The Forum, July 1906,
page 41 to 54
by ALEXANDER D. NOYES,
VERY few chapters in our recent financial liistory have been marked
by incidents so extraordinary as those of the past three months. Looking
upon the sequence of events from one point of view, it may be said that
the expectations of the best judges were completely verified. Looked upon
from another, the period may be described as a chapter of the unexpected.
What has happened during the past three months cannot be clearly understood
except in the light of the three months which preceded them, and a
brief retrospect will be necessary to introduce the quarter's history.
We saw, in the last number of THE FORUM, the manner in which the
financial markets had been warned that available supplies of capital in
the American market were inadequate for the demands which were being
placed upon them. Not to mention the 125 per cent call-money rate at
the end of 1905, Wall Street was confronted at the opening of January with
the highest rate touched at that time of the year since 1878, and with the
lowest bank surplus in twenty-six years. The eight per cent rate touched for
money in Wall Street during February had been paralleled only in 1896,
in 1893, and in 1890—in each of those years under circumstances of peculiar
and unusual strain. In the middle of March, money reached nine per
cent on the Stock Exchange, another rate paralleled at that period during
this generation only in 1903, in 1899, and in 1893. At the same time it had
become evident that the demands on capital were of almost unprecedented
volume. Up to the end of March, new securities had been announced footing
up between $400,000,000 and $500,000,000, which exceeded the total
of the full twelve months in years such as 1900,1902, and 1903, and which
surpassed the issues made during the first half of any recent year except
1901. Before the year was far advanced, it became evident that no more
of these large bond issues would be taken by the syndicates; and the ominous
movement which characterized the year of tied-up capital, 1903—the
issue of short-term notes at high rates of interest, in order to avoid sale of
long-term bonds at a sacrifice, again came into Wall Street's view. In
brief, it could be said at the end of March that the signs of the times were
definitely those of warning.
Somewhat paradoxically, that very time was characterized by a spirit of speculative optimism, and of general prediction that the " bull movement " on the Stock Exchange was about to be resumed. On Wall Street, it was commonly stated that the speculative leaders were making preparations to start the machinery of an extensive speculation for the rise as soon as the April quarter-day should arrive. In fact, even before the month of April opened, a lively advance in prices was in progress. The immediate sequel was extraordinary. In the face of a general supposition that one day of moderately tight money would end the quarter-day strain, and be followed by really easy money, call loans on the Stock Exchange started at 10 per cent on Monday, April 2, rose to 12 per cent on the 3d, to 19 per cent on the 4th, and to 30 per cent on the 5th. How far this lastnamed rate departed from the precedents of this season of the year may be judged from the following comparison of the highest call-money rates reached in April during the thirty-five past years:
For a time the stock market merely slackened in its pace under this sinister influence. Wall Street, at all events, refused to beheve that anything more than temporary and incidental strain was operating. At the end of the week, however, came a bank statement which opened the eyes of every one to the real nature of the situation. At the end of March surplus reserves had been abnormally low for that time of year, their figure, $5,131,000, not having been paralleled at that date since 1890. But a heavy loan expansion during the opening week of April brought about the spectacle, most remarkable for that period, of a deficit of $2,560,000 in bank reserves.
Now, it is true that a deficit in reserves has not been so vmusual as to
excite particular alarm. There were, it will be remembered, two deficits during
the past winter—on November 11 and on December 9. But the deficit
of April 7 attracted exceptional interest from the fact that a spring deficiency
in reserves has hardly been witnessed during the present generation.
The spring-time is the natural period for building up a bank position strong
enough to endure the strain of the harvest demand for currency in the summer
and autumn months. Hence, it will not be surprising if it is said that
no deficit has occurred in any but the late summer or autumn months since
1884. The following record shows when these deficits have come in the
past quarter century:
1906 —April 7.
1905 —November 11, December 9.
1902 —September 20.
1899 —November 4, 11, and 18.
1893 —July 8, 15, 22, 29; August 5, 12, 19, 26; September 2.
