The Future of High Finance
I
IN the numerous reflections and comments evoked by the death of Edward H. Harriman, the consideration to which the interest of the community was chiefly directed was the effect on what might be called the politics of the railway and Stock-Exchange situation, of the removal of so conspicuous a figure in both fields. The death of a reigning sovereign, of a military conqueror, of a statesman dominant in the realm of international diplomacy, is followed by a hasty survey of the situation as it existed before his death, and as it is likely to shape itself afterward. Study and inquiry address themselves to determining how much of that situation had been the out come of natural causes, how touch the artificial creation of a single powerful will and personality, and how much the temporary result of compromise or intrigue. When operations of such magnitude have been conducted by one man, and by a man of powerful will and dictatorial temper, the scope of inquiry is very similar.
The question whether the situation in regard to the mutual relations of the powerful railway corporations and the groups of financiers who control them, can remain what it was before, is canvassed eagerly, and in Wall Street anxiously. With popular interest focused so intensely on this consideration, the larger question, what the career of the departed financier signifies to the financial history and financial tendencies of the day, is slower in receiving consideration. It is this latter question which I shall discuss in the present article.
Before entering on that general discussion, however, it will be necessary to see exactly what was the situation which existed at Harriman’s death, and was largely brought about through his personal energies. Harriman became a conspicuous figure on the financial stage unusually late in life. His opportunity came with the railway bankruptcies of 1893, the era of reconstruction which ensued, and the country’s extraordinarily sudden industrial revival. In 1893 and the two succeeding years, onefourth of the country’s railway capitalization had passed into receivers’ hands. Here was at once the opening for the constructive and operating genius which is Harriman’s most honorable title to renown. With the abrupt return of American prosperity, and with the increased traffic, easy credit, and seemingly limitless facilities for capital, there came the opening for the farreaching ambitions, the bold experiments with capital, and the mastership of other financial interests, with which his career is chiefly associated in the public mind.
Acting at first merely as agent for an immensely wealthy group of capitalists commonly known as the “Standard Oil clique,” who were casting about, in the heap of prostrate corporations, for an inviting field of investment, Harriman undertook to reconstruct the bankrupt Union Pacific property. His achievement in setting it physically and financially on its feet was unquestionably brilliant. It is possible that his personal part in the successful undertaking may have been exaggerated, later on, in the public mind; for the change in underlying conditions of the country traversed by that railway was fundamental, and it is greatly to be doubted if any human being could have foreseen them.
Harriman himself, in 1896, cannot possibly be said to have reckoned on them. Nevertheless, in this windfall of good fortune Harriman took his chance; and the credit usually awarded by the world to a great experiment which succeeds even better than its author had imagined, rightly belongs to him. His genius in practical railway administration has been acknowledged by all competent critics. For mastery of the problems of developing and utilizing such new traffic resources as presented themselves, and for judgment in the still more exacting questions of the extent to which the surplus profits of a year should be reinvested in the property, he stands undoubtedly in the first rank of our Captains of Industry.
II
All this had in very large measure been achieved before Harriman began to cut a figure in the grand strategy of American finance. That later phase of his career began in the period which we nowadays chiefly associate with the monstrous “ promotion mania ” of 1901. Purchase of the parallel Southern Pacific Railway, through money raised on Union Pacific bonds, was his first spectacular achievement. Relatively speaking, it was a wise and prudent measure. The Southern Pacific owned the Central Pacific Railway, which, ever since 1866, had been the direct connecting link between the Union Pacific’s mainline western terminus in Utah, and the Pacific coast. To acquire the Central Pacific and thus complete a logical east-and-west through line from the Missouri River to the coast, it was necessary to do what Harriman did, early in 1901, and buy up Southern Pacific itself.
But the ease with which this $75,000,000 purchase was effected, in the extraordinarily favorable money and investment markets of the year, stimulated imagination and ambition. When the Northern Pacific and Great Northern railways, against Harriman’s protest, bought the $110,000,000 Chicago, Burlington, and Quincy, without inviting Union Pacific to participate in the “deal,” Harriman set out audaciously to buy control of the $155,000,000 Northern Pacific property itself. In the contest with the Hill-Morgan interests for control, he actually raised on Union Pacific’s notes secured by unissued treasury securities, money enough to buy $78,000,000 of the stock.
