were expended not less than $2,800,000,000, making demands upon the savings of the world equal to more than the usual output of all classes of securities for an entire year.

Coincident with this great destruction of wealth in war was an unprecedented demand for capital for new industrial enterprises. As usual in periods of expanding trade, the resources applied to these enterprises were converted in excessive amounts into fixed forms and the supply of circulating capital became deficient. A period of redundant capital followed the prostration of 1893. During this period, when interest rates in Europe sunk to 2 or 3 per cent. and important government loans were refunded at low rates, refunding operations constituted a large proportion of the issues of new securities. When rates for money rose, however, and capital began to become scarce, about 1897, refunding operations substantially ceased. They were resumed to some extent in 1902 and 1903, chiefly in the case of important government loans, but were again brought substantially to a halt in the next two years. In the table given below, based upon the figures of the Moniteur des Intérêts Matériels, total issues of all classes of securities are given, with con

1 Raffalovich, Marché Financier en 1905–06, 450.

9 Report on the War Finance, 1906, 12.

3 Report of the Treasurer of the United States, Finance Report, 1898, 7.

version or refunding issues. followed for each year by the net new demands for capital obtained by deducting conversions from total issues:

These figures show that, while new demands for capital were comparatively uniform from 1896 down to 1903, they increased to an enormous extent during the next three years. Hence came the strain which was felt in the market for capital in Great Britain and Germany as well as in America. In the United States issues of the negotiable securities of corporations-stocks and bonds-multiplied much more rapidly than the total mass of tangible physical property, whose value was computed in 1904 at $107,104,211,917. This increase in security issues gave an appearance of fluidity to the capital of the country, which was in some respects deceptive. While securities are themselves readily negotiable under normal conditions, they represent fixed capital and not circulating capital. Stocks are the title to shares in permanent investments, like railways, factories, and buildings. Bonds usually represent the obligations which have been issued to acquire fixed capital and are secured by mortgages upon railway mileage, factories, and buildings. The conversion of circulating capital into these fixed forms proceeded at a remarkable rate after the recovery from indus

trial depression about the year 1900. Careful calculations show the principal securities outstanding in the United States even in 1905 to have been about $35,000,000,000 par value. Among the chief items were the following:

PAR VALUE OF OUTSTANDING SECURITIES IN THE UNITED STATES, 1905.

The amount of securities outstanding throughout the world as early as 1900 was estimated at about $110,000,000,000, or more than the entire wealth of the United States. Great Britain was credited with $26,400,000,000, or $616.97 per capita; France with $19,500,000,000, or $500.94 per capita; and Germany with $10,000,000,000, or $177.41 per capita. To these amounts great additions were made during the following seven years. In Great Britain alone issues of new capital were estimated for the five years ending with 1904 at $3,454,978,975, but this included a considerable amount in foreign securities offered on the London market. In the United States calls for new company capital were computed for 1904, at $1,003,542,200; for 1905, $1,694,187,211; for 1906, $2,307,970,000; and for 1907, $1,459,325,000. Into Russia was poured in a few years French capital to the amount of at least $200,000,000.

1 For further details, vide article by the author, "The World's Wealth in Negotiable Securities," Atlantic Monthly, January, 1908, CI, 97.

' New York Journal of Commerce, January 2, 1908. Annual Review, second section, p. 10.