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They were prosperous years for Wall Street, the years 1905 and 1906. In those days the newspapers did not print graphs indicating the rise and fall of the volume of trade, but if they had, the curve of prosperity would have been shown climbing somewhat above the highest point which it had reached during the bull market of 1901, and lingering at that exalted level. And if for millions of Americans life even in those years remained an uncertain struggle for a drab and meagre existence, few of the men and women in the great houses along Fifth Avenue were deeply aware of the fact. Their little world of magnificence was like an island set apart from the common life of the country.
The news items of those years suggest, here and there, the splendor of the life on this island, and some of its characteristic contrasts.… Mrs. Astor, aged seventy-four and in failing health, gave her annual ball at 840 Fifth Avenue; she wore a magnificent Marie Antoinette costume of purple velvet, a massive tiara, a dog-collar of pearls with diamond pendant attachments, a diamond corsage ornament, and a stomacher of diamonds.… Before this ball, Mr. and Mrs. Harry Lehr gave a dinner for eighty-eight at the St. Regis; the table was fifty-eight feet long and fourteen feet across, there were three thousand white roses upon it, and toward the close of the meal the huge centerpiece was removed in order that the host and hostess, fifty-eight feet apart, might signal to one another when the time came to rise.… At James Hazen Hyde’s fancy-dress party at Sherry’s, Madame Rejane acted for his guests. The Armstrong Committee’s investigation of the unsavory financial practices of the life-insurance companies was shortly to cause Hyde’s permanent departure for France, but meanwhile he was a gay young host, costumed in his Coaching Club coat and small clothes.… James Stillman gave a dinner dance: his dining room was converted for the occasion into an artificial forest in which, after the cotillion, a picnic supper was served beside an artfully contrived waterfall.… John D. Rockefeller fled from his estate at Tarrytown to his estate at Lakewood, New Jersey, to dodge process servers from the Missouri courts. He also gave ten million dollars to the General Education Board. Shortly afterward John D. Rockefeller, Jr., spoke to his Bible Class on the topic, “Is it ever right to do wrong to achieve a right end?” … William G. Rockefeller, son of William Rockefeller and son-in-law of James Stillman, judged the beagles at the Fourth Annual Summer Dog Show at Mineola, Long Island.… Henry Clay Frick accumulated United States Steel stock; he also accumulated a Raeburn, an El Greco, a Van Dyck, a Titian, and a Ruysdael.…
At Newport, a journalist observed that the men and women of fashion were no longer content to drive in their stately carriages along Bellevue Avenue; instead, “people in goggles, veils, and dust coats tour all over this beautiful island.” … One of the exciting events of the social year was the Vanderbilt Cup Race: at sunrise of an October morning the smart traps and foreign-built automobiles of society thronged about the scenes of action on Long Island—the start and finish at Westbury, the Hair Pin Turn, the road between Manhasset and Jericho.…
William K. Vanderbilt was said to be losing his grip on the New York Central, as he spent most of his time abroad; but his name led the list of winning stables on the French turf.… Alfred G. Vanderbilt was having a 250-horsepower car built to race at Ormond; the other entries in the Ormond races included a racer constructed by a less resplendent competitor named Henry Ford, whose little automobile company actually sold 1600 cars during the year 1906.… It was said that in the houses of Elbridge Gerry and Ogden Mills, dinner for one hundred guests could be served at an hour’s notice.… In Wall Street, speculation was booming. The interest rate for call money rose at one time to 125 per cent, but the big traders were willing to pay it to buy stocks on margin; for as a financial chronicler said in the New York Tribune at the end of 1905, “Never did a year close with better record—never did a new year dawn with prospect brighter.… Good times go marching on!”
Beyond the shores of this island of splendor, however, storms were rising. Not only a storm of popular resentment and distrust, which had long been brewing, but a storm directly resulting from the financial excesses in Wall Street itself. This storm was to break in 1907.