Eventually he was beaten in this second undertaking to capture a rival railway; but the readiness with which the money market had equipped him for the venture served only to increase his ambition and his daring. Selling for cash, in the open market, the holdings in Northern Pacific which had failed to give control, and borrowing $75,000,000 additional capital on the notes of Union Pacific, Harriman went to work, in 1906, to buy up stock in from half a dozen to a dozen other railway systems, some of them on the Atlantic coast and hundreds of miles away from Union Pacific’s terminus. The notes were subsequently funded into permanent securities, and there seemed no limit to the process.
His dominating will, and perhaps even more the fear of what he would do next with his Fortunatus purse, made him, even where Union Pacific had secured but a small minority of the stock of these railways, a controlling power in their affairs. It now became possible for Wall Street to declare that Harriman was the personal dictator of seventy-five thousand miles of railroad, — one-third of the total mileage in this country, — besides having a dominant voice in the management of four oceansteamship lines, two trust companies, and three banks. The Interstate Commerce Commission, in an official report, declared that, had he acquired the Northern Pacific also, it “would have subjected to a common will and policy nearly one-half of the territory of the United States.” His counsel, Mr. William Nelson Cromwell, endeavoring in 1907 to suppress certain hostile activities in the shareholders’ meeting of a smaller Harriman corporation, soothingly pointed out that Harriman “moves in a world into which we may not enter.” He aspired to control the Equitable Life Assurance Society, and had the boldness, on the heels of the scandals of 1905, when Hyde had sold his majority interest in the Equitable stock to Ryan, to say to the latter, “ I will take half your stock; I don’t know what it cost, nor care.”
To this extraordinary power over railway finance and the money market, Wall Street added implicit belief in Harriman as a Stock-Exchange speculator on an extensive scale. Achievements in that field are naturally not spread on the record as are exploits in railway financiering. Even Congressional committees have been slow in unearthing such particulars since the famous cross-questioning of Jay Gould on the witness-stand, thirty or forty years ago. But Wall Street has its own way of learning facts in matters of this sort, even when it cannot produce the legal proof; and a conviction amounting to certainty existed that in 1906, when $131,000,000 of Union Pacific’s treasury funds were being tossed into purchase of railway shares on the Stock Exchange, Harriman and his Union Pacific associates were speculating heavily on their own account. In 1908, when daring Stock-Exchange speculations were conducted on the basis of the country’s recovery from panic, not only Wall Street, but the European markets, openly ascribed the personal initiative to Harriman. A “Harriman market,” indeed, became a familiar term to describe a great stock speculation marked by particular qualities of audacity, dash, and sudden realizing sales.
III
What would become of this extraordinary “personal control” of the country’s railways, banks, and steamship lines, was now the first question to be asked. It has already been in some part answered. Jay Gould in 1880 was described as controlling every transcontinental railway line, except two minor roads west of the Missouri River; but his heirs to-day have no important interest in any of them. The reason was that Gould’s possession was based on such power over other men as enabled him to group and manage numbers of separate owners of large blocks of the shares of the properties in question. His death ended the pact; new combinations were created, and except for three or four less important properties, the “Gould system” became a thing of the past in railway finance.
It is wholly probable that the “Harriman system” will similarly dissolve into something like its original elements— indeed, so far as regards the acquisitions of 1906, the dissolution process has already begun. The Union Pacific itself has chosen a close associate of Harriman’s to succeed him as its president, and the Baltimore and Ohio and the Illinois Central, captured by Harriman in 1906 and 1907, have replaced him in their boards by a “Harriman man.” But the New York Central, the Pacific Coast Company, and the Western Union, on all of whose directing boards Harriman had been a conspicuous figure, have elected men of other affiliations to occupy the vacant chair; and the National City Bank has chosen a partner in the house of Morgan to fill Harriman’s place in its directory. How much further the railway combinations, built up under Harriman’s personal régime, are destined to fall apart, is a matter for the future. The probability of continued disintegration is not diminished by the fact that pressure, both of indignant public opinion and of threatened legislation and litigation, points to the forced separation of the Union Pacific Railway from some at least of the $200,000,000 other railway stocks which it still holds in its treasury.
