WORLD-WIDE RISE IN PRICES It is not always easy to classify a year such as 1903, and to assign its proper place in economic history. That it was merely an interlude in the cycle of prosperity, was proved by subsequent events. Wall Street—including both the every-day speculator and what is known as " High Finance "—undoubtedly drew the inference that 1903 was a "panic year," similar to such a period as 1893, and that the easy recovery from the set-back, and the quick return of prosperity and confidence, provided conclusive testimony to the fact that, after all, economic law had changed and that the real economic penalty for financial blunders and excesses need be feared no longer. It was in fact a very noticeable phenomenon, in the discussions even of experienced bankers at that period, that the oc currence of another panic like that of 1893, with its runs of depositors, its general suspension of bank payments, its recourse to clearing-house loan cer tificates, and its premium on currency, was ac cepted as impossible. Economists who did not take that view had two explanations to offer for the relapse of 1903 and the country's quick recovery from it. One was, that this was an after-effect of the European "Boer War crisis," to be ended when financial Europe got on its feet again, as it did in 1905. Another was, that a su-called "little panic" always comes midway between two serious economic crises—as it did in 1884 and 1866—terminating definitely the period of easy money, but not so completely exhausting the community's economic power that it has to begin to build anew.
Whichever may be the more plausible theory, the fact is that, as in the sequel of 1884, the doubts and misgivings of this minor crisis were dismissed within a year and a half. By 1905, not only the United States, but Europe also, had resumed the "industrial boom" on a scale of substantial magnitude. To at least some extent, it is reasonable to suppose that resumption of full gold production in South Africa had an influence. Having reached, in English values, a high record of 415,5oo,000 in 1899, on the eve of the Transvaal War, this output sank, during the whole of the two-year period woo and 1901, to &o14,00o. It then recovered gradually; in May, 1905, it passed the high-water mark of previous monthly production; in the twelvemonth 1906, it had reached the sum of 24,500,000.
Partly because of the facilities for banking credits thus provided, partly because of a new impulse to enterprise, more keen because of the halt that had been enforced by the three or four years of financial reaction, the exploits of 1901 now began to be repeated, not in America alone, but throughout the world. This last fact is important to keep in mind. It was European over-expansion which came to grief in 1899, and American over-expansion which met its reckoning in 1903. America, which had not yet overdone things, was in a position to help out financial Europe on the first occasion; Europe had plenty of idle capital to put at America's disposal on the second. To find a period when both Europe and America, and with them the rest of the financial world, were simultaneously engaged, as they were during 1905 and 1906, in the intensely eager task of exploitation, the student of history would possibly have to go back to the early seventies.
Circumstances conspired to stimulate this world wide movement. Two years of exceptional agricul tural prosperity occurred; of wheat in particular, the world produced in 1905 a crop larger by nearly 'co, 000,000 bushels than any ever before harvested, and in 1906, the yield was ioo,000,000 bushels larger still. Prior to 1902, the world's largest wheat yield had been 2,900,000,000 bushels; the crop of 1906 was 3,400,000,000; yet such was the magnitude of consumption that English experts estimated the second of these figures to have been only 1,440,00o bushels beyond the world's actual requirements for the season. 1 In the United States, despite the signs of di minishing productive capacity in 1904, the wheat crops of 1905 and 1906 surpassed all precedent except the great "wheat year" i901; the corn crop established a new maximum yield in each of these two years; the cotton yield of 1905 was the third largest in our agricultural history and that of 1906 was only a trifle below the largest.
Notwithstanding this bounty of nature, prices and cost of living rose with greater rapidity than at any time in a generation past. Taking the London Econ omist's "index number" as a measure, we shall find that between the middle of 1897, when low level of the period was reached, and the end of 1904, the average of commodity prices had risen from 1885 to 2136. Between the middle of i9o4 and the middle of 1907, it had advanced to 2601. Comparing the index number for the end of 1904 with that for the middle of 1897, we shall find an advance of 13-1 per cent. Comparing the number for the middle of 1907 with that for the end of 1904, we shall find the rise for that second period was no less than 211 per cent. Putting the matter in another way, on the basis of units, the increase in the index number, from 1897 to 1904 inclusive, was 251 points; from 1904 to 1907 inclusive, it was 465 points.
