FINANCIAL CRISES AND DEPRESSIONS
A PAPER READ AT THE SATURDAY CLUB, DAYTON, OHIO
A. A. THOMAS
I REMEMBER the “Crisis” of 1857.
When I was a boy, it was my father’s habit to take me by the hand and lead me to where something of importance was going on; then he would say nothing, but he wanted me to see and listen. One morning he appeared at the Ludlow Street district school in Dayton and told the teacher he wanted me that day, for I could learn more at the courthouse than in school. The teacher was annoyed at such a request, but let me go; and I heard the Cooper Will case argued. The contestants had employed Tim Corwin: Edward W. Davies Esq. had employed to offset him, Booby Johnson of Cincinnati. This was the first time I had ever been in the courthouse, but I remember yet whole sentences of Johnson’s speech. The contestants had well-drilled a large number of most respectable old citizens to prove Cooper’s infirmity, to give color to their claim of mental infirmity. They said he would wander from house to house, say he was in pain, and put his hand on the place. Johnson said in closing argument, quoted word for word all they said; then with eyes flashing, whirled to the jury, who were all old men, went up close to their faces, and in low tones said: “Gentlemen, when you are old, if you have a pain, do not put your hand there, for if you do, some one twenty years after you are dead will swear you were crazy.” Then he dropped the subject, and the jurors’ faces seemed to show he had taken all effect out of testimony which had required the contestants two days to get in.
So, in 1857, when we lived in New Albany, Indiana, one day my father took me by the hand and we went to a broker’s office. I remember the crowd upon the sidewalk and the long line of [p. 1] men in which we took a place. On reaching the broker’s counter, my father laid down a roll of State Bank bills: these were checked off from a bank-note detector, and father was paid in coin the money value of the bank bills he had received in payment of his last quarter salary.
The local state bank currency was blamed as the cause of the panic of 1857, but it was not; for after three years’ depression, the country under the same currency, moved up into general prosperity in 1860, which but for disturbance of impending civil war, would have soon become all which we can call good times. “The years preceding ’57, make up a period of remarkable growth and prosperity, and in its latter part had and unprecedented activity in the construction of railways.” There had been a general downward tendency of prices, but the crisis came suddenly on the failure of the Ohio Life and Trust Co. Most men in Ohio for years believed that this company had brought the panic about, thus confusing effect with cause.
The preceding panic or crisis of 1837 was said to be “the first which displayed in this country the distinctive features of those of 1857, 1873 and 1893, and afforded an illustration of gradual and excessive expansion, and then collapse.” The years preceding 1837 were an era of unprecedented public improvements. Canals costing a hundred million dollars were built and everybody went in debt to take part in new enterprises and improvements. The refusal of the administration to extend the charter of the United States Bank, was made the scapegoat and the public vented its wrath in that remarkable political campaign of 1840. But when all the racket was over, it is questionable whether anything or all that was said and done helped in any way to bring about the prosperity which was to be enjoyed when the fullness of time had come.
The preceding indications of a financial crisis which is to be followed by a depression, have been noted, and found to be (1) and increase of the price of commodities, and later on of real estate; (2) increased activity in establishing new enterprises, especially those of production and transportation; (3) the general employment of labor at increasing wages; (4) increasing extravagance in private and public expenditure, and a new and general gullibility of investors; and lastly a great expansion of discounts and loans. [p. 2]
These, you may say, are the ordinary indications of good and ordinary prosperity,-and they are; but when they were pushed to a maximum, and more particularly have been clearly noticeable for a series of successive years, the times are ripe for a financial crisis, to be followed by a depression; for all of which, no person, or place, or system, or government administration is responsible. The late Senator John Sherman was a business man of wide intelligence. In his autobiography he says:
“In the summer of 1857 occurred on of those periodical revulsions which seem to come after a term of apparent prosperity. On Aug. 24, the Ohio Trust Co. failed. That single event, in itself unimportant, indicated an unhealthy condition of trade, caused by reckless speculation, high prices, the construction of railroads in advance of their need, a great increase in imports, and the excessive development of cities and towns.”
It is well remembered that in 1837 there were vastly more individual failures in business than twenty years later, and many more than in 1873 or ’93. Perhaps the reason was the then greater number of independent businesses, which much enterprise and small capital; but we must ascribe much to the old general custom, now nearly obsolete, of men in business signing each other’s notes for suretyship.