1890 —August 16, 23, and 30; September 6 and 13; October 18 and 25; November 8, 15, and 22; December 6.
1889 —October 6 and 12; November 9.
1884 —May 24 and 31.
1883 —March3,10,17, 24, and 31; April7 and l4; October 20 and 27.
1882 —February 25; March4; September 2,9, 16, 23, and 30; November 4y 11, 18, and 25.
1881 —February 26; March 5; August 20 and 27; September 3; October 1, 8, and 15; Decembers, 10, and 17.
1880 — April 3 and 10; November 27; December 4 and 11.
Here was another unmistakable warning to the markets.
Here was another unmistakable warning to the markets. This showing of the banks sent a very perceptible chill through Wall Street; yet the market, supported by the strong banking and speculative forces already organized to advance it, resisted the tendency to reaction, and in the second week of April surprised all watchers by suddenly resuming its advance. This movement was at first ascribed to a movement of foreign exchange in favor of this market wholly resultant from the tight money in Wall Street. Under ordinary circumstances, the par of sterling exchange is 486f, and the point at which gold can be profitably imported is approximately 484f. Under the influence of heavy borrowings by Wall Street from London, the rate declined, in this second week of April, as low as 482J, and an engagement of $3,000,000 or $4,000,000 gold for import from London to New York was at once announced. But with the announcement of these gold engagements came a sharp recovery in exchange, based obviously on the buying of bills on London, to pay for the gold thus obtained. Yet to the surprise of Wall Street, further engagements of gold continued to be announced during the second week of April, notwithstanding the fact that exchange was apparently above the import point. The true nature of the situation was not understood until the close of that week, when the Secretary of the United States Treasury, then in New York City, made the following remarkable announcement: The price of exchange having reached the point where gold ought to have been imported, and, believing the reason why it was not engaged to be the loss of its use during transit, the Sub-Treasury at New York was authorized, on Thursday afternoon, to accept bonds available as security to savings banks and to increase the deposit of any national bank desiring to import gold to any amount not exceeding $5,000,000 to any one bank, the same to be returned immediately on the arrival of the gold. On Friday the limit was removed authorizing the acceptance of security and to increase the deposit to any amount when assured that the money would be immediately used in
the engagement of gold for shipment to the United States.
In so far as concerns the purpose of the Secretary's move, his statement
explains itself. How far the actual influence of the Treasury's so-called
advance free of interest operated to cheapen the import of gold was a point
on which difference of opinion at once developed. Similar difference of
opinion showed itself in regard to the propriety of the Treasurer's action.
For reasons which wih be set forth later on, Mr. Shaw's action has come in
many quarters to be regarded as a fortunate move. This does not, however,
alter in any respect the merits of his policy on general principles.
That the Secretary had the right to deposit public money with the banks,
no one has questioned. The federal statutes covering such operations
merely say that national banks "shall be depositories of public money,
except receipts from customs, under such regulations as may be prescribed
by the Secretary," but that banks holding such government money shall
be required " to give satisfactory security, by the deposit of United States
bonds and otherwise." This is sufficiently broad authority.
But the question which did arise was what authority the Secretary had
to impose such a condition as requirement that the public deposits should
be used for importing gold. This could hardly be assigned as one of the
" regulations " which " may be prescribed by the Secretary " ; that clause
referred to safeguards for the Treasury.
This was not all. A very serious objection incurred by an operation of
this sort is that the Government, as such, has no business whatever to be
meddling in a financial market to advance the interests of anyone but itself.
There are instances where governments, our own included, have used their
credit faciUties to hold or reverse the movement of the foreign exchanges
in order to protect the Treasury from a drain on its gold reserve. This was
the nature of the famous government bond syndicate contract of 1895,
when the Treasury sold a block of new securities, at a price below the market
value, to an international banking syndicate, on the understanding
that this syndicate would provide the gold which the Treasury had not
been able to retain, and would see that, during a given period, gold should
not be withdrawn for export purposes.
