Part 17 (1/2)
Credit may be broken down in many ways. A breakdown may be due to inability on the part of those who handle coin to meet their obligations in coin. It may, however, be due to the unwillingness of those who have and handle money to put this money at the disposal of the industrial public. It is sometimes occasioned by both.
Money is indispensable to the working of the industrial system. It may be regarded as the blood of the industrial system because no farmer can operate his farm, no factory owner his factory, no railroad company its road without money or the equivalent of money--credit. And if money can be compared with the blood in the human body, the banking system must be regarded as its heart; the organ that keeps money in circulation, accommodates circulation to the needs of the body, furnishes the economic body with as much as at periods of exercise it needs; and moderates its circulation when at periods of repose the economic body is less in need of it. It is hardly necessary to point out the extreme importance under these conditions that the heart of this system act for the benefit of the system, and have at no time an interest of its own to act independently of the system or in a manner hostile to it. Now this is exactly the evil of existing monetary conditions. Those who have and handle money have an interest of their own to serve. While it is generally to their interest to use money in making the community prosperous, it is at certain critical periods to their interest on the contrary to withhold money. This is the point upon which emphasis must be put. Let us, with a view to understanding this, consider into how few hands the control of coin tends to be concentrated; and how easy it is for these few to serve their own interests at the expense of the public by withholding coin at moments of utmost need.
A very brief study of the movements of coin in the United States will demonstrate the very few hands in which the control of coin in the country is vested:
Every trust, every corporation, every railroad company makes payments to its stockholders at stated intervals consisting of dividends on stock and interest on bonds. These amounts are large. In 1905 dividends amounted to $840,018,022, and interest to $636,287,621--together a billion and a half.[116] Most of this is paid in New York and produces a regular flow of money from the great corporations to the New York banks.
The great life insurance companies have their princ.i.p.al offices in New York and there flow daily into the coffers of these companies millions of dollars of premiums, amounting in the year to nearly half a billion ($492,676,987 in 1908). During the last half century, 1859-1908, the income from premiums reached the enormous total of $7,870,892,759.[117]
All these go into the hands of New York banks and trust companies.
These moneys are, in the ordinary course of business, returned to the industrial public in the shape of accommodations to banks, loans to farmers, factories, railroad companies, etc.; and if these enormous sums that go into the hands of the Wall Street Group are not returned to the industrial system, the industrial system must perish just as the body must perish if its vital functions are not furnished with blood. But as has been stated, it is to the interest of the Group to keep the industrial system prosperous and, therefore, in prosperous times this amount gets back to the country again, the Group receiving a profit on taking in these moneys and on the paying out of them. One thing, however, is certain--that the Group can by withholding money make money scarce. It can by releasing money make it plentiful. The power given to the Group by this order of things is incalculable. If the Group desires to issue securities, it has an interest in making money plentiful. If the Group desires to purchase securities cheaply, it has an interest in making money scarce. The Group is therefore in a position where it can serve its own interests whatever be the direction these interests take.
A banker once described to me the situation as follows:
”The bulk of business is conducted with credit. An enormous credit system is built upon a relatively small amount of gold. The bankers control the gold; by controlling the gold they control credit; by controlling credit they control business.
”This credit and gold system can be compared to an enormous system of reservoirs and irrigation works, the sluices of which are all opened and closed by electricity. It takes a very minute amount of electricity to open and close the sluices; but the man who has control of that small amount of electricity has the whole irrigation system at his mercy. By pressing a b.u.t.ton he can furnish water to one region and take it away from another; and if water has been largely used--as in the case of overinvestment--he can, by withholding water altogether, put the whole population of the land irrigated by the system on its knees.”
Let us select as a concrete ill.u.s.tration of the workings of this system the events of 1907:
The year prior to the October panic of 1907 was the most prosperous year the country had ever seen. The balance of trade in our favor was $446,000,000[118]; that is to say, Europe owed us $446,000,000 on the year's transactions; the value of our crop exceeded that of the previous year by over $480,000,000; the net earnings of our railroads exceeded those of the previous year by over $260,000,000; the deposits in our banks exceeded those of the previous year by over $880,000,000; the cash held by our banks exceeded that held in the previous year by over $100,000,000; and the Treasury of the United States was bulging with ingots of gold. Nevertheless, the bankers knew that there had been overinvestment. In fifteen years the banks had invested in stocks and bonds no less than $437,000,000. In three years the trust companies had invested no less than $643,000,000 in these securities.[119]
Moreover, immense sums had been loaned by trust companies and cash reserves had fallen from nearly 18 per cent in 1897 to a little over 11 per cent in 1907.[120] The Wall Street Group knew that there had been overinvestment. As one of them said, ”We are being overwhelmed by our own prosperity.” The breeze was blowing too strong and we were carrying too much sail. The Wall Street Group, however, knowing that a crisis was at hand and determined to realize the fullest possible price for stocks, began selling securities in January, 1907, giving rise to what has been termed ”the rich man's panic,” which climaxed in March.[121] Securities fell in consequence of this selling on an average of about 40 points. This tended to cripple all weak financial inst.i.tutions which were no longer able to sell securities with a view to meeting obligations except at a loss. But this weakness did not express itself until October.
The first to suffer was the brokerage firm of Otto Heinze & Company, well-known speculators, particularly in copper stocks. The next to fall were Charles W. Morse and E.R. Thomas, also speculators and directors of the Mercantile National Bank, and others. All banks controlled by these men at once showed weakness. But the panic did not reach its climax until the Knickerbocker Trust Company became involved. To understand the situation of the Knickerbocker Trust Company, a word must be said regarding trust companies and their relations to banks.