That is to say, the average prices of commodities advanced nearly twice as far during the second period, which was less than half as long as the period from 1897 to 1904. To come down to specific articles, such as play an important part in cost of living, the average price of iron during 1904 was $15.57 per ton; in 1906, it was $20.98. Steel prices averaged, in the respective years, $22.18 and $27.45 leather, 18.9 cents a pound and 20.2; butter, 16.5 and 18; planed boards, $20.05 per thousand feet and lead, 4.42 cents and 5.781; tin, 27.90 and A glance at these figures will show the advance to have been greatest in commodities, like steel and lead, whose production in this country is in the main controlled by a single great corporation. This process was most visibly at work in the copper industry; in which, since 1899, the $153,000,000 Amalgamated Copper Company, a concern organized solely to buy and hold the shares of copper mines, exercised so controlling a voice in fixing prices that even foreign metal markets admitted its arbitrary power.4 In 1901, when this company held the price at 16 cents a pound, it was declared by the trade to be abnormally and artificially high. In 1904 the price averaged only 131; it was taken in hand again and marked up continuously to 181 cents in 1905, to 24 in 1906, and to 251 early in 19o7.5 No price approaching this had been touched since 1873; yet the rise occurred in the face of an increase in copper production, between 1904 and 1906, of 'of per cent. in the world at large, and of 13 per cent. in the United States alone. 1 Nor was it only the great industrial trusts which pur sued this policy. In 19o1, cotton was considered dear at io cents a pound; a short crop and a New York cor ner raised the price in March, 1904, to Of, from which, on the harvesting of a crop, the ensuing season, 20 per cent. larger than the previous maximum yield, it fell to 8 cents or thereabouts. The cotton growers thereupon organized; conventions were held, an asso ciation formed with branches throughout the cotton belt; resolutions were adopted fixing the minimum price at 15 cents a pound, and arrangements made for advancing money to the planter, whereby he might hold his cotton off the market until his price was reached. 2 The "official price" was not achieved; but a good part of the crop of 1906, which was only slightly smaller than the largest yield on record, was sold at prices ranging from 12 to 13 cents. Meantime, hand in hand with the rise in price of merchandise, land and rents advanced. The rise in land values, which began in earnest during 1904, reached the next year, in a good part of this country, the proportions of a mania. Farm lands naturally led in the move ment; with the great harvests and the high prices, their actual earning power was enormously enhanced, they doubled, trebled, and quadrupled in value. But town and city lots, throughout the country, followed suit. Speculation grew violent in a hundred widely separated localities, and one would see, fifty or sixty miles away from populous cities, unimproved meadow land staked out with street signs of avenues and boule vards, and in some cases dealt in through paper "options," the speculators not taking the trouble even to pass title. Sums wholly without precedent were invested in the erection of town and city dwellings. In New York City, capital expended on construction of new buildings had never, even in the excited years of 1899 and 1901, exceeded $15o,000,000; it was only $139,00o,00o in 1904. But in 1905, it rose to the extraordinary figure of and this was typical of dozens of cities throughout the United States.
Such was the story throughout the whole domain of industry, and one inevitable outcome was that, along with the speculative enthusiasm and the accla mations over the period's immense prosperity, bitter complaint arose from other quarters over the increased cost of living. There is, indeed, no doubt whatever that one large section of the community—including small-salaried employees and people with moderate fixed incomes—was being steadily forced back to a lower scale of living than had been its habit, and that another section, unwilling to economize and infected by the extravagance of the day, indulged without hesitation in living beyond its means.
