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THE second quarter of the year is a period in which the real nature of a financial situation is apt to be severely tested. Experience has taught that in this country, and probably in most others, the month of May usually throws light where nothing but obscurity and uncertainty has before existed. The reason doubtless is that in May the money markets are commonly subjected to a trial. In our own case, export of gold is usual in the early spring. If underlying conditions are so adverse that exchange moves heavily against us, and if the bank position is such that the gold which we give up cannot readily be spared, trouble develops at that time. Conversely, with conditions such that our internal strength and our mastery of the foreign exchanges are then demonstrated, confidence grows and activity increases on the financial markets and in general trade. Putting the matter tersely, from the point of view of Wall Street, a philosophic speculator of a former generation once remarked that "stocks should not be sold when the sap runs in the trees," and on this maxim has been based a very prevalent theory that a "spring boom" has a natural place in the order of the seasons.
Like most of such generalizations, the theory is sometimes wrong and always untrustworthy. A revival in the financial markets, even if not in general trade, will often mark the springtime - partly for the reason already stated, but partly also because, with harvest uncertainties not yet imminent, there is a minimum of danger in buying stocks on speculation. But, on the other hand, half the great panics of our business history have broken out in May-those, for example, of 1893, 1884, and 1857. Only a year ago, it was in May that the three really typical tendencies of the disastrous financial year were embodied in (1) the heavy withdrawal of European capital from this market; (2) the failure of the Steel Corporation's finance plan; and (3) the collapse of Pennsylvania Railroad stock on the company's offer of new shares to existing holders.
This year no such disquieting and ominous events were produced by the month of May, or by the months which immediately preceded and
followed it. In fact, considering the misgivings with which this threemonths' period of test was approached by the financial community, it is safe to describe the outcome as at least negatively reassuring. There has been no "boom," but there has been no panic. Stock exchange prices, after a brief recovery in the early spring, have fallen away again, with apathy on the Stock Exchange and complete lack of interest by the investing public; but there has been no crash of values. Gold has been sent abroad in quite unprecedented quantities; but the money market has remained indifferent, rates for loans on demand and on time continuing at the lowest figures reached in many years, and the New York bank position making the strongest showing since the summer of 1899. What is still more important, in the broadest view, trade reaction has undoubtedly spread to many quarters which had not previously felt it, and has grown more uncomfortable in quarters where it was perceived before. Railway earnings always an index to the state of general trade have steadily decreased, and the decrease has not been made good by reduction in expenses. Shrinkage of $3,100,000 on the important lines, during the opening quarter of the year, was accompanied by $13,000,000 increase in outlay for operation, and, therefore, by $16,100,000 decrease in the net; and April and May returns, so far as yet reported, show the same tendencies at work. Yet we have seen no really formidable increase in commercial failures, no trouble whatever with the banks, and no sign of distress among the railways. Indeed, the most noteworthy of all the incidents of the period has been the fact that, although the inability of great corporations to sell new stock or bonds at prices asked has been emphasized, and although a number of such corporations have been compelled to borrow on their short-time notes at rates ranging from five to seven per cent, nevertheless the financial soundness of the companies has not been questioned, and their outstanding securities have held their ground upon the
This problem of the inability of great companies to borrow on their long-term bonds, at the old-time rate of four per cent or thereabouts, at a time when lenders willingly advanced the money at a higher rate on one- and two-year obligations, is in some respects the most notable phenomenon of the time. Nothing akin to it has been witnessed in this generation; for the railway floating debt on the eve of 1893 was created when the companies' credit was admittedly impaired, and when, to meet their pressing debts, they had to pledge with banks the last assets which remained in their almost exhausted treasuries. To-day, these
notes are issued by companies in the highest credit; they are, in many cases, eagerly sought for by investors; and, on this basis, upward of $150,000,000 of such paper is outstanding. Not a few thoughtful financiers and critics hold that this strange phenomenon has a simple. explanation the fact that the interest rate in the broadest sense has risen; that borrowing corporations must hereafter pay a higher price for money; that lenders and investors recognize this fact, but that the borrowers will not recognize it, or at all events will admit it only as a temporary tendency, which is to pass away before the short-time notes fall due. This hypothesis is to be tested with the progress of the year; if true, it involves some interesting corollaries, affecting many interests and many markets. But as yet it is nothing more than theory, and cannot be said to have created actual alarm. Summed up, the history of the last three months would seem to show that the financial situation, though by no means satisfactory, is nevertheless not regarded as alarming.