Chapter Four
PANIC
A NEW YORK business man, unfolding his copy of the morning Tribune at the breakfast table on Tuesday, October 15, 1907, and running through the day’s news, would hardly have imagined that a five-inch item on page 15, carrying the headline, “UNITED COPPER BOOMING,” would prove to be of momentous consequence to him and to millions of other Americans. The item reported a “sensation” of the previous day on the New York Curb—which in those days was a real curb exchange, the brokers jostling on the pavement of Broad Street, while boys with telephone receivers clamped to their ears hung on the window-ledges above and relayed orders to them by sign language through the uproar. From what the business man saw in the Tribune, he would have gathered merely that the stock of the United Copper Company, which was said to be under the control of a group of men headed by one F. Augustus Heinze, had leaped in price within a few hours from 37¼ to 60; and that the traders who had previously sold it short (knowing the depressed condition of the copper business) were unable to buy it back except at ruinous cost.
Surely, the business man would have said to himself (if indeed he had stopped at all to think about the significance of the news item), this is a wholly unimportant episode. What one man loses in a speculative bout like this, another man gains; and everybody knows that the fortunes of a few manipulators cannot affect the general prosperity of the country. Yet in fact the gamblers’ battle in United Copper stock was destined to be to the financial panic of 1907 what the assassination at Serajevo was to the World War of 1914: not the fundamental cause, but the precipitating event. Even as the business man sipped his coffee and turned the page, a relentless sequence of events was preparing to drag him and his fellows down into the whirlpool.
Not that business men were easy in their minds in those mid-October days of 1907. It had been an ominous year. During 1906 the strain of financial over-confidence and of long-continued speculation had begun to tell severely on the money market. The managers of several big railroads had entered upon campaigns of extension and equipment as if the supply of capital to be drawn upon was endless; the big speculators had borrowed money to buy stocks as if the gambling mania would be endless. Yet the drain on the world’s supply of capital by the Russo-Japanese War and by the San Francisco earthquake and fire, though it had been hidden for a time, had been real; and likewise the supply of new and eager stock-market plungers was running out.
Conservative bankers began to be apprehensive. Altogether too much credit was tied up in Wall Street. Something like half a billion of it was of foreign origin, and now the strain began to be felt abroad. In the autumn of 1906 the Bank of England warned the big joint-stock banks of London against lending any more money wholesale to New York. The stock market faltered, sagged, and in the middle of March, 1907, suddenly and disturbingly collapsed.
“In Newport, Tuxedo, and Westchester County,” as Edwin Lefèvre wrote later, “were heard voices ordering horses to be sold and stablemen to be dismissed; automobile repair bills were angrily sent back for revision and itemized accounts were insisted upon and extensions of time asked for.”
The apprehension of the financiers was increased by the fact that President Roosevelt, who in 1906 had driven through Congress the Hepburn Bill for the regulation of railway rates, was clearly not content with this restriction of the right of the grand moguls of business to do as they pleased. He was speechmaking vehemently about “malefactors of great wealth” and advocating further federal discipline of the corporations. Apparently the President of the United States was lost to sober reason. Say though he might to his intimates that “if trouble comes from having the light turned on, remember that it is not really due to the light but to the misconduct which is exposed,” the men of Wall Street could not see things that way. To them the President was not only betraying his
financial supporters in the 1904 campaign, he was a demagogue undermining public confidence and demoralizing business at the most dangerous moment. “I would hate to tell you,” said Harriman to the reporters when his Union Pacific stock tumbled twenty-five points in the collapse of March 14, 1907, “to whom I think you ought to go for an explanation of all this.”