In 1870 I had studied law and just been admitted into the office of Judge J. A. Jordan, when he and William A. Barnett and J. O. Arnold bought and platted the Pugsley farm of perhaps fifty acres; it composed all of Dayton View proper lying east of the Salem Pike and extending to John Stoddard’s property. They were a good combination of me to plat and develop the property as they did. The spot was the best undeveloped location nearest to the center of residence, having permanent advantages as we all now know. Perhaps a fourth of the lots were sold, and some fifteen good residences, now easy to identify, were built and occupied. The street railroad to Dayton View was, by general subscription, built, which was always to continue in operation. Barnett, Arnold & Jordan, by careful figuring, estimated that they had made $60,000 in two years. But the financial crisis of 1873 intervened. All sales and house-building stopped for nearly ten years. I foreclosed the mortgage on the street railroad and bought it in at [p. 3] auction for $7000; and in the end the owners of Dayton View made nothing at all for their ten years’ work.
Meanwhile, Judge Jordan had bought the John Harries farm, adjoining the hill on Salem Avenue, for $40,000. In the end, taxes and interest wholly extinguished all his savings and much of his brothers’ who joined him in this enterprise. The other day I rode over the property, only now being built on. Of course, there is platting at Fort McKinley and building beyond, but it startled me to think of what Judge Jordan did, and that thirty-five years had intervened before the property could come into any profitable occupation or use whatever.
In 1872 I had been elected City Solicitor, and by the next year had the first money I had ever accumulated. This, with some city money I held by order of City Council till it would direct its disputed distribution, amounted to $1500 and made me feel good. One day I loaned it on interest to a prosperous clothier whose store was below my office. I received his note at sixty days bearing interest with personal security. This note was renewed. Then information came to me that the surety had never signed the note. Perhaps not, but I proved he signed the renewal, so my money went into the Merchants National Bank again, but I remember thinking I should not like to be a banker. One day Tom Gable refused to cash the City’s order on its Treasurer, and Mr. Al mays, then Cashier of Harshman’s Bank, who was standing by, said: “Why don’t you come where you can get accommodation?” “I will,” I said, and learning my balance, gave him a check for it and thereafter deposited in the Harshman bank. A few weeks later Colonel Parrott wanted to borrow my money. This made me laugh, when he explained all he wanted was to get my money out of the bank. I said, “I can do this in a less roundabout way,” and drew a check for it all, leaving sixty dollars as a nest egg. The bank broke in two weeks and I was over two years in getting that sixty dollars by four or five installment payments, from the late V. Winters, who was assignee.
The times had broken up Peter Odlin. I remember his pathetic card in the paper that, “his property amounted to $160,000; and therefore he submitted whether any creditor should sacrifice his claim, under a proper method of sale and distribution.” A friend called my attention to some [p. 4] very attractive vacant lots of Odlin’s on Brown Street, facing east, between Stickle’s brewery and the Cash location. At public auction I bought three of these for two-thirds their appraisement. I used to make figures about how they ought to increase in value. Ten years later I sold them for the exact purchase price, having meantime paid taxes, and lost interest. Robert Georgi, then Deputy Clerk of Court, was the purchaser from me of two of them, which he told me he sold four years later at the same price he had paid. Most people have forgotten the depression following 1873. I, then City Solicitor, recall that about 1875 the present market house and city buildings were built. The night the bids were received there was a great crowd of contractors, and I remember the long whistle some of them would give when the incredibly low bids were read. I think the building as it stands cost $75,000. I remember one house that Cosler, the contractor told me about. It is the brick on Third Street that belonged to McDermont, standing next west of Doctor Reeve’s. My recollection is the building was built at a third less than what would be called an average or ordinary price; and – some of you know better than I do – was it not so in this whole community and for how many years?
