3. Such a fall in prices lowers profits. A large number of people have made engagements with their creditors and with their employees based on the supposition that prices will continue at the old level. A fall in price renders it impossible to pay interest out of current earnings. Readjustments and foreclosures follow one. another in rapid succession. In cases where the lenders of money have obtained proper security the contracts are maintained at the expense of the principal of the borrowers. If a railroad bond is really secured by stock behind it, the loss falls on the stockholders, and the bondholders, ultimately at any rate, receive all that the interest contract calls for. But if, as frequently happens, the security has been a delusive one, the lenders are compelled to assent to a reduction of the interest which they believe to be safely guaranteed. 4. When the interest contracts have been in large measure readjusted, the chief effect on wages begins to make itself felt. It might be supposed, on general grounds, that a fall in price would affect the laborer sooner than the investor. But in the early stages of a commercial crisis the capitalist is not in a position to dictate terms to his laborers. He must make goods and sell goods at any price, in order to keep his head above water. As long as it lasts, the cut-throat competition which lowers profits prevents the demand for labor from being very rapidly lessened. It is when readjustments of interest have been made that the laborers' condition becomes worse. After foreclosure sales have been completed and capital is reorganized on a new basis, no capitalist is necessarily compelled to work at a loss, and some probably go out of work altogether. Under these circumstances the demand for labor becomes appreciably less than it was, and the price offered falls rapidly. The first moderate changes are as a rule accepted by the laborers as inevitable, but as reductions become more sweeping they are resisted, particularly because house rents and consumers' prices, owing to the inertia of retail trade, do not fall nearly as fast as producers' prices. The workman sees his wages reduced because his employer cannot sell goods at the old figure, while the price that he pays for his supplies remains nearly the same. He thinks that something is wrong and strikes. This usually indicates the beginning of the end of a commercial crisis. It has become a proverb in the financial world that railroad strikes give no help to those who are trying to depress the price of securities. On the contrary, in spite of the losses attending such conflicts, it has been found in 1877, 1885, and 1894 that the price of securities in general began to go up at the very time when matters seemed to be at their worst. There are two reasons for this. First, strikes cut down production in any given line to such an extent as to enable competing producers to dispose of their products or services more readily. Second, strikes indicate that wage contracts, as well as interest contracts, have been readjusted to the price conditions which prevail, and that matters have therefore reached a point where speculators can make arrangements for the future with the assurance that the marginal price charged by labor and capital for their services does not exceed the market price which the consumers are likely to pay for the results of such service. E. FINANCIAL AND INDUSTRIAL CONDITIONS DURING A CRISIS 109. A Week of Financial History11 Our markets have been more disturbed and excited this week than at any time this year. The situation looked unpromising when the week opened, and became daily more unsettled until Thursday, when there was a decided improvement; but yesterday the situation was again somewhat less favorable. Monday and Tuesday an unusual number of failures among our banks and private firms were reported in various parts of the country, but especially in the West, some of them being concerns of long standing and held in high repute. On those days, too, rumors became hourly more distinct respecting the difficulties Erie's floating debt was causing the management and the probability of its becoming needful to put the road into the hands of receivers. Tuesday afternoon the announcement was made that receivers for the company had been appointed. On Wednesday the failures referred to, the Erie receivership, and the state of the money market caused an unsettled and feverish opening, which conditions were used, and used most effectually, by those seeking to break prices, values of all the leading stocks gradually melting away. This decline was favored by the fact that the outside public having money to invest either looked upon the Erie receivership as a more disturbing affair than the step warranted, or else were discouraged by the frequent flurries and declines in prices which have occurred of late, and so for the time being kept off the market. The next day, Thursday, the outlook, as already stated, was much brighter, and so it was yesterday, though there was some reaction from the previous day, a further large break in General Electric stock being a disturbing feature. "Commercial and Financial Chronicle, July 29, 1893, 162. Copyright (1893). Money on call representing bankers' balances was not stringent until Wednesday. The loans early in the week were from 6 to 2 per cent, the latter figure being recorded on Monday after the inquiry for the day had been satisfied and there seemed to be an abundance offered. The demand for currency for shipment to the West, stimulated by the failure of the "Mitchell" bank at Milwaukee, and of banks at Louisville and Indianapolis, was urgent on Tuesday, and on the following day a calling in of loans by some of the banks and trust companies in this city and in Brooklyn created a disturbance in the money market, while the fall in stock values induced discrimination against collateral, and the rate was advanced to three-sixteenths of 1 per cent and interest, equal to about 74 per cent per annum, and large amounts were loaned at one-eighth of 1 per cent and interest, equal to 51 per cent per annum. On Thursday there was an early demand for money which caused 51 per cent to be again recorded, but in the afternoon the rate fell to 6 per cent. Yesterday the course was much the same, the range being 51 and 2 per cent, with the close at the lowest figure. The average for the week was