Soon, however, a succession of foreign events bore witness that even far beyond the range of Roosevelt’s insistent voice the world-wide speculative boom had undermined credit. In April and May there was a panic in Egypt. In May and June there was one in Japan. Early in October there was one in Chile. During the summer the stock market in Wall Street had another sinking spell. Commodity prices—some of which, like that of copper, had been artificially maintained by monopolistic control long after new contracts had ceased to be made—were sliding; the price of copper dropped from 26 cents to 22, to 18, to 13, and still buyers were scarce. It began to be whispered that the supposedly invincible Standard Oil crowd of speculators, led by H. H. Rogers and William Rockefeller, were loaded down with stocks which they had bought for a seemingly inevitable rise in prices; and that instead of standing ready, as of old, to support the sagging market with new purchases, they were being forced to throw their holdings overboard for whatever they would bring. Corporations which could not continue in business without new money were becoming sorely embarrassed. The New York street railway combination failed. Now at last a crisis which had hitherto been acute only in the financial market-places of the country was beginning to throw out of work, by the thousand, men who knew nothing about the congestion in securities or the depletion of bank reserves, but felt their effect nevertheless: machines standing idle, factories closed down, foremen turning away workers.
With each new turn for the worse in the financial situation the bankers and the financial writers expressed a hope that the storm clouds had at last blown by; but however calm their faces, in the back of their minds grew a slow and restless fear. What next?
It was at this moment that Heinze and his friends pushed up the price of the stock of the United Copper Company.
2
F. Augustus Heinze was one of the youngest and most picturesque of the buccaneers of finance. Only thirty-six years old, he had “the torso of a Yale halfback, muscles of steel, and a face of ivory whiteness, lighted up with a pair of large blue eyes.” Part Irish, part German-Jewish, he had been born in Brooklyn but had gone out to Butte, Montana, at the age of eighteen to seek his fortune, and had made it—none too scrupulously.
His first big exploit was to lease the Estrella copper mine, and to draw the lease so ingeniously that he was able to snatch all the profits from it and leave the owner none. In due course Heinze had a copper company of his own and was at war with the giant Amalgamated Copper Company, controlled by H. H. Rogers. Heinze’s strategy was to claim that his veins of copper ore ran down under the Amalgamated’s land and that he therefore had a right to them under the so-called “apex law,” and then to bring injunctions against the Amalgamated. Since Montana judges as well as Montana legislators were often purchasable and were popularly elected, the copper war became a legal and political war waged with the aid of subsidized newspapers; and in this sort of contest young Heinze with his thirty-seven lawyers, his eloquence, his dashing good looks, his glamor in the eyes of the women, and his shrewd decision to pay high wages to his workmen was a formidable power. Clad in a loose black suit with flowing tie, his hands thrust into the old-fashioned waistband pockets of his trousers, he was the perfect swashbuckler of the mining camps—shrewd, reckless, popular, confident, and ready to use any and every weapon to annihilate the biggest and most overcapitalized copper company in the country. At last he sold out to Rogers, took his millions, came back to New York, and became—God save the mark—a bank president. Not that he was particularly interested in banking; but a bank president could command ready funds with which to play the market, and there wasn’t a finer gambling game in the world.
In the United Copper pool with Heinze was a little barrel-shaped man named Charles W. Morse, who came from the sober state of Maine but possessed none of the scrupulous caution supposed to be characteristic of the New Englander. Morse had worked his way through Bowdoin in the grand manner by getting paid a salary as clerk in his father’s company and hiring another man to do the work for less cash, while he himself divided his time between studying and journeying to New York to sell Kennebec River ice to a New York brewery and other concerns. By the time the big holding-company boom set in, Morse was promoting the American Ice Company and using his monopolistic power—with the aid of Tammany politicians—to push up the price of ice to the people of the metropolis. Presently he went into banking, for he too had discovered that it is convenient for a speculator and promoter to have access to depositors’ funds. He borrowed large sums through “dummies” to finance his private operations; at one time, for example, his bank lent him a hundred thousand dollars in his stenographer’s name. And he had made the further discovery that it was possible through a succession of borrowings to gain control of bank after bank. The Morse technic was simple: borrow money and buy the controlling shares in a bank; then put up these shares as collateral against another loan of money, with which you buy another bank, and so on. As soon as you control the bank it becomes quite simple to have such loans to yourself approved—and other loans, too, with which you may promote other companies and play the market.