The depression following 1873 ended about 1880, “with an advancing movement, healthy at first, but excessive later.” I remember R. N. King, in 1881, came home from New York, and said: “Hurry up anything you are getting ready to sell, for you can sell any security in New York that has a picture on it.” Railroad construction and building of every kind started into unknown activity; but this high jinks prosperity received a check by the assassination of Garfield, and soon ended in a financial crisis in May, 1884, the date of the failure of Grant & Ward in New York. It was two years after this that I was walking with Colonel Corwin up town on Fifth Street near the Hill school house at Eagle Street; the sidewalk at that point and beyond was covered with people walking to the center of the city. “Do you know why these people are walking?” asked Corwin. “I will tell you; they are walking because they have not money to pay car fare.” [p. 5]
The advance in what was called prosperity from this on to the panic of 1893, was gradual, continued, and excessive at last.
Burton, a writer of some authority, from his study of the questions says:
“In many respects the crisis of 1893 was followed by distress more severe than that of 1873. There was a larger number of bank failures; the decrease in deposits and the withdrawal of money from circulation was discontinued for a longer time, but it cannot be compared with that of 1873 in its intensity or its continuance.”
Perhaps the depression was made greater or more protracted by the Bryan silver issue of 1896; it ended in the business revival of 1898, which continued with an increasing momentum or velocity until the middle of the summer just past.
There has been some belief that we can calculate the rise and fall of prices and thus anticipate them as we can a coming eclipse; but I think intelligent attempts to do this have been pretty much abandoned. A man named Bender, of no general education, but of much narrow intelligence and industry, wrote a book on the subject which John H. Patterson and I studied with a great deal of conviction. He predicted the present revulsion as due in 1903; but after a slight check that year, business and prices and prosperity bounded ahead, each year in excess of all previous, until the summer of 1907.
Burton, in his volume, gives “A Selection of Opinions as to the Causes of Crises and Depressions.” He seems to approve or value that of Jevons, which is as follows:
“The remote cause of these commercial tides has not been so well ascertained. It seems to lie in the varying proportion which the capital devoted to permanent and remote investment bears to that which is but temporarily invested soon to reproduce itself.”
Perhaps that assists or satisfies your mind. It doesn’t help me much. I prefer the opinion of James A. Lawson. It is as follows: [p. 6]
“The cause is to be attributed to a sudden check given to an extensive and long-continued trading upon credit.”
Or, I would rest content with old Philip Klopfer’s answer.
“Philip, are we not back in the times of 1893,” “Yes.” “Why?” “Well, I will tell you,” said he; “too many people have been trying to do business on too much borrowed capital; that’s the long and short of it.”
In the times succeeding 1893, at the Beckel House, I saw much of the late Mr. J. C. Pierce, then Vice-President of the Dayton National, a man of few words and fine intelligence. I remember his amusement at the then outcry for more currency. “They say, Thomas, there is not enough currency. Why? There is all there ever was. If under existing conditions people hold back or put away currency, they would a third more if it had been in circulation.” It seems to me the proposition is sound; and if so, there is probably little or nothing in the ado now for a more elastic currency. The thing amiss which caused these times was not that there was not money enough, but that enterprising and venturesome business men could get it too easily. Money, that is credit, and the confidence which gave this was not suddenly or artificially created, nor can it be suddenly or artificially restored. “To move the crop,” at my Minnesota town, the buyer or the bank doesn’t want currency, but credit in Chicago. The farmer for his load of grain gets a check; if he can get the money on this, he doesn’t want it, for he would rather have the check than the cash.
Among men whose opinions ought to be worth most and who are prominent enough to be heard, there does not appear in the mass of suggestions or advice any substantial agreement upon any needed change in the laws relating to National Banks. Possibly the whole National banking system is as good as may be, or as good as it will, with one substantial correction.
All bankers know and admit that each bank should carry or hold a certain percentage, or reserve of its deposits, as currency in its vaults, for the purpose of payments if a flurry occurs. [p. 7] The national banking laws should and do specify this; and we may assume that the percentage is large enough. But the law permits, as perhaps it must, that a proportion of this reserve be placed in other “reserve banks,” to be drawn upon demand, as convenience or emergency require. What is wrong is, upon this currency the smaller banks are authorized and accustomed to receive interest, say three per cent., from such other “reserve banks.” The temptation and consequence is for banks so to place and leave out on interest too large a proportion of their currency; for when the crisis arrives, which should be and can be anticipated and provided for, the “reserve banks” won’t pay until they are ready; and thus the currency reserve, or cash on hand, which the law and safety requires, is a “fraud, delusion and a snare.” The remedy is to forbid the banks to receive or pay any interest at all on any currency reserve. If this were so now, is it probable that we should ever have heard of the present pinch for currency at all?