IV
Such dissolution of a railway empire is in accordance with experience; it is also an altogether reassuring fact. But it does not by any means settle the larger question, to what extent the career of Harriman does or does not mark out the nature of our financial history in the years ahead of us. I have thus far restricted my review of the situation to that part of it wherein Harriman individually played a part. But, as every one conversant with our recent financial history is aware, the movement to bring great American enterprises and industries under the control of a single group of men had a very much larger scope than the Harriman undertakings.
Harriman’s scheme of personal control may, indeed, be described as an alternative expedient, adopted when another and different scheme, with the same objective point, had apparently broken down. In 1900 and 1901, it was the “holding company” which was to serve the purpose. The “ billion-dollar Steel Corporation” of 1901 was such a holding company; the eighteen or nineteen constituent corporations, whose ownership it acquired through purchase of their stock with its own securities, are still intact, although subject, since the Circuit Court’s decision of November 20, to the United States Supreme Court’s application of the anti-trust law. The $100,000,000 “Shipping Trust” of 1902 is another: the White Star and the other steamship lines whose stock it owns still perform certain corporate acts on their own account. The $153,000,000 Amalgamated Copper Company of 1899, which, through its agencies, fixes the price of copper for some half-dozen powerful copper-producing companies, thereby largely controlling the price of copper for the trade, is merely a corporation which owns shares in those smaller companies and draws dividends as its subsidiaries earn and pay them. It was merely extending the holding-company plan a bit when the deadlock in the “Northern Pacific corner” of 1901 was broken by the formation of the $400,000,000 Northern Securities Company, with no ostensible purpose save to hold the bulk of the outstanding Northern Pacific and Great Northern stock, purchased with its own shares.
To what lengths the holding-company expedient would have been extended, had nothing occurred to check its adoption throughout corporate industry, it is difficult to say. The counsel of the Northern Securities himself admitted to the United States Supreme Court, in 1903, that thesame machinery might conceivably be employed to buy up all the railways in the country, and to lodge control of them in the hands of three or four individuals. Largely because of this admitted fact, the highest court declared the device adopted by that company to be repugnant to the law, and the $400,000,000 holding company was by law dismantled. With the ambitions of our powerful financiers blockaded in that direction, it was left for Harriman to try the experiment of personal control through an inverted pyramid of credit, based on a great corporation chartered for other purposes.
The results of that second experiment we have already seen. The situation left after Harriman’s death does not prove that the same expedient may not again be employed by other aspiring autocrats. But the disintegration of the chain of corporations thus acquired, the pretty plain signs that a reckoning with the courts and legislatures was not far away, and the doubts of the very financiers engaged in the experiment, as to whether a structure thus built up was secure against future shocks to credit, make the immediate revival of the Harriman plan a doubtful recourse. One does not need to be very old in Wall-Street experience to recognize that McLeod completely wrecked the Philadelphia and Reading Railway in 1893 by a series of experiments almost exactly parallel to Harriman’s. Financial conditions in 1906 have slight resemblance to those of 1893; but there is no sure guarantee against the longer future.
It is, therefore, a matter of singularly interesting conjecture, what the next chapter in the movement for control of the many by the few will be. But the fact that the purpose has not been relinquished makes it worth while to ask again just what is involved in any such undertaking. The case of the holding companies is typical. It is quite beyond dispute that the purpose of these companies was, first, to acquire control of the underlying properties, for given financial interests, by a smaller personal investment than outright purchase by individuals would necessitate; second, to seat such interests so firmly in control that they could not be dislodged. A primary and fundamental purpose of guaranteeing “harmony in the industry” was indeed asserted by the authors of all the experiments in question; but this was virtually conditioned on their own continued control of things.
As for the motive of insuring a management against removal under any and all circumstances, Mr. J. P. Morgan testified on the witness-stand, in 1902, his conviction that enormous capitalization of a holding company was chiefly desirable because such a capital stock would make contests for control impracticable, and because, therefore, “stability of control” would be guaranteed. I need not discuss at length the inherent weakness of this theory, even on the supposition of a competent management elected at the start. It is enough to say that the necessary sequel to Mr. Morgan’s own proposition would be a perpetual and self-perpetuating management; that we are summoned to take for granted the wisdom and honesty, not only of an existing directorate, but of its successors, to the end of time; and, finally, that it is tacitly assumed, in the case of a conceivably incompetent or unscrupulous future management, that the shareholders will possess no power to remove them.
