The Atlantic Monthly/Volume 1/Number 1/The Financial Flurry
THE FINANCIAL FLURRY.
"Break, break, break,
On thy cold, gray crags, O Sea!"
"I remember a day," said a friend not long since, "a day as sweet, calm, cool, and bright as that whose wedding and funeral song the poet sings in the same verse, when I stood upon the white sea-coast near Naples, and looked far away across the blue, silent waters, and up the gray, flowery steeps, to where the towering cone of Vesuvius cleaves the skies. It was in the spring-time; luxuriant nature seemed to have nothing to do but to grow and bloom, and the huge mountain itself was profoundly at peace,—smiling a welcome, apparently, to the delicate bean-plants and wild vines which clambered up its sides, and wearing a light curl of smoke, like a gay coronal, around its brow. The bay was alive with red-capped fishermen, each one intent on fishing up his inverted brother below him; the beach was thronged with women, who chattered cheerfully over their baskets; and along the road scampered soldiers in bright uniforms, as if they had no conceivable purpose in life but to bathe in that clear sunshine, and breathe that soft, delicious air.
"A few hours later," continued he, "I stood not far from the same spot, and saw that mountain angrily belching forth pitch and flames; the earth beneath my feet groaned with sullen, suppressed rage, or as if it were in pain; vast volumes of lurid smoke rolled through the sky, and streams of melted brimstone coursed down the hill-sides, burning up the pretty flowers, crushing the trees, and ruthlessly devouring the snug farms and cottages of the loving Philemons and Baucises who had incautiously built too near the fatal precinct. The poor contadini, who lately chaffered so vivaciously over their macaroni and chestnuts, were flying panic-smitten in all directions; some clasped their crucifixes, and called wildly upon the saints for protection; others leaped frantically into boats and rowed themselves dead, in the needless endeavor to escape death; while the general expression of the people was that of a multitude who, the next minute, expected to see the skies fall to crush them, or the earth open to swallow them up forever. But I was myself unmoved," our friend concluded, in his usual vein of philosophy, "though, I trust, not unsympathizing; because I saw, through those dun clouds of smoke, the stars still shining serenely aloft, and because I felt that after that transient convulsion of nature the great sun would rise as majestically as ever on the morrow, to show us, here and there, no doubt, a beautiful tract now desolate, here and there a fruitful vale now filled with ashes,—but also, the same glorious bay breathing calmly in its bed, the same cloudless sky holding the green and peaceful earth in its complacent embrace."
We could not, as we listened to the story of the traveller, help considering it an illustration of that great convulsion of finance which has visited us during the last month. We do not mean to call this an eruption, which would scarcely be appropriate,—inasmuch as the characteristic of it was not a preternatural activity, but rather a preternatural stagnation and paralysis; but there is certainly a striking similarity in the contrasts presented by the two pictures just painted, and the contrasts presented in the condition of the commercial world as it is now, and as it was only a few weeks since. Then all nature smiled, and we scarcely thought of the future in the happy consciousness of the present; whereas now all nature seems to frown, and we eagerly long for the future to escape the endless vexations and miseries of the present. Our trade, which lately bloomed like a Neapolitan spring-day, is now covered with clouds and sifted with ashes, as if some angry Vesuvius had exploded its contents over us and shot the hot lava-tides among our snug vineyards and cottages. May we not also, in this case, as in that, draw some consolation from the knowledge that the stars are still shining behind the smoke, and that the sun will assuredly come up to-morrow, as it has come up on so many morrows, for so many thousands of years? Convulsions, by the very fact of their violence, show that they are short-lived; and though we, who suffer by them directly, are apt to derive the slenderest solace from the philosophy which demonstrates their transientness, or their utility in certain aspects, it is nevertheless profitable, for various reasons, to make them a subject of remark.