This contract, arranged by Mr. Cariisle and sanctioned by President
Cleveland, was the result of a critical emergency. It was approved by
economic force solely on the ground of that emergency, but it has not, in
retrospect, been deemed to have permanently solved the Government's
dilemma. In any case, it is obvious that the taking of such a step for the
sake of guarding the national currency and public credit is a very different
thing from acting on similar lines for the benefit either of gold-importing
bankers or of a troubled money market.
It was alleged last April, by defenders of Secretary Shaw's special
action, that the Bank of France and the Bank of Germany had on occa-
sion offered precisely such facilities to gold importers when the markets of
Paris or Berlin were in need of gold. But to this contention there was the
obvious answer that these banks were private institutions, using deposits
placed with them on the same terms as those of any ordinary bank; that
they presumably saw profit for themselves in the importation; and that,
even if they did not, their action none the less would fail to serve as precedent
for similar action by a government. Indeed, this part of the discussion
narrowed down to the fact that only Russia, among modern governments,
had attempted to use its public funds for the purpose of influencing
As to the question of the permanent results which these " special facihties
" of the Treasury could achieve, it was shown at once that the only outcome
of the policy would be the cheapening of the cost of importing gold.
To put the matter technically, the gold-import point was raised. Where
gold could be imported without government assistance of the sort at484|,
bankers would find a profit with the Treasury facilities at slightly above
485. But this did not mean that gold was bound to flow this way because
of such alteration in the gold point. No intelligent financier has at any
time contended that the similar facilities of the Bank of France and the
Bank of Germany have actually caused gold exports from any other country.
What they did accomplish was to divert to Paris, or Berlin, as the
case might be, gold which was already leaving other markets, and which,
but for such inducements, might have gone elsewhere than to the market
where the facilities were offered.
In March, 1891, John Sherman, then a Senator, drew up a bill providing
that higher charges than had theretofore prevailed should be placed by
the Treasury on gold buUion given up to exporters. On that occasion,
which was a time of large gold exports, hasty reasoners jumped to the conclusion
that the gold-export movement would henceforth be obstructive.
As a matter of fact, the only outcome of Mr. Sherman's legislation was to
raise the gold point and to make it as cheap to export United States coin
as to export bullion. Up to that time all exports had been made in gold
bullion; during the next three months $60,000,000 of the United States
gold coin was sent to Europe. In other words, the tendency of the market
remained the same and was in no respect affected by the action of the
No other conclusion can be drawn as to Secretary Shaw's move in the
matter of gold imports. Had it not been for certain remarkable events
which swiftly followed and which reversed immediately the movement of
exchange, it is altogether probable that the gold importations which were
effected as a consequence of the Treasury facihties would have come
abruptly to a close. During the three or four days when the markets were
in ignorance of the Treasurer's new action, something hke $6,000,000 in
gold was obtained in Europe. The instant it was known, through Mr.
Shaw's announcement, that the gold point had been altered, foreign
exchange advanced to a point far above the level where gold could be imported
even with the cost of interest in transit removed. Such was the
situation in the middle of April, when another event occurred, destined to
influence profoundly all the finances of the season.
On Wednesday, April 18, the news of the San Francisco earthquake
arrived at the opening of all the markets. The destruction of San Francisco
was not accomplished by the earthquake alone, nor in a single day,
and at the start financial markets were inclined to minimize the results of
the catastrophe. Toward the end of the week, however, the conviction
grew rapidly that a serious blow at the prosperity of one section of the
country had been dealt, and that the consequences of the disaster on the
money market could not easily be measured. In the presence of a new
and wholly unfamihar occurrence of this sort, markets are usually reluctant
to draw conclusions; it was not, therefore, until the tangible bearing
of the event on bank reserves came into view, through the shipment of currency
in large quantities to San Francisco, that the immediate significance
of the event began to be appreciated. It will now be interesting to
examine into the question of what the destruction of San Francisco really
means to the financial prospect — a question by no means settled in the
financial mind even yet.