Against these consequences, organized labor was able to protect itself; the urgent demand for skilled workers in every branch of industry made easy the frequent exaction of advance in wages. Extensive strikes were rare, because employers, their books full of pressing contracts, could not risk losing workmen whom they might possibly not be able to replace. What the rise in wages was, we may learn from the Government's reports. Taking as a basis the average wages paid to American laborers in the decade 1890 1899, and assuming, for purposes of comparison, ioo as the index-figure of wages paid per hour of labor in that period, the statements show that the average rate in 1904 was 117, that it was 118.9 in 1905, 124.2 in 1906, and 128.8 in 1907. It is open to argument, and indeed is largely proved by the calculations of this same Government report, that these higher wages did not much more than compensate for the increased cost of living.
But a quite inevitable outcome of this extraordinary rise in cost of materials and labor was the demand for increased amounts of capital for use in trade, and a rise in the price of money. Even among merchants, it was common complaint that nearly twice as much money had to be used to conduct the same volume of business as had been necessary two or three years before. Manufacturers had the higher cost of labor and materials to absorb increased capital on the same amount of output, and this happened at a time when the bank-deposit fund, the surplus capital of the com munity, was being narrowed by the increasing cost of living. That necessarily meant low bank reserves and dear money. Yet evidence of a growing strain on capital resources was no more conspicuous than evidence of the financial community's readiness to draw still more largely on the credit market. This readiness was tested in a very conclusive way. On the night of February 8, 1904, the Japanese fleet at tacked the Russian squadron at Port Arthur, and one of the three most costly wars since the Napoleonic era began. It continued, on sea and land, until August 29, 1905, and it involved an expenditure, by the two belligerents, of a sum not far below two thousand million dollars.
From the outbreak of the Manchurian war, it was plain that political affiliation would throw on France the burden of equipping Russia, and on England that of equipping Japan. The prospect was viewed with great uneasiness; for Russian bonds, in a sum total estimated between $1,400,000,00o and $1,7o0,000,00o, were already in the hands of French investors, 1 who might be frightened into panicky liquidation, and a very prevalent belief existed that Japan's economic resources were not strong enough to endure the prodigious strain ahead of them.' On Europe's stock exchanges, a collapse at once occurred in the general investment market, especially on the Paris Bourse and in Russian but it was promptly checked, and such was the confidence of the French rentier, that Russia raised in the Paris market, during 1904 and 1905, the great part of its $500,000,000 loans of the period, and in 1906 easily raised $400,000,000 more to settle the post-bellum expenses.
Japan, applying first to its treaty ally, Great Britain, now tried a highly interesting experiment—it asked the co-operation of American bankers and investors. Russia had made, some years before, a similar tenta tive application, and had failed. The American public showed no interest; no banker could be enlisted in an "underwriting"; and although one Russian bond issue was "listed" on the New York Stock Exchange, and a silver vase presented by the Czar to that in stitution as acknowledgment of the favor, not one of the bonds was ever dealt in. Japan now made, in May, 1904, its initial offer of $5o,000,000 bonds, allotted equally to England and the United States. The terms were inviting; Japan pledged its customs revenue to se cure the bonds, offered them at 931 cents on the dollar, and fixed an interest rate of 6 per cent. The loan was moderately over-subscribed. In November, Japan again applied to the London and New York markets for a loan of $6o,000,000. It bore the same interest and security as the loan of May, but sold at 88. Be tween that time and Japan's next application to the markets, events in Manchuria moved swiftly. On January 2, 1905, the Russians surrendered Port Arthur; in March, after continuous fighting of a week or more, the main Russian army met disastrous defeat at Muk den; in the same month, Japan asked for $15o,000,000 more from the English and American money markets. With the prestige of victory on their side, and with the bonds of 1904 selling on the market io per cent. above their issue price, the Japanese financiers fixed an interest rate of only 4.5 per cent., pledged only the Government's tobacco monopoly against the loan, and asked the price of 871, or nearly as much as was brought by the second 6 per cent. loan of 1904. Yet such was the enthusiasm of capitalists, that the American half of the loan was applied for six times over. First and last, Japan expended, in conducting the Eastern War, the sum of 1,982,190,000 yen, or, roughly, $991,000p00, making the rate of outlay, of the two contestants in the Eastern conflict, in the year and a half of war, more than $3,00o,000 daily. Something less than half of Japan's war expenditure, and a similar part of Russia's, were defrayed through in creased home taxation and domestic loans. But taking the belligerents together, it is safe to say that the Eastern War brought a requisition on the neutral markets, dur ing 1904 and 1905, of not much less than one billion dollars.