In a season of great public calamity, moreover, everybody feels that he ought to participate in it in some way, if not as a sufferer, then as a sympathizer, and, in either capacity, as a speculator upon its causes and probable effects. The learned historian, Monsieur Alcofribas, who preserves for our instruction "the heroic deeds and prowesses" of the great king of the Dipsodes, tells us how that once, when Philip of Macedon threatened Corinth, the virtuous inhabitants of that city were thrown into mortal fear; but they were not too much paralyzed to forget the necessity of defence; and while some fortified the walls, others sharpened spears, and others again carried the baskets, the noble Diogenes, who was doubtless the chief literary man of the place, was observed to thwack and bang his tub with unmerciful vehemence. When he was asked why he did so, he replied, that it was for the purpose of showing that he was not a mere slug and lazy spectator, in a crowd so fervently exercised. In these times, therefore, when Philip of Macedon is not precisely thundering at our walls, but nibbling at every man's cupboard and cheese-press, it behooves each Diogenes to rattle his tub at least, in order to prove, in the spirit of his prototype and master,
"Though he be rid of fear,
He is not void of care."
If the noise he makes only add to the general turbulence and confusion, the show of sympathy will at least go for something.
The same authority, whom we have just quoted, has a piece of advice with which we intend to set our tub in motion. "Whatsoever," he says, "those blindfolded, blockheady fools, the astrologers of Louvain, Nuremberg, Tubingen, and Lyons, may tell you, don't you feed yourselves up with whims and fancies, nor believe there is any Governor of the whole universe this year but God the Creator, who by his Word rules and governs all things, in their nature, propriety, and conditions, and without whose preservation and governance all things in a moment would be reduced to nothing, as out of nothing they were by him created." It is a most sound and salutary truth, not to be forgotten in times of commercial distress, nor even in discussing financial questions, remote as they may seem to be from the domain of ethics. God rules in the market, as he does on the mountain; he has provided eternal laws for society, as he has for the stars or the seas; and it is just as impossible to escape him or his ways in Wall Street or State Street as it is anywhere else. We do not wish to suggest any improper comparisons, but does not the Psalmist assert, "If I make my bed in sheol, behold Thou art there"?
In other words, commerce, the exchange of commodities, banking, and whatever relates to it, currency, the rise and fall of prices, the rates of profits, are all subject to laws as universal and unerring as those which Newton deduces in the "Principia," or Donald McKay applies in the construction of a clipper ship. As they are manifested by more complicated phenomena, man may not know them as accurately as he knows the laws of astronomy or mechanics; but he can no more doubt the existence of the former than he can the existence of the latter; and he can no more infringe the one than he can infringe the other with impunity. The poorest housekeeper is perfectly well aware that certain rules of order are to be observed in the management of the house, or else you will have either starvation or the sheriff inside of it in a little time. But what means that formidable, big-sounding phrase, Political Economy, more than national housekeeping? Can you manage the immense, overgrown family of Uncle Sam with less calculation, less regard to justice, prudence, thrift, than you use in your own little affairs? Can you sail that tremendous vessel, the Ship of State, without looking well to your chart and compass and Navigator's Guide?
When the "Central America" sinks to the bottom of the sea with five hundred souls on board, though it is in the midst of a terrible tempest, the public instinct is inclined to impute the disaster less to the mysterious uproar of wind and wave than to some concealed defect in the vessel. Had she sunk in a tranquil ocean, while the winds were idle and the waves asleep, the incident would have produced a burst of indignation, above the deeper wail of sorrow, strong enough to sweep the guilty instruments of it out of existence. The world would have felt that some great law of mechanics had been wilfully violated. But here is a whole commercial society suddenly wrecked, in a moment of general peace, after ten years of high, but not very florid or very unwholesome prosperity, on the heel of an abundant recompense to the efforts of labor,—when there has occurred no public calamity, no war, no famine, no fire, no domestic insurrection, scarcely one startling event, and when the interpositions of the government have been literally as unfelt as the dropping of the dew, a whole commercial society is wrecked; values sink to the bottom like the California gold on the "Central America"; great money-corporations fall to pieces as her state-rooms and cabins fell to pieces; the relations of trade are dislocated as her ribs and beams were dislocated; and the people are cast upon an uncertain sea, as her passengers were cast,—not to struggle for physical existence like them, but to endure an amount of anguish and despair almost equal to what was endured by those unhappy victims.