It may be said that there are two lines of argument applied to this question.
On the one hand, the natural contention is made that $150,000,000
or more of capital has been absolutely destroyed; that the loss must be
made up by drawing on reserves of capital elsewhere; and that, therefore,
there necessarily must be less capital to use for other purposes. That a
situation of this sort should have occurred when available supplies of capital
in this country were already manifestly inadequate for the demands
that were pressing on them aggravated the force of this argument. On
the other hand, it was answered, and it must be said that the answer is
repeated in many quarters where one would not expect it, that the destruction
of so huge an amount of property, which must be promptly replaced,
creates a new demand both for labor and for the products of industry. The
point was made that the building trade in particular, and, in general,
all trades connected with the building industry, would necessarily
receive a stimulus and be helped in the securing of profits. The laborer
must similarly benefit both in San Francisco itself and in the trades on
which the new demand falls. As for the question of drawing on supphes
of capital needed elsewhere, it was further argued that the bulk of the loss
incurred at San Francisco would be made good from the reserves of fire
insurance companies, and that a very great part of this indemnity — perhaps
one-half — would come from foreign markets. As for the waste of
capital involved in the destruction of San Francisco buildings, the argument
was occasionally heard that, without either earthquake or fire. New
York City, for example, is perpetually engaged in tearing down buildings
which have been in steady use and of great value, merely to replace them
with other buildings which are larger. The waste is not so sudden in this
case as in the case of San Francisco, but waste, none the less, exists.
I have stated fairly these two sides of the argument, because there is at
least some basis of truth in each. There can, however, be little dispute
that the view is correct which assumes outright that destruction of capital
is in itself a bad thing, and that'wholesale destruction involves a loss and a
strain, greater or less, on the world's markets as a whole. The argument
that the destruction of San Francisco will cause a business boom through
the new demand brought into producing industries merely repeats another
still more familiar argument, that war is a good thing industrially for the
same reason — that it converges on certain industries a great demand,
which increases because of the fact that the products in question are largely
destined for building purposes. But the argument of war, as an economic
blessing, has not only always been held in just contempt by serious reasoners,
but has been visibly exploded by the results of the Boer war and the
war between Russia and Japan. In regard to the case last mentioned,
European markets are still straitened by the huge demands thrown on
them in connection with that struggle, and the English market has not yet
reeovered from its own waste of capital during the Transvaal contest.
The analogy is fair with San Francisco. But it is not necessary to trust
to analogy. We have only to inquire, first, what has actually happened in a
financial way since the situation on the Pacific Coast became clearly known,
and compare it with what happened in such an interesting parallel situation
as the Chicago fire in 1871. That calamity, which occurred on October
8, came on a situation much resembling that which existed on the arrival
of the San Francisco news. There had been a famous boom in trade; there
was widespread hquidation; bank reserves in New York had been brought
so low that the surplus was almost extinguished, and the interior was still
drawing currency from New York. On this situation came the Chicago news,
showing property losses of probably $200,000,000, offset by insurance liabilities
somewhat exceeding $88,000,000. These figures meant more to the
country at that time than they would mean to-day. The Chicago fire was
followed by postponement of business by the banks until the chaos could
be at least temporarily modified; and in this interval very large amounts of
currency were shipped from the New York banks, these shipments causing
heavy reduction of Eastern loans and a violent fall in prices on the Stock
Exchange. Thus far it was apparent that the strain was being felt acutely.
Yet it is rather a striking fact that within a month currency began to come
back from Chicago to New York, the banks having then resumed payments
to depositors; and before the year was over the enormous boom which had
spread over the country in 1871 seemed to be resumed with redoubled
force, leading to the famous climax of speculation which occurred in 1872.
The inference, then, so far as one case may be taken as typical, was that
Chicago's disaster affected financial markets severely but only temporarily.
The difficulty in full application of this argument lies in the fact that 1872
pursued its activities in the face of excessive and abnormal money stringency,
and that 1873 brought a terrific reckoning.