The Wall Street Journal estimates that there are now or were lately in the New York city banks five hundred million dollars ($500,000,000) of this currency reserve of Western banks. The Chicago bankers decide through their organization and announce that they cannot safely resume payment because small Western banks would at once want their currency reserve. Why should they not want it? It should in larger part be in their own vaults.
Americans come home from abroad believing our National banking methods are better than any in Europe. The late Mr. Al Barney told my brother of his first business with a Continental bank: It was in Switzerland. The front door was locked: Barney rang the door-bell; a liveried servant ushered him into a club-like sitting room, and took his hat and coat. Barney said he wished to draw $100 on his letter of credit. In time, the banker or manager appeared and gave him the hospitalities of a general conversation. The letter went out, but returned followed by the servant with the gold on a silver platter. “Do you receive deposits?” asked Barney. “No, we don’t want to be troubled with merely holding other people’s money; we have enough of our own.” [p. 8]
I have spoken of the last failure of a Dayton bank, but it was a generation – thirty-five years – ago. During this interval the National banks of Dayton, regarding what the people want, have probably been as good as they ever will be. Their methods and management have been honest, conservative, considerate and successful, and all this at incredibly small expense to their customers. My brother in San Francisco remits me each month, $17.50. How? Why, he draws and mails me his check on his local bank and I endorse and get credit at my bank here. They collect this check and the total cost to my brother and me is the two cents for postage. In general business, one can hardly measure the value of such convenient and inexpensive methods. Then again, it is not the custom of people in this country to carry or hide money even over night; and they put it in bank and pay bills by check. Every business man goes and sends to bank nearly every day.
During each of the past five years we have often been told by sanguine men, “Panics in this country can’t occur again.” Why? “Because there is no reason for them. And bankers are better organized for mutual help.” But such persons, or we, are in confusion from the misnomer. Panics are frights, and foolish action in consequence, for no adequate reason. The financial crises of 1907, 1893, 1887, 1873, 1857, and 1837 were no such things; nor was the prolonged business depression which followed each of them in years before this. There is no questions that panics proper can be averted and financial crises can be minimized by intelligent co-operation of banks for mutual help; also that the ability or disposition to do this is new. The clearing-house certificates of the last disturbance probably saved many and did no harm; and probably this will be true again now. But it was not the banks which spent the money that produced the crises of the years I have named. They held the bag, while others played the game.
To get some measure of the amount of new investments during the last seven years, let us come home to things we know [p. 9] most about. In manufacturing centers, cities and towns are substantially all alike. Take the Cash, the Barney Car Company, Platt Iron Works, the Davis Sewing Machine Company, the Malleable, the Stoddard Company, and, say, any other half-dozen of the factories here next larger in size, which you may name. In the last seven years have they not increased their plants an average of one-half? In so doing have they not become borrowers of money, perhaps from their stockholders, and in proportionate amounts? These extensions you say have reduced output cost and only met the demands upon them. Yes, but for a productive capacity frequently far in excess of the mean of normal times. An enormous investment of late years has been in transportation, which too, has permanently promoted the prosperity of the whole country. Yes, but not more than that did which produced the crisis of 1837. The New York Central is said to owe on short term notes $200,000,000 for “betterments of its structures.” Much of such expenditures provides for the future and is a duty to the public, yet produces no immediate revenue. Henry P. Stone, President of the Chicago Telephone Company, long Vice-President of the Chicago, Burlington and Quincy, once had a long talk with me on this subject. “The Galesburg depot or station,” he said, “is frame and old and out of date; a new one, luxurious in appointments, costing $50,000, is substituted.” “Does it not help the road?” I asked. “Not in revenue,” he answered. “The road will never earn a dollar more because of its new station.”