Now can this have happened arbitrarily, capriciously, mysteriously, without some gross and positive violation of social law, some wilful and therefore wicked departure from the known principles of science? Every random conjecture as to the causes of the prevailing distress implies an answer to the question, and it need not be repeated. It is more important to inquire what those violations and departures have been, than to reiterate the general principle. What has led to the lamentable results under which we suffer? What has rendered the winds so tempestuous that they must needs blow down our noble ship? What has provoked the ire of those big bully waves so that they advance to demolish us? Ah! hark just here how the Diogenidae tumble and thump their tubs! each one rapping out his own tune; each one screaming to boot, to be heard above the din!
One cries, that we Americans are an unconscionably greedy people, ever hasting to get rich, never satisfied with our gains, and, in the frantic eagerness of accumulation, disregarding alike justice, truth, probity, and moderation. Under this impulse our trade becomes an incessant and hazardous adventure, like the stakes of the gambler upon the turn of the dice, or upon the figures of the sweat-cloth; a feverish impatience for success pushes everything to the verge of ruin, and only after it has toppled over the brink, and we have followed it, does the danger of the game we had been playing become apparent.—A second qualifies this view, and shouts, that our vice is not so much greed, which is the vice of the miser, as extravagance, which is the vice of the spendthrift; and that as soon as we get one dollar, we run in debt for ten. We must have fine houses, fine horses, fine millinery, fine upholstery, troops of servants, and give costly dinners, and attend magnificent balls. Our very shops and counting-houses must resemble the palaces of the Venetian nobility, and our dwellings be more royally arrayed than the dwellings of the mightiest monarchs. When the time comes—as come it will—for paying for all this glorious frippery, we collapse, we wither, we fleet, we sink into the sand.—A third Diogenes, of a more practical turn of mind, vociferates, that the whole thing comes from the want of a high protective tariff. These subtle and malignant foreigners, who are so jealous of our progress, who are ever on the watch to ruin us, who make any quantity of goods at any time, for nothing, and send them here just at the right moment, to swamp us irrecoverably, are the authors of the mischief, and ought to be kept outside of the nation by a triple wall of icebergs drawn around each port. They pour in upon us a flood of commodities, which destroys our manufactures; they carry off all our gold and silver, which eviscerates the banks; the banks squeeze the merchants, to the last drop of blood; and the merchants perish in the process, carrying with them hosts of mechanics, farmers, and professional men.—Not so, bellows a fourth philosopher, perhaps a little more seedy than the rest; it is all the work of "the infernal credit system,"—of the practice of making money out of that which is only a promise to pay money,—out of that which purports to have a real equivalent in some vault, when no such equivalent exists, and is, therefore, a fraud on the face of it,—and which, deluging the community, raises the price of everything, begets speculation, stimulates an excessive and factitious trade, and is then suddenly withdrawn from the system, at the height of its inflation, like wind sucked from a bladder, to leave it a mere flaccid, wrinkled, empty, worthless old film of fat!
Now, for our part, we think all the Diogenidæ right, but not precisely in the way in which they state the matter; and we think the seedy Diogenes the rightest of all,—because he has struck nearest to the centre, to the organic fact which controls the other facts,—yet, without sharing his prejudice against credit, one of the blessedest of inventions. As a very long and a very dull treatise, however, would scarcely suffice to explain all the reasons for our thinking so, we must devote the one or two pages that are given us to a few simple, elementary, frontal principles, familiar, no doubt, to every one, and therefore the more important to be recalled, when every one seems to have forgotten them. Nothing is better known than the laws of gravitation; nothing staler in the repetition; but if the folk around us are building their houses so that they all fall down upon our heads, it behooves us to remind them of those laws.