With this Chicago precedent in mind, let us see exactly what has happened
since the San Francisco incident. I have said already that the shipments
of currency to San Francisco soon rose to large amounts. They
were needed obviously to guard the situation when the banks should reopen
for business, which they did not do until near the end of May. Before the
fire, the $40,000,000 individual bank deposits and the $150,000,000, or
thereabouts, of savings-bank deposits in San Francisco were guarded as
amply as the similar liabilities in any other city. Clearly, however, when
credit had been demoralized by the destruction of the city, when people
with substantial bank deposits had been living for weeks either on the loans
of friends and neighbors, or on virtually the public charity, there was a
chance that the reopening of the banks would be followed by a general rush
of depositors to get their own money into their hands. How large such
demands would be it was impossible to foreshadow; the case was too exceptional.
But, obviously, good judgment dictated that the banks should
protect themselves in advance against all possible emergency. They,
therefore, called for remittances of their Eastern balances, and in addition
borrowed in Eastern markets to procure additional currency remittances.
By the middle of May these shipments of currency from the East had
reached the imposing sum of $40,000,000.
The Eastern markets naturally could not have faced with equanimity
such demands on their reserves, coming at the moment when those reserves
had proved to be inadequate for immediate needs. It was here, however,
that the foreign exchange market showed its real possibilities. I have
shown already that the gold-import-facility expedient of Secretary Shaw
had apparently reached the limit of its effect just before the San Francisco
news came on the markets. That news, however, created a wholly different
situation. In the first place, it was at once ascertained that English
fire insurance companies would be called upon for indemnity payments to
the stricken city, amounting in all, probably, to something between!
$40,000,000 and $50,000,000. Within a month or two all of this sum would
have to be remitted through New York to San Francisco. In anticipation
of these large and known remittances, bankers at once sold exchange in
New York City. The market fell so far under this new and legitimate
pressure that the gold-import point was promptly reached again, and gold
to the extent of $45,000,000 obtained for New York frpm the London and
This, then, was the singular situation created in the money market by
the San Francisco fire. The Eastern markets had sent, say, $40,000,000 of
their reserves to the Pacific Coast and had almost exactly replaced that loss
by gold drawn from Europe. To this extent it might have been supposed
that the general market situation would have remained unchanged. There
were several reasons, however, why this could not be. In the first place,
the unsettlement of so great a disaster had very naturally affected pubHc
confidence; in the second place, it was evident that the very payment of
these insurance indemnities would involve the seUing by the fire-insurance
companies of the securities owned by them, or else would necessitate their
withdrawal from the general money market of the funds loaned out for
In either case a strain would be put upon both home and foreign money
markets. The bank situation could not well have remained unchanged
through the mere substitution of European gold for the currency sent to
San Francisco. The result was, first, a gradual weakening on the New
York Stock Exchange, followed by a break of such violence as to cancel
the greater part of the gains made in stocks during the preceding winter.
Through this decline and the resultant liquidation of speculative loans by
the Stock Exchange, bank habilities were enormously reduced. At the
same time. Wall Street resorted largely to the English and French markets,
where large sums were borrowed at rates inviting to the Londoner, and as
a consequence, the burden of liabihties was to a still larger extent shifted
from New York to Europe.
The net result was an easy money market. In the closing weeks of May,
money on call went at three per cent as 'against the thirty-per-cent rate
existing in the opening week of April; and time loans, which during most
of the year had held firmly around the six-per-centrate, dechned below four
and a half per cent. As to the bearing of these comphcated movements
on the immediate future, that may be said to depend on several influences
whose operation cannot be confidently predicted. In the first place, the
question is, what is to happen with the currency sent to San Francisco?
