America’s Money Machine

THE STOCK MARKET now entered a period of apathy, but not of recovery. The Administration renewed its anti-monopoly campaign and filed suit against the Reading Company and others, alleging monopoly in the anthracite industry.

So passed the spring and summer. After early June Washington had gone into summer hibernation, and no cabinet meetings occurred until late in October, after the Panic. Toward the end of summer it was announced that the President would go game hunting in Louisiana and Oklahoma around the first of October. In September, Stuyvesant Fish opened his campaign for return to power in a circular to Illinois Central stockholders, soliciting their proxies, in which he insinuated that Harriman’s support was from directors who had made money through Harriman’s stock rigging. Fish’s successor to the Illinois Central presidency, J. T. Harahan, promptly countered with a letter to stockholders, made public, in which he disclosed for the first time publicly that Fish, in addition to his loans of Illinois Central funds to favored banks, had lent $1 1/2 million from the corporation to himself on inadequate security.

The contest between the parties for proxies at the annual meeting was a much more public affair than such contests today. In Hartford, Connecticut, a meeting of local stockholders was convened and the merits of the case were discussed by a member of the clergy, the Reverend Francis Goodwin. After counselling against personal feelings, he outlined what he regarded as three great evils in the management of the railroad. First, he said, Fish had admitted that millions were loaned to him as president of the road, and although the road had suffered no loss, yet stockholders should make it felt that they held this practice wrong, and one that might lead to disastrous results. Second, as the road was presently managed, the board of directors was practically impotent. The chairman of the executive committee (Mr. Harriman) was in absolute power, and if the stockholders remained silent, they would be responsible. Third, Harriman’s career was such that no confidence could be reposed in him. He was in it for his own profit and to carry out his own vast schemes.

Among Harriman’s misdeeds, spread before the meeting, was his juggling of Southern Pacific accounts to manipulate the stock. Thus, he had charged cost of improvements to operating expenses, thereby showing reduced earnings, and so depressed the stock, but later, desiring to enhance the stock he transferred these same accounts to surplus, which would be distributed to stockholders.

The climax of the fight came just before the annual meeting, which opened on Tuesday noon, October 15, when the Fish forces obtained a court injunction forbidding Harriman to vote the Union Pacific holdings of Illinois Central stock. About 400 persons attended the meeting in Chicago, and it was reported that Fish was greeted by applause as he entered the room, but that Harriman, because of his small stature, entered unobserved—in any case, without recognition by those present. Fish affably approached Harahan, his successor in the presidency, and attempted to lay his hand on his shoulder, but Harahan was not to be placated, and almost returned the gesture with a blow. Fish, it is said, merely smiled and returned to his seat. Harriman, however, noticing Fish’s son, went over and shook hands with him.

The meeting ended in a draw, and a motion was accepted to adjourn until December 18.

The day before the Illinois Central meeting the telegraph services reported that Roosevelt had stalked a bear in the Louisiana swamps, but had failed to bag it.

The pricking of the United Copper bubble collapsed the assets of Mercantile National, and when suspicious depositors started a run of withdrawals, the company appealed to the Clearing House for help, where it met with the demand that Heinze and his partner Morse be removed from the bank directorate. This was done but it did not halt the run. The week ended with rumors that all was not well with another big bank.

Uneasiness grew and spread, but like fire eating through a bale of cotton, it was not yet ready to burst into flames. Only those market operators whose perceptions were trained to such smolderings were sensitive to the portents.

Monday, October 21, was a day electric with omen. Wall Street braced for a storm, not knowing in what quarter it would strike. The Knickerbocker Trust Company, an uptown bank with 18,000 depositors and $67 million in deposits, was the first to feel the force of the blast. There was no apparent run—no visible panic in the streets, but all day long the bank was paying out cash to depositors who wanted their money. The Knickerbocker was not a member of the Clearing House Association, and at the day’s end the National Bank of Commerce notified the Clearing House that it would no longer act as Knickerbocker’s clearing agent. That evening the Knickerbocker directors called on Morgan for help, meeting him at his library where the conference went on until 9 P.M., and then the directors with some of Morgan’s men adjourned to a private dining room in Sherry’s restaurant where, amid the coming and going of waiters, they continued their discussions until 2 o’clock of the following morning.