1. Human wisdom has discovered nothing clearer than this,—that in all the operations of trade above a primitive barter, you must have a standard or measure of values; and human ingenuity has never been able to devise any standard more perfect, in essential respects, than the precious metals. It may be doubted, indeed, whether the choice of these metals for currency is a result of human ingenuity. Paley and his school of theologians demonstrate the existence, intelligence, and goodness of God from the evidences of design in creation,—from that nice adaptation of means to ends which shows an infinite knowledge and infinite benevolence at work; but no one of the instances in which they found their argument, from the watch, which affords the primal illustration, to the human body, which furnishes the most complex confirmations, is a more astonishing or exquisite proof of pre-arrangement than is the adaptedness of gold and silver to the purposes of currency. Your standard or measure, for instance, must, in the first place, possess a certain uniformity; if it be a measure of capacity, it must not be of the size of a thimble in the morning, and as big as a haystack at night, like the mystic bottle of the fairy tale; if a measure of length, it must not be made of caoutchouc, as long as your finger to-day, and as long as the Atlantic Cable to-morrow; and so, if a measure of value, it must not equal one thousand at ten o'clock, and equal zero at three. But the precious metals do possess this uniformity; they are not scarce, as diamonds are, so that a pinch of them might measure the value of a city; nor are they as plenty as blackberries, so that a wagon-load could scarcely buy a fat goose for dinner. They cannot be washed away like a piece of soap, nor wear out like a bit of wampum, nor crumble like agate or carnelian in dividing. In short, they combine all the advantages that are needed, with few or none of the disadvantages that would be troublesome, in a substance which is used for money. They possess intrinsic utility, they are equably supplied, they may be easily divided and then fused again, they take a stamp, and they retain the same qualities everywhere and at all times. Accordingly, all the civilized nations, from the time of great-great-great-grandfather Moses down to the time of President Buchanan, have used the precious metals for their standard of values; while your barbarians only, your silly Sandwich-islanders, your stupid troglodytes of interior Africa, your savage red men, have used for that purpose fish-bones, beaver-skins, cowries, strings of beads, or a lump of old rags. Q.E.D., then, on Paley's principles, the precious metals were meant by Divine Providence for use as money, at least more than anything else, because nothing else is so well adapted to the end. Intelligent man everywhere has been glad to recognize the Divine teaching; and the American man—holding himself the most intelligent of all men—has incorporated the lesson in his fundamental law. Nothing can be money for him, constitutionally, but metal which has a genuine ring in it.
2. Being the established standard, the precious metals, so long as they continue unchanged in amount, have a precise and definite relation to all other commodities. But they do not continue unchanged; and neither do other commodities continue unchanged. There is more gold at one time than another, and more wheat at one time than another; so that the relation between the two is not a determinate, but a variable one; and it is this variation which causes or constitutes the fluctuation of prices. If wheat increases in quantity, more of it will be given for the same money; and if it decreases, less of it will be given for the same money; on the other hand, if money increases, more of it will be given for a specific quantity of wheat, and if it decreases, less will be given; while if they increase or decrease together, a relative equilibrium will be maintained. But the beauty of the precious metals, as we have said, is that they are not liable to very sudden or considerable increase or decrease; only twice in the course of history, on the occasion of the discovery of the South American mines by the Spaniards, and of the California mines by the Americans, has there been recorded an unusual production of gold and silver; and in both cases, it is important to note, the same effect followed,--a very considerable enhancement of prices; that is, all other articles seemed to grow dear, although the real fact was that money had only grown cheap. In Spain every commodity rose; everybody experienced that delicious feeling, which we sometimes enjoy in dreams, of going up without spring or effort; and Spain was considered to be enviably prosperous and happy. As for San Francisco, we all remember the fabulous prices which ruled in that vicinity. An acquaintance of ours wrote us then, that he gave five dollars for a dinner consisting of half a pullet and two potatoes, and when he added a pint of champagne, it came to five dollars more. He allowed his washerwoman one hundred and fifty dollars a month, paid fifty dollars for a pair of second-hand cow-hide boots, and hired a cellar, seven feet by nine, and six feet under ground, at the rate of fifteen thousand dollars a year. But both in Spain and in San Francisco this ludicrous exaggeration of values cured itself. The manufacturers and merchants of all the world sent their goods of all sorts to such tempting markets; and it was not long before the goods, not the money, were in excess. Prices came down, as sailors say, by the run, and Spain and San Francisco were reduced once more to rationality and comfort. These were exceptional cases, but they illustrate the general principle, that the increase of money raises prices, and the decrease of money lowers them, which is all we wish to state. In ordinary cases, however, when the currency is in its normal condition, this rise and fall of prices is like the rise and fall of the tides, the mere pulsations of the great sea, which drown and damage nobody, and rather keep the waters more clear and wholesome by their gentle agitation.