There has been no railroad construction near us lately, but 2,500 miles of trolley road have been built in Ohio. Of those near us, do half of them pay? What good do they do, what their ultimate value may be, are matters not questioned. Take the Dayton and Covington, for instance: It is profitable in the summer, not in winter; but earns no money net in twelve months. Take the telephone constructions in Dayton in the last seven years; and those for electric light. I was about to specify, - but you know them already. Nearly all the money which was spent for these and tens of thousands like investments, was raised by loans which still exist, secured by collateral, and made by the banks in the larger financial centers, and out of the currency reserve they held as cash reserve for some jay bank. [p. 10]
Look at platted subdivision real estate, around the city of Dayton, beginning with the west. Call between here and the Home available for present use, if you will; still the farms north, south, and west of that institution are lately platted and sold. Driving on the Eaton pike where farm fields extend off in perspective, adjoining the Home Cemetery, “Are those soldier’s graves?” some one asked. “No, my friend, what you see are numbered stakes or slats, marking lots of a platted subdivision of the city of Dayton. Those are not soldiers’ graves, my friend, they are the graves of the first sixpence of the savings of some working girl, who will continue her weekly payments for the next five years.”
Going through Edgemont, the fields are platted south to the river bridge, and west to Pease’s greenhouse; beyond Carmonte to the church on the Pike; north on the Covington road to Shoup’s Mill site. The Huffman Hill cars are to be run continuously because all farms, including Kemp’s, are platted east of its terminus. Gilsey Craighead said: “I have just sold some ground on the Brandt Pike for five times the most ever offered for it before to my father or me.”
Edward Everett Hale tells the story of one of New York’s richest business men, away back, who on his eightieth birthday was surrounded by a group of especial friends, all young men. “Tell us your secret of business success,” they said to him; but he was not inclined to talk. “Oh yes! you know; tell us,” they urged. “Well,” at last he said, “I will, if you will take it down.” They all got ready; each had paper and pencil. “Are you all ready?” “Yes, we are.” “Well, then, here it is, _ Bet on the Country!’”
When the panic year of 1857 ended, my father moved to Dayton, fifty years ago next spring, and we lived in the center of where Rike’s drygoods business now is, and facing on Main Street. To the south and across the street were homes with large lawns and yards, about three of which would occupy each half-square. Where the Davies Building stands was an old town home, with yard south and east – enough to raise lot of raspberries and exercise setter dogs. Where the Kuhns Building is stood old Jimmie Elliott’s little frame carpenter shop, where [p. 11] he sat with old line Whigs and discussed the greatness of General Scott, and Elliott’s grounds reached back to the Arcade Building line. Twenty years afterward, in 1858, Hoglan & Pease made auction at the courthouse of their vacant plat at the west end of Fifth Street bridge. I asked Al Mays to buy with me, and take chances. He said, “No, Thomas, we can afford to sell this way, but not to buy,” – he meant on small, long partial payments. Fifteen years ago, Corwin and I for the City Railway bought its power-house site, at ten times the price Mays refused to buy it for with me.
When the St. Louis Exposition commissioners came to Dayton, knowing and representing every country on the globe, they cared for no part at all of my address except one thing. I said: “When John Patterson’s grandfather became of age, there was not a white man in the state of Ohio; then his son Jefferson and grandson John H.; so al the wealth in the state of Ohio has been created here in less than three generations. “ In the silence which followed, I knew what they were thinking of. They were thinking about the incomparable opportunities that this country offered compared with any other in the world, to him who had thrift and enterprise and would “Bet on the Country.”
Lately a man from Detroit came to ask me to help write a book, to be called “Greater Dayton.” Thinking he meant a history of the city, I said, “No, it has been done already.” “But,” urged he, “have you thought out what Dayton will be in fifty years from now? I want you to describe that, and trace the causes from what is now and has been.”
Mr. John W. Stoddard once told me the books of the Third Street Railroad showed that from its beginning the passenger receipts had increased on the average just ten per cent. a year. This was twenty years ago, and I know its receipts have increased since, and average of just ten per cent. a year. The figures have a value as a mathematical fact, measuring, as we understand, the growth of the city as a whole. But, mind you, this development is not uniform. There are fat times that enrich and lean times which squeeze the life out of an investment. If then, substantially correct in trying to learn and exhibit what are the true causes of real financial crises, it would appear safe to say, that no one person or combination of [p. 12] persons can affect them or their consequences, in any important way, any more than a boat on the ocean can affect the wind and tides which move or retard it. Just the same, however, it is worth the boatman’s while to study the winds and tides which affect him. It is well with him if he knows and better if he anticipates where he is.
(--Written and read December 1907; printed October 1911.)