In 1901, there were those who were ready to accept such conditions for the future; but even the greatest holding companies have been making history since then. The stupid blunders of the Amalgamated Copper Company, in the management of its subsidiaries’ trade in 1901 and 1906, taught something. The original organization of the Shipping Trust has long been classed by the markets as a chapter of misjudgment. The verdict of the financial community long ago stamped as gravely mistaken policies the four per cent dividend on the Steel Corporation’s common stock at the very beginning of its career, and the attempt of 1903 to turn $200,000,000 of its stock into mortgage bonds.
Of Harriman’s experiments, it need only be recalled that, while his use of Union Pacific’s credit for the purchase of $78,000,000 Northern Pacific stock turned out a lucky venture from the Stock-Exchange point of view, and realized on the subsequent liquidation of the shares a handsome profit, his $131,000,000 purchases of stocks in 1906 resulted within a year, by his own admission in an annual report, in a paper loss of $23,149,000. The values quoted at the height of panic, during October, 1907, measured a loss of no less than $40,000,000. The experiment was a blunder of the most serious sort, from the usual penalties of which his company was saved only by the exceptional immunity of its own territory from the panic shock, and by the real resources accumulated by Union Pacific. in the days before Harriman began to speculate in the market with its credit.
V
Considerations such as these make it necessary to consider under what sort of auspices our industries and our corporations would be lodged, in case the recent experiments in “concentrated control” were to be indefinitely pursued. This brings up a highly interesting phase of contemporary financial history, involving certain practical problems, regarding which the financial world is to-day in a singular condition of bewilderment.
A term which has become extremely familiar, these past half-dozen years, in the vernacular of financial markets, but which, so far as I know, is not contained in any English dictionary, is that of “high finance.” The term is indigenous to France: in the Dictionnaire de l’Académic, “haute finance ” is described as applied to “ceux qui font des grandes affaires d’argent” The definition is possibly too comprehensive: it would fit a colossal swindler or speculator — as well as the great bankers and capitalists whose names are household synonyms for conservatism. As we shall see, there has been much the same difficulty in the later popular application of the term. It was taken over in its French form into the phraseology of Lombard Street, two or three generations ago, by way of describing the powerful London houses which occupied the position of arbiters and intermediaries between the money market and the great states and enterprises which had to resort to it, and, in the form of “high finance,” it reappeared on the American markets when the functions which the term described became matters of everyday discussion.
The haute finance of French and English money markets was the epitome of conservatism. The words were used, even on the Stock Exchange, in a tone of awe. Men of affairs were perfectly well aware what bankers and what banking-houses made up even the inner circle of high finance. Socially and individually, members of that circle were as accessible as other business men. But the public conviction that the actions and policies of these houses were inspired, not only by intimate knowledge of the inner affairs of finance, but by the strictest conservatism, gave to high finance as an institution a dignity which no individual classed in its membership could alone have enjoyed. It was to the high finance that powerful governments resorted, when war was threatening and the exchequers had to learn where the war-loans could be placed. The selling of investment securities— which has become traditionally a warning, more or less distinct as the case might be, of such an impending event in national politics — was usually the realizing process whereby high finance, and the institutions affiliated with it, were converting investments into cash by way of preparation for the public loans. To this same high finance came corporations requiring new capital in large amounts.
The problem in these cases, as in the case of imperative government demands, was to adjust the request for capital to the resources of the market. Contrary to the ideas of many people, an existing supply of capital is at no time inexhaustible. Sudden and unexpected demands, on an investment market where capital was already actively employed, involved displacement. Some other borrowers would have to go without or get less than they expected, or else, through a more or less automatic lowering of prices for other investments, some part of the capital already placed must be released. It was the part of high finance to prepare for such contingencies and to provide for the unexpected wants with a minimum of strain on the existing situation. In the case of a speculative mania, it was its business, so far as possible, to curb the excesses of the markets and to husband its own available resources against the credit crisis to which such speculation pointed. In the case of panic itself, it was the office of high finance to meet the emergency, provide for urgent needs, and avert the general insolvency which might otherwise be threatened.