There is no reason to suppose that when the banking business is again
quietly in progress, and, to a greater or lees extent, normal conditions have
returned, this huge mass of emergency currency will be retained. Sooner
or later it will flow out again to the markets where the need of it, either
for bank reserves or for the medium of exchange, is greater. Under
ordinary circumstances, this would mean that New York itself would get
back the bulk of the currency sent to San Franciso, and some of it has
already returned at this writing. The doubt of the present arises from the
question how far the money markets 'of the Middle West will have occasion
themselves to use the cash released from the Pacific Coast.
This question becomes very interesting from the fact that at the close
of May money rates in New York were substantially below the rates prevaihng
in the West •— the difference in both call and time loans running
from one to two per cent. A second question arising in the same connection
is to what extent the gold' sent by Europe could be retained in New
York City if the comparatively easy money rates of May were to continue.
This is a question which in turn depends very largely on the developments
in Europe itself, which must now be noticed.
The action of the European money markets during the past three
months has been such as to make extremely difficult any sure judgment of
the situation. Like our own banks, the great banks of Europe largely
decreased their reserves in the earlier months of the year, and on April 5
the Bank of England, whose rate is an index to the general foreign situation,
reduced that rate from four to three and a half per cent, thus fixing
a lower figure than it maintained at the corresponding date in 1904,1903,
1901, or 1900. At the same time the weekly statement of the English
bank showed a ratio of reserves to habilities stronger than that of the
opening week of April in any of the past eight years except 1905. It was
figured out, at the opening of the quarter which we have under review, that
the nine great national banks of Europe showed an increase of gold holdings,
as compared with the last week of December, amounting to no less
than $123,000,000. This looked like exceptional strength; but the comparison
with the opening of April a year ago did not show up so favorably.
It is true that the banks of France and Italy had increased, as compared
with April, 1905, about $30,000,000 apiece, and that several smaller institutions
had also made gains. But against this stood the fact that the
Bank of England held in actual gold $6,500,000 less than the year before,
while decreases were also shown of $20,700,000 at the Bank of Germany,
$70,000,000 at the Bank of Russia, and $10,500,000 at the Bank of Austria.
The net decrease for all these institutions; compared with 1905,
was very nearly $43,000,000.
This was hot on its face a particularly favorable showing when it was
recalled how severe was the strain imposed on these same money markets
by the active trade movement in the latter part of 1905. But, on the other
hand, the comparison just given was somewhat misleading from the fact
that, but for the $70,000,000 decrease in the gold held by the Bank of Russia,
the showing of the banks as a whole would have been better than last
year's. The Bank of Russia is not a lender on other markets, and its gold
reserve is merely held against outstanding notes; therefore the decrease
there was of no particular consequence to the rest of Europe. After all
allowances were made, however, the figures showed that, generally speaking,
the position of the foreign banks was httle,if any, stronger than a year
before, and that the English and German markets were distinctly weaker.
The French market alone showed a positive increase in financial resources,
and in that it undoubtedly reflected the situation of the Paris market.
This point should be kept in mind because of the highly important rok
which the French market assumed in the later transactions of the past
Notwithstanding this powerful position of the French bank, and the
continued easy money on the Paris market, there were few signs at the
opening of the past few months that Paris would give relief to other markets.
For the tenacity with which that market held to its own capital,
there were advanced a number of explanations. The first had to do with
the dispute between France and Germany over the irritating Morocco question.
This quarrel, if it may so be called, was never taken seriously in
political circles, and the somewhat blustering tone assumed by Germany
was regarded solely as part of a diplomatic programme. It so turned out
to be, when the definite declaration by the Russian delegates at Algeciras,
that they would support the main contention of France, led to retreat by
Germany from her original ultimatum. But while the dispute continued,
the habitual caution of French financiers led them to turn a deaf ear to all
propositions for engagements of capital. It is the habit of that market to
refer to the famous precedent of the Franco-Prussian War, when the international
dispute was not considered seriously on the markets until within
two weeks of the actual outbreak of hostilities.