Morgan had little confidence in the Knickerbocker management, but a stake in its solvency. It is said that he himself, or his firm, was a substantial stockholder. He eventually agreed to find some support for the bank on condition of the resignation of the Knickerbocker president, C. T. Barney.1 Financial support—understood to be to the extent of $12 million—was guaranteed. The news was too tardy to stem anxiety and the publicity of the Sherry Restaurant meeting did not help. When the bank’s doors opened the following morning the lines stretched along Fifth Avenue for a block, and the bank had to open seven paying windows. It had $8 million in cash, and hoped that would serve, but at noon a runner from the Hanover Bank presented a check for $1 1/2 million. The draft was met, but that was the end; the till was empty. The windows rang down, and the Knickerbocker Trust Company was in insolvency with $52 million of liabilities.

Panic now spread in Wall Street, throughout the nation. On the Stock Exchange call money went to 70 per cent and quotations tumbled. The ticker brought news from Pittsburgh of the triple failure of the great Westinghouse interests—the Westinghouse Electric and Manufacturing Co., the Westinghouse Machine Co., and the Securities Investment Co., along with the closing of the Pittsburgh stock exchange. As the day wore on reports came in of bank closings and business failures throughout the land. Like fire leaping a break strip, a run started on the Trust Company of America, and by closing time the bank had been drained of $13 million.

The country was now in the cold grip of crisis.

Morgan, now at the helm, had gotten in touch with George B. Cortelyou—Roosevelt’s Secretary of the Treasury—and Cortelyou had come to New York, leaving on the four o’clock train, Tuesday afternoon. Cortelyou was not a financial expert. He had begun his career as a stenographer, and his skill at shorthand had brought him to President Cleveland’s service. Later he became a private secretary to President McKinley. When the Department of Commerce and Labor was created in 1903, Cortelyou obtained the secretaryship. Later Roosevelt made him Postmaster General, and it was only shortly before the Panic that he had been elevated to the Treasury.

Tuesday evening, after a day of continuous conference at his offices, Morgan and a group of financiers went uptown, where Morgan’s secretary had engaged a suite at the Manhattan Hotel, to await Cortelyou. Among those with Morgan were James A. Stillman of the National City Bank, representing the Rockefeller interests; John A. Stewart, president of the United States Trust Company, who presided; Henry C. Frick and Elbert H. Gary of the steel “trust”; Thomas F. Ryan, the speculator; August Belmont; and Hamilton Fish, brother of Stuyvesant Fish. Not least in the company was the railway magnate E. H. Harriman.

It was not until toward midnight that Cortelyou arrived.

Meantime, the urgent question was the condition of the Trust Company of America, where a run was expected on the morrow. Its balance sheet indicated that it could meet its obligations, given a breathing spell. The group agreed to advance $13 million. Would the Treasury assist? Roosevelt was not due back until Thursday, the twenty-fourth. Cortelyou hesitated, but in the end agreed to deposit $25 million of government funds in various New York banks.2 Having gained this much, Morgan went off to bed, leaving his partner, George Perkins, and Oakleigh Thorne, president of the Trust Company of America, to draft a formal agreement on the undertakings. Somewhere around 1 A.M. on the morning of Wednesday, October 23, Perkins gave out a statement that read in part:

It was not a diplomatic statement, or as reassuring as it was intended to be. The reference to the Trust Company of America as the “chief sore point” was not one to allay distrust among the bank’s depositors, despite the promise of support. When the bank opened, the street before the bank was jammed with depositors with their pass books. The line continued to grow and at one o’clock extended east to William Street and down almost to Exchange Place. On the Exchange a frantic selling was going on, and call money reached 90 per cent, but the Exchange did not have to close. Fresh money came in—$5 million from the National City at around two o’clock—and quotations steadied. All day long the Trust Company continued to pay out cash, preserving as much as possible the routine of a normal day. Three o’clock came, and to accommodate those who had not yet been able to present their drafts, the bank kept its doors open a little longer.

Two hours after closing, porters from J. P. Morgan & Co. carried a big tin box and several bags into the bank. No explanation was made; none was needed. Vice president Babcock announced during the evening:

“After one of the most remarkable runs in the history of banking, we will open our doors as usual tomorrow. We paid all checks today as fast as they were presented, and will do so tomorrow. The Trust Company of America is perfectly solvent. . . .”

