Sunday, November 23, 2008

Lessons from History

from The Panic of 1907 by Robert Bruner and Sean Carr:

In a Memorial Day speech at Indianapolis, President Theodore Roosevelt railed that the "predatory man of wealth" was the primary threat to private property in the United States:
One great problem that we have before us is to preserve the rights of property, and these can only be preserved if we remember that they are in less jeopardy from the Socialist and the Anarchist than from the predatory man of wealth. There can be no halt in the course we have deliberately elected to pursue, the policy of asserting the right of the nation, so far as it has the power, to supervise and control the business use of wealth, especially in the corporate form.

Progressive activism was reflected at the state level as well; various states passed legislation sharply limiting the prices railroads could charge passengers. Business analysts believed these prices yielded revenues below the costs necessary to provide the services, thus inducing downward pressures on stock prices. The Chronicle opined, "What is ailing the railroads and the stock market? ... The underlying cause is the same as it was at the time of the collapse in March, the same, indeed, as it has been for about a year and a half, during all of which period a shrinkage in values has been in progress. Owing to the assaults of those high in authority and adverse legislation both by Congress and the State legislatures, confidence is almost completely gone. No one is willing to buy at what appear like ridiculously low prices because no one can tell what the future may bring forth.

The initial judgment of knowledgeable observers was that the break in stock prices in March 1907 had been sparked by investor fears arising from the Roosevelt administration's aggressive attitude toward railroads and industrial corporations. "For a year we have been foretelling this catastrophe, an assured result of the trials railroad property, railroad men and other large capitalists have been forced to suffer," the Commercial and Chronicle said, commenting on a newly launched investigation E.H. Harriman's Union Pacific railroad. "What has just taken place is not the final scene. Hereafter, if the irritant is continued, as we presume it will be, it will not be so exclusively securities and security-holders that will suffer; all sorts of industrial affairs are sure to get involved.” That irritant, of course, was the president of the United States.

The book is worth reading for the details of events, but the analysis is incomplete. A better overall understanding of the Panic of 1907 would include a description of the regulatory restrictions in place at the time including the reserve requirements and the effects of their consequent pyramiding within the banking system, severe branching restrictions, and bond-collateral restrictions on currency issuance. (See Salsman, Richard "Bankers as Scapegoats for Government Created Banking Crises in U.S. History" in The Crisis in American Banking, ed. Lawrence H. White, NY University Press, 1993. Briefly reviewed here. For a more technical discussion focusing on the need for and use of currency substitutes, see Horwitz, Steven, "Competitive Currencies, Legal Restrictions, and the Origins of the Fed: Some Evidence from the Panic of 1907" here.)

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