It was predicted freely in the European markets that, with the Morocco
question settled, French capital would be placed at the disposal of outside
borrowers. But hardly had the German dispute disappeared from the
financial scene, when the question of a Russian loan appeared. This loan
was regarded as an imperative necessity. During the whole period since
the St. Petersburg riots, at the opening of 1905, Russia had only been able
to obtain the money requisite for her government through short-term loans.
These loans were now approaching maturity, and it was questionable
whether they could be extended on the same terms. At the same time, the
Russian Finance Department had been obliged to face an enormous deficit
in public revenue, for which provision must be immediately made if the
Government were to continue to pay its maturing bills.
At the start it was expected that $250,000,000 would provide for all the
needs of the Russian Government; but it soon appeared that this sum was
quite inadequate. After the Algeciras settlement, negotiations between
the French and Russian bankers proceeded rapidly, and, toward the close
of April, formal announcement was made that a loan for no less than $440,-
000,000 would be floated. It was originally planned that this loan should
be distributed between France, Switzerland, Belgium, England, Holland,
Germany, and the United States; and the terms announced were a price of
eighty-nine for a five-per-cent loan with fifty years to run, and without
the right to redeem or convert until ten years had expired. It will be seen
at once that this bid for money was much higher than any made in the
recent money markets by Russia or by any other government. It was, in
fact, contended that the interest yield was higher than that obtained from
any loan issued by any European government, except in time of war, for a
generation past. The inducement for subscriptions—always supposing the
solvency of Russia to be assured — was, therefore, very great; yet the
first discovery of the negotiators was that they could rely on neither Germany
nor the United States.
Partial assent had been made by New York financiers to the proposition
that $50,000,000 of the Russian loan should be floated in New York;
but the thirty-per-cent money market at the opening of April, and the
peculiar position in which the life insurance companies, the general subscribers
to a Russian loan, now found themselves, put an end abruptly to
the negotiations. Germany, it had been calculated, would take between
$50,000,000 and 100,000,000; but she refused to subscribe at all, and the
refusal was at once put down to political resentment. The theory was
that Germany, having provided funds for Russia during the earlier months
of 1905, when the Government was in straits and the Paris bankers closed
their doors against it, had reckoned with confidence on the support of Russia
for its pretentions in the Morocco conference. This expectation had been
unpleasantly upset; and the Government, therefore, was determined that
no help should be granted to the ungrateful neighbor through the issue of
German capital. Whether this theory was correct or not, it is certain that
the German bankers would have taken a portion of the loan but for the
positive throwing of the Government's influence against it. Naturally, the
pohtical argument was not pubUcly advanced. It was stated, on the contrary,
that the impending issue of some large government loans in Berlin
itself made it unwise to crowd the market by Russia's loan subscription.
For a time this loss of two subscribing markets caused some apprehension as to the ultimate success of the loan. It was found, however, that
these absentees could be replaced. On the final distribution of the $440,000,000 issue, France, Belgium, and Switzerland took $240,000,000, London $66,000,000, Vienna $33,000,000, Amsterdam $11,000,000, and St. Petersburg itself no less than $100,000,000. This subscription by St. Petersburg was taken with very considerable skepticism in the financial community, where it is not yet seriously believed that sufficient resources exist in the Russian capital to make possible such a money pajonent. It was recalled that when an effort was made a year ago to place only $50,000,000 on the Russian market, the savings banks had to be practically forced by pressure from the government to take the bonds, and the interest rate paid to depositors had to be raised to attract the necessary funds.
Of Vienna, too, the general comment was that the large subscription to the Russian loan was either mere pretense, or else was used as a means of granting indirect opportunities to the German bankers to subscribe. The loan flotation was announced, however, as an entire success. In London it was moderately over-subscribed; at Paris applications were so large that in some cases only one per cent of the amount applied for by investors was allotted. Every one knows that over-subscriptions of this sort are often fictitious in their nature. But, in the case of Paris, there can be no doubt that the high rate offered by the Russian government, and the strong endorsement of the loan by the Paris credit institutions, brought about so great a tying up of capital for the purpose of the subscription that, in the end, the actual allotment of the loan, instead of tightening the money markets, actually reheved them.