Now money thus expended is pure waste; it does not return to the channels of industry, and it diminishes the world's reserve of capital. Yet this prodigious drain did not in the least restrict demands for capital in finance and industry; on the contrary, it seemed to stimulate them. Although 1904 had been the year of heavy Japanese loans in London, requisitions on that market's capital, through new security issues, ran in 1905 $22o,000,00o above the preceding year, reach ing a height never exceeded save in the twelvemonth before the "Baring panic Exchange of checks at the London Bankers' Clearing-house, in 19os, rose 16 per cent. above the highest previous yearly total, and 3o per cent. above so active a year as All this reflected immense activity at the central money market of the world. In the United States, bank clearings in 1905 rose 27 per cent. over 1904 and greatly exceeded all previous records; yet those of 1906 were II per cent. larger On the European continent, Germany's issue of new securities in 1905 was 70 per cent. larger than in 1904; the esti mated total, $770,000,000, comparing with $615,000, 000 in 1898, itself the maximum of that decade's excited "boom" and the previous high record in the country's That it was not alone financial activity, moreover, which was pulling at the market's purse-strings, may be shown by the fact that iron production, a fair measure of industrial conditions, increased in England from 8,3oo,000 tons in 1904 to 9,500,000 in 1905 and io,000,000 in 1906—a 3o per cent. increase over 1901, in Germany from io,000,000 tons in 1904 to 12,200,000 in 1906, and in the United States from 16,40o,000 tons in 1904 to 25,300,000 in 1906; the figures of the last-named year being in all three instances unprecedented. 2 "Everything is in motion," wrote a trained observer regarding 1906; "railways, steamers, factories, harbors, docks; it is evident that so gigantic a development of trade and industry could not fail to have a marked influence upon the position of the international money market." 3 That influence would have been less formidable, even with the engulfing of capital in the Eastern War loans, had not speculation, with its enhancement of values and its peremptory demand on bank resources, thrown its weight into the scale. Let it again be ob served that, unlike our "boom" of 19o1, the industrial expansion of 19o5 and 1906, and the speculation which accompanied it,' were limited only by the bounds of the civilized world. In October, 1905, when the Imperial Bank of Germany put up its discount rate successively to 5, to 51, and to 6 per cent.—the last named figure being the highest ever reached, except in time of actual financial panic,—the authorities of the bank declared publicly that the volume of un covered note circulation, a pure emergency device, was the largest in the history of the institution, and that the high discount rate was expressly designed to apply a curb to the German speculative mania.' In Egypt, land and stock speculation reached, between 19o5 and 1907, a pitch of excitement which, later on, a responsi ble financier described as meaning that the " people were apparently mad; I do not know what other word to use; they seemed to think that every company that came out was worth double its value before it had even started business." 2 In Japan, the declaration of peace in August, 1905, was followed by what was described in a subsequent government review as a "fever of enterprise," in which "prices of securities rose higher and higher," with "a similar rise of prices in and of which high banking authority re marked that, by 1906, "men of judgnient had already begun to look askance at this state of From South America, it was reported of 1905, by an observer on the spot, that in Chili, "the only apparent factor that restricts operations in all directions is the scarcity of labor; wages and salaries have risen greatly and continue to rise, as all employers are on the lookout for workers. As money became more plentiful, the price of provisions rose and money became more expensive." Here, then, were markets in four continents plunging simultaneously into speculation, at the very moment when trade demands were at a maximum, and when the Manchurian war had drawn in such prodigious sums on the world's capital reserves. The process was imitated in the surrounding states. It was not to be supposed that, with its appetite whetted by remem brance of 19o1, and with its own interior commerce, foreign trade, railway revenue, grain harvests, metal and mineral production, iron and textile manufacture, at top notch in its history, 3 the United States, in yet another continent, would