Morse promoted a combination of most of the steamship companies plying along the Eastern seaboard. Financially as well as physically, his steamships, like his ice, floated on water, for he had learned well the peculiar advantages of overcapitalization. Morse was spoken of as the “admiral of the Atlantic coast.” And now he, too, with only one eye on his banks, was toying with United Copper stock in company with F. Augustus Heinze, Edward R. Thomas, and other like-minded spirits. They worked through the brokerage house of Otto Heinze & Co., in which were two of F. Augustus’ brothers.
The flurry in United Copper on Monday, October 14, 1907, which as we have seen was inconspicuously reported in the next morning’s Tribune, was part of a speculative campaign conducted by these plungers. They had made large purchases of United Copper stock through a number of brokers, who were supposedly holding the purchased shares for them; and so complete had been their control of the market that although the prices of other copper company stocks had been sliding, United Copper had stood firm until the preceding Saturday. On Saturday, however, there had been a sharp outbreak of selling and the price had gone down. The Heinze crowd suspected some of their allied brokers of selling—and also of having had to hock Heinze’s stock certificates with the banks to get cash. On Monday various short-sellers bought stock to cover their commitments, and as we have seen these repurchases drove the price way up from 37¼ to 60. Thereupon Heinze and his cronies apparently guessed that they had the market cornered. If, they reasoned, we call upon our false allies to deliver the stock they have bought for us, they won’t be able to do it, and we’ll be able to dictate terms to them which will punish them for their treachery and make a round profit for ourselves. So they suddenly called for delivery of the certificates by 2:15 on Tuesday afternoon.
But they had guessed wrong. They did not have the shares cornered. Enough stockholders in United Copper, hitherto inactive, had seen in the newspapers just such items as our hypothetical business man read on that Tuesday morning, and had decided that this was the golden moment for selling out, to permit the allied brokers to cover their short purchases and comply with the Heinze demand without running the price beyond 60. The stock was duly delivered—and the Heinze cash ran out. In the last few minutes of Tuesday’s trading the Heinze crowd were selling United Copper frantically to raise enough money to save themselves, and the price dropped from 60 to 36. The next day—Wednesday the 16th—it plunged to 10. In the débâcle the firm of Otto Heinze & Co. and one of its allies went to the wall. The jig was nearly up for the young swashbuckler of
the mining camps.
Even so, the damage done by these failures would probably have been limited had Heinze and his friends not been bankers as well as gamblers. Heinze was president of the Mercantile National Bank; Morse and Thomas were directors of it. When the Heinze failure was headlined on the front pages of the papers, depositors naturally became suspicious and began to withdraw their funds. Suspicion spread to the Morse chain of banks, too. The Mercantile, finding its cash being drained away by uneasy depositors, applied to the Clearing House for help. And the crisis of 1907 thereupon went into its second stage.
3
To understand the events of the second and third stages of the crisis it is necessary to understand the nature of the banking organization in New York at that time.
In the first place, there was then no Federal Reserve System, able to mobilize money from scattered banks and provide it wherever it might be needed in time of stress. Each bank stood on its own feet, except for such aid as the Clearing House might see fit to give it. In the second place, the Clearing House—an association of banks which took care of the daily exchange of checks between them—was dominated by the more conservative and solidly entrenched institutions which were either within the Morgan sphere of influence or the National City Bank sphere of influence or were in substantial accord with those financial powers. In the third place, the big bankers who thus dominated the Clearing House management had long looked with disapproval upon the character of competition which the Heinze and Morse banks and others of similar nature had been giving them. In the fourth place, these Clearing House authorities possessed powers which enabled them to dictate terms to the lesser banks in time of crisis; for suddenly to deny Clearing House facilities to a bank at such a time would virtually condemn it to death.
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