The scope of operations indicated was confined to no one market: it was world-wide, and therefore high finance became necessarily an international institution. Berlin would borrow enormous sums from Paris when German trade activity had strained the German markets, as in 1898. Paris would borrow in similar amounts from London when, as in 1882, financial crisis confronted the Paris markets and credit was shaken throughout France. London would borrow from Paris, as it did in 1899, when war was impending, the English markets were collapsing, and capital was needed instantly for the British war-loans. Enormous sums of capital were therefore shifting from market to market, and to effect such transfers, credit in its highest form had to exist between the circles of high finance in the various money-centres. It has been said by bankers of high international position that it was possible for as much as $50,000,000 to be borrowed for such purposes, on its simple note, by a banking-house in one country from banking-houses in another.
It is easy to see what qualities were required from banking interests cooperating in such undertakings, and guarding the world’s credit-system as a whole. Conservatism in its highest form was an absolute prerequisite; experience, intimate knowledge of an existing situation, and possession of the absolute confidence of capitalists and institutions in the community about them, were equally essential, and were more or less conditioned on the extent to which the first-named quality prevailed. It did not follow that no lapse from these exacting standards ever happened in the circles of high finance. Prior to 1857, the London house of Overend, Gurney & Co. would possibly have been included in this high sphere of banking by the average Londoner. “No cleverer men of business,” writes Walter Bagehot in his Lombard Street, “cleverer, I mean, for the purposes of their particular calling, could well be found than the founders and first managers of that house; but in a very few years the rule in it passed to a generation whose folly surpassed the usual limit of imaginable incapacity.” The London panic of 1857 told the rest of the story. In a less degree, it may be said that the rashness and misjudgment of the banking-house of Baring Brothers, during London’s “Argentine craze” of 1889 and 1890, marked another lapse in high finance. But instances of this sort were as rare as they were discreditable, and the term of high finance, with the attributes popularly ascribed to it, continued to picture to the public mind an unchanged and enduring institution.
VI
This sketch of what may still be called the European conception of high finance is not less interesting in view of the very singular change which seems to have come over the attitude of the American markets, and of the American people at large, in regard to that institution. President Roosevelt, in one of his public addresses of 1907, referred to high finance as a term of timehonored distinction which had been brought in this country into actual disrepute. Mr. Roosevelt will scarcely be cited as an expert authority on financial problems, but in this assertion he may fairly be said to have voiced the feeling of the day, even in Wall Street.
This is what a recognized financial authority, removed even from local or political prejudice in the matter, has had to say on the same points. The London Economist, writing editorially, after our market’s wild exploits of 1901, of the passing of control in American railway enterprises from adventurers of the Jay Gould stripe to banking interests in the field of high finance, remarked that recent events had disclosed a situation “which may be but little less harmful to real investors than the depredations of the ‘bosses.’ ” Discussing the severe and world-wide money squeeze of 1905, the same authority declared that the real cause of the stringency was the Wall-Street speculation and the consequent “locking-up of the funds of the banks in Wall Street by the financial magnates who control those institutions.” And again, in describing the panic of 1907, the Economist declared that “the financial crisis in America is really a moral crisis,” caused by the public’s discovery of the imprudence and recklessness of “the leading financiers who control banks, trust companies, and industrial corporations.”
Clearly, these are not references to financial brigands and adventurers. Rightly or wrongly, but in either case explicitly, the Economist frames an indictment against American high finance. The conservative source from which the accusation comes is so far removed from the field of “muckraking” or “yellow journalism” as to render off-hand dismissal of the charges unjustifiable. In recent years, moreover, the published comment of the London and continental money markets, in the most serious European journals, has been largely to the purport that the policy of the highest financial circles in the United States has been so venturesome in conception, and so completely indifferent to the derangement of the American and other money markets, that in its periods of ambitious speculation, it constituted a menace to all the markets of the world.