3. The same law is observed to operate, whenever anything is made, either by the decrees of government or the usages of society, to take the place of the precious metals as money. Paper, in the shape of bank-bills, promising to pay money on demand, is the most frequent, because the most cheap and convenient substitute; accordingly, when convertible paper-money is increased, it raises prices, and when it is diminished, it depresses prices, just as in the case of a metallic currency. But there are these two signal points of distinction between a paper and a metallic currency: first, that paper money may be increased or diminished much more easily than metallic money; and, second, that any excess or deficiency of the former is not so easily corrected by the natural operations of trade. The sudden or large increase of the metals is prevented by their scarcity and the laborious processes necessary to produce them, and a sudden or large decrease of them could be brought about only by some great public calamity which should destroy them or cause them to be hoarded. But paper money, whether made by a government or made by authorized corporations, may be issued and put in circulation almost at will, and again be withdrawn at will. We do not mean that the issue and withdrawal of it are wholly unchecked, but that the checks, as the entire history of banking would seem to prove, are comparatively inefficient and delusive. If the rise and fall of prices, caused by the fluctuations of metallic money, are to be compared to the rise and fall of the tides, the rise and fall of paper prices are more like the increase and decrease of steam in a boiler, which is an admirable agent, but demanding an incessant and scientific control. The sea-tides, even after a tempest, will regulate themselves, because they have all the oceans and all the rivers of the globe to draw upon; but the steam in a boiler is a thing confined, and yet capable of immense and destructive expansion. A metallic currency runs from nation to nation, and has its perturbations corrected from nation to nation; but a paper currency is local, and cannot be so well corrected by the great interchanges of the globe. Let us make this clearer in another way.
4. It is universally conceded, by all the writers on finance, that any unusual production of currency occasions a rise of prices; the relative value of money is less than it was before, while the relative value of other articles is greater; a greater quantity of money is given for other articles, and fewer of other articles are given for the same amount of money. This rise has the double effect of provoking the importation of foreign commodities, and of preventing the exportation of domestic commodities; inasmuch as the same enhancement of rates, which opens a good domestic market for the former, closes the foreign market to the latter; and thus an unfavorable balance accumulates rapidly against the country where the rise occurs, in respect to other countries where it has not occurred. Now sooner or later this balance must be paid; and as products cannot be profitably shipped abroad to furnish a fund whereupon to draw bills of exchange, it must be paid in coin. The coin is therefore abstracted from circulation; and if coin were the only currency, such an abstraction would of itself induce a fall of prices, which would operate as a check upon importations until the old relation of equilibrium should be restored. But where the government, or where individuals, whether organized or alone, have the power to replace the departed coin by issues of paper money, prices are for a while maintained, and importations continued as vigorously as ever. All this, however, is but a postponement of the day of settlement. The balance to be extinguished is a substantial balance, which can be discharged only by substantial means; a mere promise to pay, a mere sign and representative of debt, will not extinguish it, any more than the smell of a cook-shop will extinguish a ravenous appetite. The insatiable creditor will have money; and the depositories of that essential become, under his assaults, more and more meagre and tenuous. The managers of them at last get alarmed, and begin to withhold their issues of paper; which means that they begin to reduce their loans to the community. The money-market grows "tight," as it is phrased; the money-world feels generally as if it had taken an overdose of persimmons. Merchants and dealers, shorn of their usual accommodations, are compelled to borrow at ruinous usuries, or to fail to meet their payments. Their default involves others; others fail, and others again. The bowels of the banks, with us the great money-lenders, close with the snap and tenacity of steel-traps; and then a general panic, or want of commercial confidence, brings on a paralysis of the domestic exchanges, and wide-spread bankruptcy and ruin. Importations are checked, of course; but they are checked in a sharp, rapid, and violent way, accompanied by the most painful embarrassments and convulsions.
