Chapter 29

THE FINANCIAL PANIC OF 1907

[1907]

Popular opinion ascribed three reasons for the panic of 1907. The first of these was the attitude of the President toward certain great corporations. It is true that his attacks bared some of the most deeply rooted evils which have always been at the bottom of our panics--dishonesty in the administration of great aggregations of capital. Great were the lamentations and doleful the predictions of what would happen should the President not change his policy of enforcing the laws. The railway opponents of the President were sure the panic came from the Hepburn Bill, which was passed early in 1906. If this had been dangerous to the welfare of the railroads it is reasonable to assume that foreign capital would have been withdrawn from American railways and that American capitalists interested in railroads would have attempted to avert financial ruin by disposing of their holdings. Neither situation developed, for the European investors increased their holdings and American capitalists continued to plan still greater investments in railways.

The second general explanation was found in the unsound and reckless banking in New York City. The dangers arising from trust companies had been known for several years. It came to be believed that the deposits in these trust companies were being misused by the bank officers for the promotion of various speculating schemes. The disclosures which came with the investigation of the insurance companies fixed these beliefs more firmly in the minds of the people, and the first break in confidence precipitated runs on the New York banks.

The third explanation was that the panic was due to the defects in our American currency system.

These were the popular explanations, but there were deep-seated causes which had worked to bring about the existing conditions. The crisis was world-wide and was felt most in the countries where there was a gold standard. In 1890 the world's supply of gold available for monetary use was hardly $4,000,000,000; in 1907 it was more than $7,000,000,000. Along with this went a rapid rise in the average price of commodities in gold-standard countries. Bank deposits in the United States in 1907 were three times as great as they were in 1897. Amidst all this prosperity there were forces which were bound to bring a reaction and among the most important of these was the demand for capital for conversion into fixed forms. Ready capital was also lessened relatively by the great losses experienced as a result of the Spanish-American War, the Boer War, the Japanese-Russian War, the San Francisco earthquake, and the Baltimore fire. These losses, which amounted to $3,000,000,000, came at a time when the world was just entering upon a period of great industrial activity and needed all its capital. Much capital was absorbed in the construction of railroads, industrial plants, development of foreign industries, etc. These conditions brought about a tightening of money rates in Europe and American financial centres; consequently rates of interest went up. Commercial paper which brought three to three and one-half per cent in New York in 1897 brought seven per cent in 1907.