INTRODUCTION

The extraordinary movements of the stock market during the year 1884 invite a careful inquiry. Prices dropped lower than at any other time since the resumption of specie payments, losing in a few weeks well-nigh half of the marvelous gain which had been realized during two years and a half. Failures of extraordinary magnitude resulted, and gigantic frauds stained names hitherto of the highest honor. One-tenth of the entire railroad property of the country was thrown into bankruptcy, and many companies of good standing were compelled to pass dividends.

It was called on the Street “a rich man’s panic”. In the current phrase, there were no ” lambs” that year. For the first time in the history of speculation, almost, the ” outsiders ” looked on with amusement while the skilled operators slaughtered each other. Those who had been most powerful in speculation, and had accumulated the largest wealth by operations in railway securities, were as a rule those who suffered most during this remarkable year. Especially, the men who had loaded themselves with all the securities they could carry in June, 1881, expecting to bring about a great advance in prices, after struggling for three years to unload on the public, were finally compelled to unload on each other. Those who had so long handled the stock market with success for their own benefit, and to the loss of the public and “the lambs”, were the men upon whom the heaviest losses fell.

This collapse of prices was not caused by industrial disaster. It is true, there had been in ” protected ” manufactures some depression, which had been attributed quite commonly to fears connected with an attempted change of the tariff. But, if such an apprehension had existed, it had been removed by the defeat of that measure before the collapse in securities began. The records of the year show that production, at least during the early part of the year, had continued at almost the maximum rate, nor had any important failures among manufacturing establishments disturbed public confidence. The railroads themselves had been doing better than usual. The published earnings for about 40,000 miles of railway in April, 1884, had shown, in comparison with the earnings of the same roads in April, 1883, a gain of nearly $1,300,000, or about 9 per cent., the increase in the mileage of roads reporting having been about the same, and for the four months ending April 3oth, the earnings in 1884 had been larger than in 1883, though during the first three months the gain had been only about $200,000, traffic having been seriously interrupted on important roads by storms and floods.

Nor was the depression caused by monetary disturbance or stress. It came before there had arisen any serious question as to the ability of the Government to continue gold payments, and after an outflow of specie to Europe, which had continued for several months, had practically ceased. The rate of 6o-days exchange had been reduced, May 1st, to 4.87 1/4 a 4.87 1/2, at which price scarcely any profit could be realized on shipments, and in fact they immediately stopped. Near the end of April the Associated Hanks of New York held; a larger reserve than they had ever held during their whole history at that period in the In spite of some rumors that dividends on important railroads were to be passed on account of previous shrink age-in business, the reported earnings for April appeared to warrant encouragement, and the average price of sixty stocks at the close of the last Saturday in that month was but 2 1/2 cents on the dollar below the average of their closing prices for the previous’ year, and was above their average at the lowest point in January, 1884.

Nor was the disaster caused by commercial failures. Favorable prospects as to the crops, and the large supplies carried over from 1883, had caused some depression in wheat during April, but before the first of May the price had recovered and was about as high as it had been at any time during the year, and no commercial disturbance had resulted from that or any other cause. There was prevalent a general feeling, early in May, that a good business for the rest of the year was to be expected. Indeed, the prospect was commonly considered much brighter than is usual in a year of Presidential election, and the promise of large crops, which was then held to justify a hope of increased activity in business, was afterwards bountifully answered.

It is to be observed, moreover, that labor was generally well employed, and at fair wages. Prices, if not as low as they were afterwards, were low enough to render living cheaper than it had been for several years, while wages, until some reduction began in April, were on the whole about as high as at any previous time. Moreover, it was held that the moderate reduction in wages, which had been commenced, would help business materially by permitting increased production.

It is not to be inferred that this panic, after the manner of some others, came like thunder out of a clear sky. It was not wholly unexpected. Among those who had to do with dealings in stocks, whether as investors or operators, it had been felt for some time that the market was in a doubtful condition. Some had definitely predicted that failures of greater magnitude than had been seen for years must occur before the market could recover a healthy state. But these gloomy anticipations, it is proper to note, were distinctly based upon the conditions affecting that market, and not upon the state of business throughout the country, which, it was commonly believed, had reached the turning point, and would thereafter improve.