This was no matter of mere general inference; for the instant the
Russian loan had been provided for, markets began to hear of loans by
Paris to the other money centres. Beginning in a comparatively small
way, this movement increased until, at the time of the San Prancisco disaster,
French capital and French gold were freely placed at the service of
the London market to make good the loss sustained by the shipments to
America; and toward the close of May announcement was made that American
securities in considerable quantity had been actually placed in Paris.
Twelve million dohars short-term bonds of New York City had been placed
in that market without difficulty; and later a $50,000,000 short-term bond
of the Pennsylvania Railroad was similarly taken. It was not unnatural
that so novel an announcement should have encouraged the feeUng that
the Paris market in its present strong position would be able to relieve
the necessities of New York.
The test of the capacity and willingness of Paris to do this service to
American finance will provide an interesting spectacle during the balance
of the year. It is not safe to accept at once the theory that Paris will do
this, or the theory that it will not. The French market and the French
investor are in many ways pecuhar. The Stock Exchange market itself
is surrounded by restrictions such as exist on no other financial market —
among which is the requirement of a tax on foreign securities introduced
into France, a tax so heavy that the cost of such promotion frequently
renders the subsequent sale unremunerative. It was this heavy tax
which obstructed the effort seriously undertaken during 1901 to place
the United States Steel Corporation shares on the Paris Bourse.
On the other hand, a somewhat new device in French finance has been
introduced within the past twelve months. It consists in the formation of
large banking companies who sell their own stock to French investors
under the privileges and immunities of a domestic issue, and then invest
the proceeds in such outside securities as American bonds, which thus may
find a market without recourse to the Paris Stock Exchange. How far
this movement will extend, to what extent it may take the form of
virtual absorption of our securities by the French investor, is thus far
largely a matter of experiment. What must be admitted at the start is
that the temper of the French investor, thus far, has indicated that he will
not allow his money to go abroad unless special inducements are offered.
Such inducements would not have been offered by our outstanding securities
at prices quoted on the New York Stock Exchange during most of
As against this consideration, there can be no doubt that Paris was a
large lender of money in New York on short-term borrowings of our bankers
during the past three months. This, however, is nothing new; it
merely repeats the experience of 1900 and 1901. The debt thus created
is a floating debt which may be peremptorily called in at maturity, even
though its payment at that time might be highly inconvienent to the borrower.
The existence of an exceptionally large floating debt of this sort
standing against us just now on Europe's markets explains the keen anxiety
which bankers have displayed to sell on those foreign markets such
amounts of long-term investment issues as would practically provide for
the taking up of these short-term borrowings without remittances of capital
The financial markets, then, approach the second half of 1906 in a position
which perplexes the most experienced observers. Prosperity in every
branch of American industry seems to be fairly at the high notch; and the
reahty of this prosperity is cordially recognized by Europe, which, during
the past four years, has been for the most part a sceptical observer. That
American industry is extremely profitable, and that American wealth is
accumulating at an amazingly rapid rate, are two propositions which
scarcely admit of question or denial. As to how far our markets, in their
enthusiasm to discount so favorable a situation, have extended themselves
beyond the capacity even of the present situation to sustain the burden
comfortably is a different question. Beyond all these matters of general
application stands the problem of the summer and autumn money markets.
Last December, last February, and as recently as the first week of
last April, the New York money market gave emphatic warnings as to
what might be expected in the money market of the autumn. Such a
series of warnings rarely occurs without cumulative meaning. Unless the
situation has been radically altered, and for the better, by the San Francisco
fire, then it would be only wise to look with great caution to the
finances of the later months. There still remain to be seen, however,
first, what the actual effect of the San Francisco losses will be on American
finance in general; secondly, where the great mass of currency sent to the
Pacific Coast will go when it moves away from that market; and, thirdly,
what the attitude of financial Europe later in the year will be toward the
New York markets. ALEXANDER D. NOTES,