Two different positions may be held in regard to a. judgment of this sort. It may be accepted as pointing to real and important changes which have befallen twentieth-century finance, or it may be rejected as imputing to our American financiers actions and motives which belong to people wholly outside their membership. Whichever position be adopted, it will certainly be worth while to inquire as to the basis for such declarations. What will probably first impress the mind of any one making such an inquiry is that, ten years ago, accusat ions of the sort were not only not made, but would have been inconceivable. Even in the general public’s mind, the high finance of the American markets was at that time regarded in exactly the same light as the high finance of Europe. The United States had had its chapters of extravagant and demoralizing speculation, of railway “ looting,” and unprincipled promotion. These, in periods of credit inflation and unsettlement of financial ideas, have been a characteristic of all young financial communities, and of our own perhaps as distinctly as of any other.
Our Jay Goulds and our Jim Fisks, with their followers, operated on a reckless scale in the Stock Exchange; they controlled railways whose finances they manipulated to suit themselves; they aspired on occasion to the control of banks and newspapers, and when they died, they sometimes left fortunes of fifty or eighty millions to their families. But except in the sense that they handled enormous sums of money, it would never have occurred to any one, even in 1869, to consider these personages as members of the circles of high finance as we have interpreted the term. It was in fact a very low and vulgar finance in which they exhibited their activities, and the public knew it. To have ranked them as anything but financial adventurers, or to have spoken of them as a part of the body of great financiers in whose hands the credit of the American market ultimately rested, would have been to commit the absurdity of which a certain Lord Mayor of London was guilty, fourteen years ago, when he gave a dinner at the Mansion House to the successful gold-mine speculator, “Barney” Barnato, and invited the Rothschilds and Hambros to participate in the function.
Behind these sinister figures which crossed the stage of Wall-Street speculation in our later paper-money days, and apart from them, were grouped conservative financiers of the same type as those who constituted the high finance of Lombard Street; and no small part of their duties at that time was to protect the security and money markets against the designs of the millionaire adventurers. Precisely the same line of distinction could be drawn, throughout the much later periods of 1893 and 1895, and the subsequent years when protection of a collapsing public credit, and reconstruction of a group of insolvent railway systems, called for exercise of the highest powers of financial conservatism and sagacity, and for possession, in the largest measure, of the confidence of prudent home and foreign investors. The work of financial rehabilitation, pursued under such auspices between 1894 and 1900, was a most gratifying exhibition of the traditional qualities of high finance.
VII
It was in 1900 that this phase of the situation first appeared to change. During 1901 and since that time, it will hardly be denied that our greatest banking-institutions and our greatest banking-houses became in a sense identified — certainly so in the view of Wall Street and the general public — with the promoting and speculating movement of the day. At the same time, our men of enormous inherited or invested fortune, such as, in European markets, would have grouped themselves around the conservative institutions which embody high finance, entered the field of Stock-Exchange speculation and manipulation on a scale which made the exploits even of the Goulds and Fisks appear as small affairs.
It is scarcely necessary to repeat the well-known story. The “underwriting syndicates” with ultra-respectable connections; the access indirectly obtained to trust funds of life-insurance companies which were forbidden by law to embark their funds in enterprises of the sort; the expedients employed to tempt the already excited outside investing public into the arena of stock speculation—all this is a nineyear-old tale with which every one is familiar. The more significant fact, perhaps, was that in powerful banking circles — where, had all this occurred in Europe, one might confidently have looked for words of disapproval, caution, and rebuke — criticism of these excesses in the markets was received either with resentment, or with the calm explanation that we were living now in a new era of economics and finance, where former precedent counted for little or nothing.
Equally striking and significant were the expedients adopted to sustain the speculation thus provoked. Not only were the resources of domestic banks drawn upon until the resultant liabilities repeatedly ran beyond the ratio of cash reserves prescribed by law, but credit was raised in Europe, a foreign floating indebtedness of admittedly unprecedented volume being thereby repeatedly created. The time arrived when this attitude of the most powerful banking interests became a matter of everyday remark, at home and abroad. The so-called “rich men’s panic” of 1903, an altogether humiliating experience, was made up of forced liquidation by the very richest. The panic of 1907 was preceded by similar convulsive liquidation by some of the wealthiest men in the United States, who, twenty years ago, would almost certainly have been ranked in the inner circle of conservative high finance.