probably about 10 per cent. Renewals were at from 6 to 8, and while banks and trust companies quoted 6, very little was loaned over the counter at this figure, and the institutions that had money to loan offered it in the stock exchange. Time contracts continue in urgent demand and good rates are bid, but the supply is small and chiefly confined to private sources. Neither banks nor trust companies are making loans on time, but it is probable that a few of the insurance companies and other corporations have yielded to the importunities of brokers. The basis of the business is 6 per cent; in addition I per cent commission is paid for thirty days, 11⁄2 per cent for sixty days, and 2 per cent for four months. Scarcely anything is done in commercial paper, and the few transactions made are at such rates as can be agreed upon. Many of the jobbing commission houses are advising the mills with which they do business to shut down, as it is impossible at present to make advances, and many of the mills at the East are consequently closing. IIO. General Industrial Conditions in a Crisis1 While special telegrams from many points South and West report a more hopeful feeling in financial and commercial circles, due to the increased currency issue by New York national banks, the gold afloat for the United States, and in the expectation that Congress will promptly repeal the compulsory purchase of silver clause 15 Adapted from Bradstreet's, August 5 and 12, 1893, 495, 511. of the Sherman Act, the week has, on the whole, brought more unfavorable features in the apparent hoarding and scarcity of currency East and West, the near approach of the demand for funds to "move the crops," the increase in the shut-down movement by manufacturers in New England, Middle and Central Western States, and the clog to trade shown by prohibitive rates for New York exchange at centers East, West, and Northwest. Chicago packers and grain shippers selling to interior eastern points, having been unable to sell their New York exchange, are ordering the currency to pay for stuff shipped direct by express, thus doing away with banks. At New York credit of both banks and commercial interests is unimpaired, but actual money is scarce and commands a premium. The arrival of gold in transit is expected to clear the atmosphere and relieve pressure. Demands for actual currency from all quarters on New York are pressing. The scarcity of small notes and silver dollars is a feature. Banks are generally refusing or complying only partially with requests for large sums. The irrational but widespread hoarding of currency has compelled jobbers and manufacturers in many instances to do business more nearly than ever on a cash basis, which has resulted in a further restriction of trade throughout the country. This is accompanied by such signs of aggravation as increased difficulty in disposing of commercial paper, a still greater scarcity of currency at larger centers, and a shut-down movement among industrial establishments; the latter, together with curtailment of forces in that and in commercial lines, points to the enforced idleness of nearly 1,000,000 wage-earners within the past two months, as compared with not more than 400,000 at the close of 1884, the previous year of greatest business depression. The week's bank clearings total is the smallest of recent years-$802,000,000-17 per cent less than last week and 20 per cent less than in the week of 1892. A hand to mouth demand for staples is reported from Boston; many leading industries have shut down, currency is scarcer, commercial paper is ignored, and general business rather more clogged than last week, all of which applies as well to New York, Philadelphia, Baltimore, and Pittsburg. Increased demands from country banks make currency scarcer at Cleveland and Cincinnati, where previous dullness is intensified. Business at Louisville is almost at a standstill, banks declining to receive country checks even for collection, and preferring not to handle New York exchange. General trade is almost on a cash basis at Indianapolis, and reduced in volume, which is also true at Milwaukee. Chicago bankers are hopeful, owing to the heavy gold importations, but orders left with jobbers are held awaiting crop advices, some of the latter being doubtful. St. Paul, Minneapolis, and Duluth jobbers are doing a hand to mouth business, awaiting a change in the situation. St. Louis reports a shrinkage in the volume of sales of dry goods and hardware, while at Omaha banking accommodations and the volume of trade continue in reduced volume. Live stock receipts are smaller, with higher prices, and the corn crop is damaged in western Nebraska. III. The Premium on Currency in 189316 Other than the President's message and the meeting of Congress, which we have remarked upon in a subsequent column, the premium on gold and currency that has prevailed has been the important topic. This feature in the situation we referred to last week when it had developed only very moderate proportions. From that beginning, however, the demand for currency gradually grew more urgent, the premium rising as high even as 5 per cent, disclosing a marked scarcity of currency, not alone in this city but very noticeable at Philadelphia and Boston in the East and Chicago and other centers in the West. All kinds of currency were in request including even standard silver dollars. Foreign bankers also report that 11⁄2 per cent was paid for gold to arrive. Of course the gold import movement had been affected by these operations, which in turn have raised foreign exchange rates materially, since the premium paid raises the power of exchange and consequently the point at which gold can be imported at a profit. Thursday, however, there were decided indications that the transactions in currency had culminated. On that day the supply was increased by large offerings and the demand slackened. Yesterday the same conditions continued to prevail. and the premium on currency dropped to 12 and 2 per cent. II2. The Hoarding of Currency in 189317 BY J. DE WITT WARNER Then developed the feature that will forever characterize the stringency of 1893-instructive to those who have not already learned how immaterial is any ordinary supply of legal currency when compared with credit in its various forms-the real currency of the 10 Commercial and Financial Chronicle, August 12, 1893, 196. |