The movements during the year involved a heavy loss to investors. Many who never speculate at all began the year rich and ended it paupers, and throughout the year the anxiety of those who had large investments was constant. Attention was turned sharply to the causes of decline, and particularly to those causes which directly concerned the prices of securities, rather than the prices of products or the general condition of business. More seriously than ever before, it was asked whether a progressive decline in the rate of interest, resulting from the accumulation of capital, had not permanently affected the value of securities. It was asked whether excessive railroad building, during the years preceding, had not so prostrated the business of transportation that, at least for a long time, it must continue comparatively unprofitable. It was asked whether the value of investments had not been permanently affected by the hostility of Congress and State Legislatures, and by the prospect of enactments which threatened the vested rights of many corporations and the management and profits of nearly all. But, especially, it was asked whether a serious change had not taken place in the management of corporations, and whether the growing abuse of corporate trusts for selfish and stock-jobbing ends, and the prostitution of courts and judges to aid dishonest schemes, hail not created a distrust of securities generally, which would last for a long time.

An effort to throw light upon these questions has led to the inquiries contained in this volume. Undertaken without preconceived ideas to warp the presentation of fads, it may perhaps render the work of investigation easier for others, even though they do not accept its conclusions First, the course of prices of speculative securities during the year 1884 will be examined, with the special influences affecting the securities of different corporations. It will be found that the path broadens as we advance. What had seemed a narrow combat between individuals broadens into a conflict of social, political and economic forces, which concerns every department of industry and trade, and the welfare of the nation in the highest sense. The search leads, indeed, into almost every field of economic interest. The reader will be invited to examine the legitimate influences which affect the general market for securities, and, in that connection, the operations of the railway companies, their earnings, and their combinations, and the effects of free competition or pooling restrictions upon their interests and the public welfare. He will be asked to consider the financial situation, the changes in the position of the banks, the movements of specie, and the connection of the banks with speculative operations. Attention will then be given to the prices of railway bonds, of United States, State and City bonds, of bank stocks, and of manufacturing stocks during the same year. These prices will be contrasted with those of speculative securities, ‘and the contrast will be found eminently suggestive.

But it will be found that the year 1884 cannot be understood without a knowledge of the previous speculative movement. That year was a result of 1883 and of 1882, and these in turn were results of the years 1878-1881 inclusive, and these in turn were to a great extent results of the prolonged prostration of industry and depression of speculative values, which attended and followed the panic of 1873. Hence an examination of the prices of speculative securities for thirteen years is undertaken. The course of the market is traced year by year, and in decisive years, month by month. The influence of general or legitimate considerations upon that market at different periods, and of changes in the currency, of the course of the United States Government with regard to payment of its indebtedness and the security of investments in its bonds, and particularly the influence of the development of the railway and telegraph system, is examined with especial reference to the observed changes in the state of the stock market. Next, a similar examination of the prices of other securities for the same extended period casts light upon the question whether the contrast between speculative and other securities, which is seen in 1884, appears at other times of great depression or of great advance. A review of the causes of the panic of 1873, and of the prolonged depression which followed, with the connection of speculative movements during that period with the legitimate influences which affected the value of securities, prepares for a consideration of the remarkable advance in prices from 1878 to 1881, the “boom ” in manufactures, and the great expansion in trade. The culmination of this movement in 1881, and its connection with the state of agriculture in that year, and with the political influences which affected or were thought to affect the prospects of business generally, are investigated with especial regard to the speculative and other influences which produced the subsequent decline during the years 1882 and 1883, and the collapse of prices in 1884.

Attention is next given to the influence of the market for securities upon the internal and foreign commerce of the country, and upon the development of industries requiring large capital or increased facilities for transportation, and it is found that this influence has been very important. The effect of railroad-building upon agriculture and manufactures, the absorption of capital in railway enterprises, the dispersion and derangement of industries, and the effect of the construction of new and competing lines upon the value of older properties, are considered, and these topics lead to the inquiry how far excess in railway-building is itself a result of the facilities which speculative markets give, and of the powerful impulses which they bring into operation. The influence of such markets upon the banking system is next considered, with the manner in which banking operations have become year by year more intimately connected with the market for securities, and the resulting changes in the modes of banking, and in the relations between the banks and those engaged in productive industry or in commerce. The influence of such markets as now exist, and of their present peculiarities, on the public morals, on solvency in trade and official fidelity, on legislative action and on the conduct of the courts, constitutes a topic of manifest importance. Finally, it is considered how far the methods now prevalent in speculative dealings are inseparable from an open market; how far the existence of such a market is essential to the public interest ; and in what manner, if at all, existing evils may be checked by legislation or other governmental action.

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