More impressive than any other incident of the period, in the light it threw on the nature of the situation, was the attitude of the great lending institutions, home and foreign. Not only in Europe, but in New York itself, it had been previously an accepted tradition of the money market that, when Stock-Exchange speculation went beyond reasonable bounds, and especially when demands for credit by the Wall-Street speculators had visibly impaired the position of the local banks, energetic measures would be taken by those institutions to put a quietus on the movement by restricting accommodation. In 1905, when stock speculation at Berlin grew as wild as it was in New York City, the Imperial Bank of Germany raised its official discount rate to six percent, the highest figure ever reached by it up to that time, outside of actual panic years, and the president of the bank publicly stated, as a reason for t he advance, that “excesses of speculation on the Bourse had unduly increased the demand for money,” and that “it was the duty of the Reichsbank to put a damper on the movement.”
The great New York banks pursued no such policy, though the excesses of speculation were greater that year in New York than at Berlin; they continued to supply the speculators until their surplus reserves were exhausted at the moment of the greatest need of bank funds to finance the movement of the crops. What the New York banks would not do, in relation to a Wall-Street speculation, the Bank of England found itself forced to do when powerful international banking-houses proceeded to make high bids for enormous sums of the London market’s capital, apparently to sustain the WallStreet speculation. Twice — in 1906 and in 1909 — this great state bank had recourse to extreme expedients to prevent further advance of credit, by the European money market, to the powerful Wall-Street borrowers. On both occasions, the aspect of the matter most novel in the experience of our market was that the large banking interests in New York, instead of quietly coöperating in this effort of foreign high finance to restrain excesses in credit exploitation, appeared to take the ground that such action, by such institutions as the Bank of England, was either an impertinence or a confession of weakness, and as such might be disregarded.
VIII
The facts which I have cited are so familiar nowadays that it has seemed hardly necessary to recapitulate them. They had, no doubt, a psychological as well as purely financial cause. They may be explained in large measure by the genuine and quite unprecedented prosperity of the United States, which was reflected, as prosperity always is, by enthusiastic speculation. But they were also reasonably to be ascribed to what a French critic of economics of high standing has called the “financial megalomania” of our capitalists. The phenomena bear close relation to the inquiry with which we started out — namely, to what extent a career such as Harriman’s is an omen for the country’s financial future, and what problems will arise hereafter, if his exploits in the credit market really foreshadowed the next chapter in our financial history.
These questions are likely to be tested during the next year or two. All that can now confidently be said is, that the practices referred to have already had a distinctly unfortunate effect on the position occupied by the American market in relation to financial Europe, and that the public mood is such that resumption of the process of exploiting corporation credit, on the scale and for the purposes of 1901 or 1906, will almost certainly encounter obstacles in the courts and the legislatures. President Taft’s lately-announced policy of restricting ownership by railways of stock in other railway corporations, and of conferring on the Interstate Commerce Commission the power to veto issues of new securities, except for the business requirements of the issuing corporation, is one illustration of what the progress of events may bring. Such a restriction will, to many minds, seem superfluous and irritating, since, in theory at least, the directors of a great corporation are assumed to act with the widest knowledge and with the best interests of their properties in view. But the “Harriman episode,” taken along with the other tendencies of the day which we have reviewed, does not show that the theory can be safely left to operate alone.
Not the least interesting aspect of the situation is the bearing of all these recent phenomena on the movement to establish a central bank of issue. Mr. Taft, in his Boston speech of September 14, pronounced it an “ indispensable requirement” that such an institution “shall be kept free from Wall-Street influences.” But this is not in all respects so simple an achievement as might be imagined. In more than one quarter, it has been asked with much concern, since the discussion opened, how far we could be assured that a central bank would use its necessarily great power over the American money market as we have seen the great state banks of Europe to have done, — deliberately to place impediments in the way of the extravagant use of credit for exploiting and promoting schemes of powerful interests in the market; and whether it could be surely guaranteed beforehand that such power might not be used, as even the United States Treasury’s great powers have been used on certain well-remembered occasions, to smooth the path of a daring and dangerous experiment in the field of speculation.