The Financial Effect

THE correct historical perspective is manifestly impossible save as we regard the past. Man is not all brain mechanism. The heart has a voice in our affairs, and none is so glacial of soul as to be entirely unaffected by personal bias. With the lapse of time the inessential is eliminated, and we are able to see the event as it was and not as contemporary observation believed it to have been. Did we really know the present we could foretell the future.
     The consideration of these facts appears curiously pertinent as this time. We have seen four years of astounding prosperity. Ahead of us, we are told, there is nothing but increasing abundance. We have grown rich, but we shall grow richer. The stupendous expansion in our commercial and industrial operations will continue.
     In Wall Street, as indeed in other places, sentiment governs the action of the majority, and therefore is recognized as a potent influence by the unsentimental minority. Credit, the vital spirit of the body commercial, is sentiment. A man’s credit is good because other men believe him honest. Confidence, that makes men extend their enterprises, is, when analyzed, sentiment. It was sentiment that shook business men’s souls in 1896. It is sentiment that makes them now look hopefully upon the future. It may therefore be assumed that, while conditions change, sentiment remains always at work, and that as it has largely governed men’s actions in the past, so must it do now and in the years to come.
     Keen observers of the course of the stock-market believe that the upward swing of the financial pendulum has almost culminated. Not that we are to take a sudden downward plunge, but that we have been standing upon the very summit of the period of prosperity, and that, following a law as inexorable as any other natural law, we must presently begin to walk down hill. The arguments used are of general application, and not based upon special occurrences affecting this or the other group of securities. In the first place, there is the extent of the swing. The average price of twenty active stocks has risen from about $42 a share in August, 1896, to $118 in May and in June of this year. It now is about $109 per share. Our prosperity has been enormous, but has the stock-market failed to keep pace with it?
     The country, however, was never so prosperous, and the most conservative minds in manufacturing and in Wall Street see in the death of President McKinley no serious menace to commercial and financial growth and stability. That stocks cannot continue always to advance we all know, but the leading minds agree to-day that there is no reason, even remotely discernible, why there should be permanent declines large enough to be called serious.
     The minds of the majority have rebelled with striking unanimity as compared with previous booms. The country is rich as never before. The boom of 1880-1881 is not to be mentioned in the same breath with the present. We did not then have this or the other factor in our favor. Hence the absurdity of the comparison. As a matter of fact, it must be admitted that our knowledge of values is greater than twenty years ago, and that we are better organized, more compact, financially.
     The most conservative periodical, appealing to the “solid” bankers and investors, the one paper that might be expected not to encourage over-optimism at the wrong time—The Commercial and Financial Chronicle—published its usual weekly editorial leader on July 2, 1881. It was written on the day before President Garfield was shot, and was as follows:

     While the general financial outlook is eminently satisfactory and promising, there are certain conditions which, when severed from all others, can be made to wear as squally a look as the most desperate croaker could wish. For instance, our banks last week in their returns gave their aggregate loans at 345,000,000, against 285,000,000 in 1880, and 253,000,000 in 1879. Then again, so far as these loans are based on Stock Exchange values, it is quite true that a return to the selling rates of 1879 would wipe out the entire increase in loans; and furthermore it is likely that more than three-quarters of the bank loans are based on just such securities. Hence the argument is that this is all a vast fiction, making a panic inevitable which will wipe out the fiction as the baseless values of 1873 were wiped out.
     The obvious difficulty with such reasoning as the above is that former years furnish no analogy for us now, mainly because the commercial situation is so incomparably strong and idle capital the world over is so singularly abundant. To-day we publish the government figures for May, and they show a merchandise balance in our favor of $8,616,000, against $789,000 last year, while for the last two months the favorable balance aggregates $20,000,000 against an adverse balance of $3,000,000 for the same months of 1880. Then again was there ever a period during which money ruled continuously so low? When government bonds paid only 3 per cent. [959][960] and the best railroad bonds not to exceed 4? And then, finally, is there any comparison in railroad earnings at present with 1879, and how can there be any comparison of values?
     These suggestions, and others which might be added, clearly lead us to the conclusion that whoever is waiting for a panic in which to make his investments is not likely to be gratified this summer. Of course stocks may decline. Certain conditions may depress certain stocks, but they are only special and temporary influences, not general or permanent, and are supplemented in part by other conditions of traffic and travel more favorable than a year ago.

     Then came the assassination of Garfield. Superficial students of the market said that Guiteau’s bullet caused the culmination of that bull market. But there were many who knew better then, as we all know better now. The dramatic element in the President’s murder appealed to men’s minds, and made it serve as a sort of chronological milestone. On the Saturday following the tragedy, the Chronicle published another editorial on the situation. It said:

     At first the impression prevailed that the shot had been fatal. The market consequently took a plunge downward, but the incipient panic was soon arrested by the receipt of the further intelligence that the President was living, although dangerously wounded. After this first shock there was time for reflection and operators became more cautious: but still a disposition was manifested to sell. The market was panicky until just before the close, when it was turned upward by more favorable news regarding the President.  .  .  .  On Monday, July 4, the Stock Exchange was closed.  .  .  .  By Tuesday the condition of the President was improved. The London market had not been materially influenced on Monday, and there was a decided recovery there the next morning. These facts served to allay the excitement here. Influenced by the cheering news from Washington, the reaction became more rapid, and by Thursday morning the market had entirely recovered.
     This experience of the Street goes far to show that prices have a more stable foundation than many claimed. It has often been said of late that the market only needed a sudden shock to send it tumbling downward. Had this been the situation the decline on Saturday could not have been arrested, but the market would have closed in a wild panic.  .  .  .  .  The market dropped, of course, but the decline was slight compared with that which has often resulted from failures or other events of a singular character, while the recovery was rapid. The situation at the moment of writing is hopeful. There are reasonable assurances of the President’s recovery; but now, even if there should be an unfavorable turn, it is believed that the shock of his death would produce only a temporary effect upon the market.

     The foregoing reads very much like the editorial utterances of financial experts to-day. The analogy is complete. The first thought in many minds on Saturday on reading the news from Buffalo was that the bull market of 1898-1901 was definitely over. Stocks declined sharply, but strong interests came to the rescue, and a rally followed. The fear-stricken of Friday night became the courageous of the week following. Strong interests, we are told, own the great bulk of the securities. In 1881 it was also a fact that Mr. Vanderbilt, Mr. Gould, and their associates held vast quantities of stocks.
     The country is richer to-day. But human nature and human fallibility remain unchanged. The best informed, however, see no serious danger anywhere in the immediate future.