Banks in the city of New York are required by law to keep a reserve of 15 per cent of their deposits in coin. Trust companies, not being subject to the banking law in this respect, are not called upon to maintain this reserve. They have, therefore, an advantage over banks because they can invest the whole of their deposits instead of keeping a part of them uninvested in coin. The natural hostility that would arise between trust companies and banks owing to this difference was eliminated in almost every case because trust companies were controlled by the banks. The Knickerbocker Trust Company, however, formed a notable exception to this rule.
Owing to the genius of its President, Charles T. Barney, the Knickerbocker Trust Company had increased its deposits to over eighty millions in 1907. Mr. Barney did not belong to the Wall Street Group in the sense of the word that he acted independently of it, and his extraordinary enterprise and ability aroused the jealousy of the Group. In 1907, the inst.i.tution having 8,000 depositors with total deposits of $80,000,000, became an independent power which was not to be tolerated by the Group. Under these conditions, it could not be expected that the Group would make any extraordinary effort to save the Knickerbocker Trust Company. It was to the interest of the Group that the Knickerbocker Trust Company should cease to remain an independent financial power.
Everybody knew that the Knickerbocker Trust Company, though temporarily embarra.s.sed, was perfectly sound. The receivers, appointed when its doors closed, so stated and subsequent events have proved that the receivers were right. No one doubts the ability of the Group to save the Knickerbocker Trust Company if it had chosen to do so. But the Group had in its hands an instrument by means of which the ruin of Mr. Barney could be effected: The clearing house has never admitted trust companies to members.h.i.+p, because trust companies were not under the obligation to maintain the 15 per cent reserve above referred to.
This matter had come up frequently for discussion and the clearing house had insisted that all trust companies applying for members.h.i.+p to the clearing house should keep a reserve at of least 10 per cent. This the trust companies declined to do; but they nevertheless profited by the clearing-house system by employing banks that were members of the Clearing House a.s.sociation to do their clearing for them--a dangerous situation that proved the ruin of Mr. Barney. The Bank of Commerce was the clearing-house agent of the Knickerbocker Trust Company; and the Bank of Commerce was controlled by the Wall Street Group. Under these conditions, the Knickerbocker Trust Company was at the mercy of the Wall Street Group.
The Bank of Commerce publicly announced its refusal to clear any longer for the Knickerbocker Trust Company on the 21st of October.[122] Mr. Charles T. Barney was told that no help would be given to the Knickerbocker Trust Company unless he resigned.
Understanding this to mean that help would be given if he did resign, he resigned; but help was withheld; the Knickerbocker Trust Company was allowed to go into the hands of receivers, and Mr. Barney committed suicide.
Mr. Barney's corporation was not the only one upon which the Group had its eye. The Group is interested in the General Electric Company, the largest electrical company in America. The only serious rival of the General Electric Company in the country is the Westinghouse Company.
Westinghouse was doing a larger business than he had capital for. ”He was overwhelmed by his own prosperity.” All Westinghouse needed at that time was money in order to protect his business. This money was refused to him.
The Group is also interested in the railroads of the country and indeed controls them. It is one of the bad features of our railroad system that it almost everywhere controls steams.h.i.+p lines and thus prevents the public from having the benefit of cheaper water rates by exacting the same rates on steamboats as upon land. Morse with the supposed backing of the Knickerbocker Trust had organized a system of steams.h.i.+p companies which were running independently of the railroads and threatening their monopoly of freight rates. It was necessary that these steams.h.i.+p lines should be controlled by the various railroad systems with which these lines competed, and Morse's steams.h.i.+p company was forced into the hands of a receiver.
But there was another corporation of still more importance to the Group--the Tennessee Coal and Iron Company.
The Steel Trust had never been able to purchase this company, and this company was in a measure indispensable to them. The Tennessee Coal and Iron Company had the extraordinary advantage of owning inter-bedded coal and iron; that is to say, coal and iron in the same spot. It was thus relieved of the necessity of transporting coal several hundred miles to iron ore or iron ore several hundred miles to coal. This enabled the Tennessee Coal and Iron Company to fix a price for steel independently of the Steel Trust.
As has been explained, although trusts seek to have weak independent concerns in existence if only to prevent strong independent concerns from being organized, they cannot afford to have an independent concern competing with them which is able to fix prices lower than their own. For this reason, the Wall Street Group availed itself of the panic to get control of the Tennessee Coal and Iron Company.
Upon the testimony of Oakleigh Thorne, President of the Trust Company of America, and George W. Perkins of the firm of J.P. Morgan & Company, who is a member of the Finance Board of the United States Steel Corporation, before the Senate Committee on January 19, 1909,[123] it appears that a syndicate had been organized for the purpose of acquiring the stock of the Tennessee Coal and Iron Company.
Mr. Oakleigh Thorne was a member of this syndicate, and the Trust Company of America, of which he was president, had loaned on November 1, 1907, $482,700 to this syndicate against the stock of the Tennessee Coal and Iron Company as collateral. It seems that the Trust Company called this loan and that although the stock of the Tennessee Coal and Iron Company was a dividend-paying stock and quoted at 119, the syndicate found it impossible to borrow money upon it. The only condition upon which they could borrow money was selling out to the Steel Trust.