The crisis had been met, the peak of the storm was over; but the waves of panic continued to beat, and the winds of disaster to howl. A call began uptown at the Dollar Savings Bank; when a headline reported the run on “a Harlem savings bank,” a scramble began at the Harlem Savings Bank. Some three other banks in Harlem were involved.

Downtown, when Morgan, accompanied by his son-in-law, Herbert Satterlee, arrived in Wall Street by brougham, following his late conferences of the night before, he was met with the news that the Stock Exchange was in collapse due to the drop in stock values and the inability of brokers to find call money. The president of the Exchange, R. H. Thomas, called Morgan with the news that the Exchange would have to close unless funds were found. It was then 1:30 P.M. and less than an hour remained for settling accounts. Morgan promptly summoned the leading bankers to his office and notified them that $25 million was needed within fifteen minutes. The meeting produced $27 million, and the Evening Post headline ran, “MORGAN AND COMPANY SAVE MARKET.”

There followed that evening another long conference in the Morgan library that lasted until 1 A.M. The problem was the disappearance of cash into safe deposit boxes. Even the sound banks—sound so far as balance sheet preponderance of assets over liabilities to others was concerned—were in an illiquid state: they had exhausted their cash. Everywhere ready money was disappearing into safe deposit boxes, shoe boxes, coffee cans, stockings and mattresses.

What emerged from that conference was the decision to utilize the well-tried device of clearing house certificates—a technique to which we will give attention in a subsequent chapter.

The storm continued to blow: on Friday the stock market again felt the shock of heavy selling; since Monday nine great banking houses in New York had succumbed, and throughout the country, from the great cities of Chicago and St. Louis and San Francisco to the smallest hamlets, the shock waves caused the crumbling of countless little banks and business firms with insufficient cash. But the main disaster was in the financial centers, New York most of all.

For a fortnight the storm continued to lash. On Monday a run began again at the Trust Company of America, so narrowly saved the week before. Night after night Morgan was awake, holding conferences in his opulently furnished library, until daylight showed through the portiered windows and fell upon the Italian marble and the Renaissance treasures with which it was filled. By the end of the week, however, the blasts were subsiding.

Reassuring statements from Morgan and other Wall Street leaders like Stillman and Vanderlip helped. The issuance of clearing house certificates provided a form of cash that restored some liquidity to the banking system and to business.

“I had a delightful time,” the President declared in a brief acknowledgment of the reporters. “I am extremely gratified over the fact that I got a bear as the result of my hunt, and nonetheless so that I had to work twelve days to get it . . . The entire twenty-four days have been full of both profit and pleasure. . . .”

The following day a cabinet meeting was held—the first since early June—that lasted two hours and a half, and while “the financial situation was discussed at some length,” the principal preoccupation was an accumulation of routine departmental matters, as well as naval matters—the latter probably the projected display of the naval forces in foreign waters.

Winkler, in his Morgan the Magnificent, may be somewhat overcome by his subject, but his comment is of interest:

The financial markets gradually regained stability, but the general effect of the crisis was like that of a four-minute earthquake: the economy of the country was crippled and hobbled throughout the following year.

Agitation now mounted for currency or banking reform, or some government action that would prevent such debacles in the future.

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3Who committed suicide a few weeks later.

• 1*Who committed suicide a few weeks later.
• 2*A niggardly amount considering the fact that the Treasury at the time held over $300 million in free gold (not required for the redemption of gold certificates) and nearly $50 million in other forms of money—sums equal to more than 20 per cent of all gold in the country, 10 per cent of the total money stock and well over a third of the total deposit liabilities of all the New York clearing house banks.
• 3Morgan had little confidence in the Knickerbocker management, but a stake in its solvency. It is said that he himself, or his firm, was a substantial stockholder. He eventually agreed to find some support for the bank on condition of the resignation of the Knickerbocker president, C. T. Barney.* Financial support—understood to be to the extent of $12 million—was guaranteed. The news was too tardy to stem anxiety and the publicity of the Sherry Restaurant meeting did not help. When the bank’s doors opened the following morning the lines stretched along Fifth Avenue for a block, and the bank had to open seven paying windows. It had $8 million in cash, and hoped that would serve, but at noon a runner from the Hanover Bank presented a check for $1 1/2 million. The draft was met, but that was the end; the till was empty. The windows rang down, and the Knickerbocker Trust Company was in insolvency with $52 million of liabilities.