fail to follow suit. Of the American speculation in commodities and land I have already spoken; but the spectacular interest of the period attached to the Stock Exchange. During the autumn of 1905 this speculation reached a singular position. It was not, like the American stock specu lation of isci, conducted on the basis of public partici pation; the real outside investor now had employment for his own capital in the increasing demands of his private business. But to his absence the speculative leaders, who comprised large groups of immensely wealthy capitalists, bank officers, and railway direc tors, were seemingly indifferent.' Their bank affili ations enabled them to pursue their course unchecked; their use of credit was practically unrestrained; there seemed no bounds to the audacity of their Railways with share capital running into the tens of millions were practically cornered on the Stock Ex change; one of them, a company with $7o,000,000 outstanding stock, was put up zo per cent. in price within a fortnight, and without a particle of news to affect its value legitimately. The same thing happened in a dozen other properties.
These exploits were carried out in the face of rapidly falling bank reserves and rapidly rising money rates. Even at the height of the speculative craze of 1901, mercantile discounts at New York had ranged around 5 per cent.; in the autumn of 1905, the full legal rate was charged, plus a "broker's commission," which brought the actual rate as high as 7 per cent.—a very abnormal figure, showing that general trade was feeling the But the Stock Exchange speculation did not halt; in various stocks controlled by powerful groups of capitalists, advances of 10 to zo per cent. occurred, with enormous trading. When the New York banks reported a steadily weakening position, recourse was had to Europe. Money was raised in London on the collateral of these speculative holdings, and great blocks of American stock shipped from New York to the English market. 2 "Finance bills" re appeared—a device which had first become familiar in 1901 and 1902, and which meant the raising of capital abroad, sometimes in tens of millions of dollars, not on the basis of automatic extinction of the debt by grain and cotton exports, but through outright borrowing on the paper of powerful New York banking houses.3 Such, however, was the persistence of de mands on home bank resources, that even this ex pedient failed to relieve the pressure, and meantime money rates were advancing in Europe also. On November 1905, and again on December 9th, reserves of the New York Associated Banks fell below the 25 per cent. ratio to deposits stipulated by the National Bank Act. Rates for demand loans on Wall Street went to 25 per cent. in November, and still the Stock Exchange speculation for the rise continued. On December 28th, the rate reached 125 per cent. Addressing a gathering of practical New York business men, a few days afterward, and referring to that money rate, an eminent financier declared: "If the currency conditions of this country are not changed materially, I predict that you will have such a panic in this country as will make all previous panics look like child's play." 1 Just how far this prophecy was destined to be ful filled, we are presently to see. But in the light of what we have now reviewed, it may reasonably be asked, whether the laying of responsibility on the currency touched the source of evil. A very different inter pretation of the same events was made by an eminent European economist, who wrote, at the culmination of this strain on the money market of the world: " The growing industrial states, particularly the new coun tries, are at this moment demanding more capital than the whole world has accumulated recently, or is accumulating to-day. . . . The civilized world, so far as it can be reckoned up, provides $2,400,000,000 in available capital annually for investment in securities; it is asked in 1906 to provide $3,250,000,000; there was a demand, in America at any rate, for even more than its part of the above estimate to be provided during 1907. But the world has not got it; therefore it cannot provide it. Add to this the effect of catastrophes such as the San Francisco and Valparaiso earthquakes, which cost something like $200,000,000, and you will have a perfectly clear explanation of the existing crisis, the rise in the interest rate and the fall of investment securi ties. The truth is, nations, quite as well as individuals, have reached the point where they must limit their undertakings to the possibilities of the case; that will be done, if not will ingly, then by force of events."'