This we believe to be an outline of the history of all our commercial catastrophes, stripped of those local and incidental circumstances which vary from time to time: over-issues of money,—speculative prosperity,—all the world getting rich in the most agreeable manner,—fairy palaces rising on all sides, without the sound of trowel or hammer; then,—the day of adjustment,—the rapid contraction of the currency,—all the world getting poor in the most drastic and disagreeable manner,—and those fairy palaces, which rose under our very eyelids over-night, vanishing, like the palace of Aladdin from the vision of the Grand-Seignior after he awoke in the morning. But, alas! the revulsion does not stop with the overthrow of the palaces which had been reared without labor; it is not satisfied with the dissipation of mere fancies and dreams; but, being itself a most real thing, it carries with it many a stately structure, which the toil, the economy, the self-denial of years had hardly raised. Extraneous causes,—a short crop,—a reduced tariff,—a peculiar mania of enterprise,—may hasten or retard the various steps of the process which has been described; but its cause and its course are almost always the same, and the discerning eye may easily detect them, from the beginning to the end of our modern commercial experience. In the existing difficulties, in this country, the railroad speculations have had much to do with producing and aggravating the effect; but the primary source of it, we think, is to be found in the ease with which our currency is inflated, under a banking system which varies from State to State, and which, outside of New England and New York, where it is by no means perfect, is as bungling a contrivance, for the ends to be answered, as was ever inflicted on the patience of mankind. Much of the trouble is due also to the extravagance and reckless waste of our people, which, though owing in some degree to our want of good manners and good taste, are directly traceable to the stimulus given to expense by the over-issue of artificial money. While the paper which passes for money is plenty, and every man can easily get "accommodations" from the banks, we squander without thought. No matter how costly the articles we buy; the expansion of the currency is greater than the rise in market values; and it is only when the contraction comes that we see how foolishly lavish we have been.
What, then, is the remedy? "Why, away with paper currency altogether!" says one. Yes,—tear up your Croton-water-pipes, because the breaking of a main sometimes submerges your dwellings; destroy your railroads, because the trains sometimes run off the track; arrest your steamships, because an "Arctic" and a "Central America" go disastrously down into the deep, deep sea! That were not wise, surely; that were very unwise, even were it possible, which it is not.—"Give us a high protective tariff," says another. Most certainly, friend, if we are to be perpetually flooded with paper, a high tariff is needed;—your theory is at least consistent, however it may have worked in practice. But a high protective tariff is an impossibility, because it can be attained only by favor of the Federal legislature; and, as we all know, at the door of that legislature stands the inexorable shape of the Slave Power, which consults no interest but its own in the management of government, and which will never make a concession to the manufacturers or the merchants of the North, unless it be to purchase some new act of baseness, or bind them in some new chains of servility.—But have you inquired whether that flood of paper is necessary? We frankly tell you that we do not believe it is; we believe that a better system is possible,—to be brought about, not by greater restrictions on banking, but by greater freedom; and we only regret that we have not now space to discuss that faith with you in all its reasons and results. We hope to be permitted to do so at some other time. Meanwhile, let us rejoice that the whole subject is in a position to be frankly discussed. A few years ago, when the question of the currency was a question of party politics, there was no aspect in which it could be presented, which did not arouse all the restless jealousies of party prejudice. If you talked of hard-money, you were denounced as a Benton bullionist; if you talked of credit, you were called a Whig banker, plotting to devour the poor; and the calmest phrases of science were turned into the shibboleths of an internecine warfare. A better hour has come, and let us improve it to our mutual edification.
This work was published before January 1, 1928, and is in the public domain worldwide because the author died at least 100 years ago.