The last article which I wrote for THE FORUM noticed the fact that movement of prices on the Stock Exchange had come almost to a halt, and called attention to the miniature market of 73,000 shares on March 10, which emphasized those conditions. As a matter of fact, however, a rather noteworthy change, both in immediate underlying conditions and in the market movement which reflected them, was then very near at hand. This change in the market came about in a very curious way. Ever since the Circuit Court's decision of April 9, 1903, declaring the Northern Securities combination illegal and ordering its dissolution, the final decision, on appeal to the United States Supreme Court, had been discussed in Wall Street as an unsettling possibility. It was recalled that the Circuit Court's decision had been followed by great demoralization in financial values, and, more particularly, by predictions that endorsement of so sweeping a construction of the law would result not only in overthrowing the Northern Securities, but in bringing into question the legality of a dozen or more very important railway combinations including the Pennsylvania Railroad's purchase of the Baltimore and Ohio, the combination by purchase or lease of the anthracite coal carriers, the New York and New Haven's ownership of the Sound steamers, and the Union Pacific's control of the Southern Pacific. During the first part of the present year, expectation of the decision and predictions as to its nature played a large part in the unsettling of financial plans.
On March 14 the Supreme Court handed down its decision and, as had been expected, it was against the Northern Securities. The conclusions of the Circuit Court were reaffirmed and its order for the dissolution of the company approved. Yet the stock market, after a day of uncertain vacillation, suddenly turned strong, and in the next two weeks advanced with a vigor which had hardly been witnessed since the great reaction in prices began, more than a year before. Not only did prices rise, but volume of business increased. The total trading at New York, which on March 10 had fallen to 73,000 shares, reached on March 23 the extraordinary volume of 1,300,000 shares, the largest of any day in eleven months. It is not often that Wall Street's predictions and expectations are reversed in so singular a fashion.
There are several explanations. One, and possibly the most obvious, lies in the fact that the decision had been anticipated, and, in Wall Street's phrase, "discounted." It is a maxim of financial markets that when every one has been looking for bad news and adjusting accordingly his position on the market, the bad news will be found to have spent its force before the announcement actually is made. It was also argued that the settling of this disputed question had at least removed vexatious uncertainty from the general situation, and had made it possible for the market to see where it actually stood. more important cause remains to be noticed.
But the still
The decision of the Supreme Court was made on somewhat peculiar lines. In a bench of nine, five judges gave their voice against the Securities Company, and four in favor of it. But of the five judges whose vote fixed the formal judgment of the Court, only four followed precisely the lines of the lower court's decision. The fifth judge whose opinion ran against the merger Justice Brewer- called attention to the fact that he did not concur in the sweeping language either of the Circuit Court's decision, or of the Trans-Missouri decision of the Supreme Court in 1897; the gist of that important ruling having been that in agreements or combinations of this sort "the necessary effect is to restrain trade or commerce, no matter what the intent was on the part of those who signed it." For reasons set forth in his opinion, Justice Brewer found that the Northern Securities merger was distinctly a contract in restraint of trade. Referring to the device by which a holding company had been formed to control the ownership of the two merged companies, he remarked:
If the parties interested in these two railroads can, through the instrumentality of a holding corporation, place both under one control, then in like manner, as was
conceded on the argument by one of the counsel appellants, could the control of all the railroad companies in the country be placed in a single corporation. . . . The holders of $201,000,000 of stock in the Northern Securities Company might organize another corporation to hold their stock in that company, and the new corporation holding the majority of the stock in the Northern Securities Company, and acting in obedience to the wishes of a majority of its stockholders, would control the action of the Securities Company . . . and this process might be extended until a single corporation whose stock was owned by three or four parties would be in practical control of both roads, or, having before us the possibilities of combination, in control of the whole transportation of the country.
But as regards the general position of the court against contracts or agreements for regulation of trade prices or transportation rates, Justice Brewer made this important statement:
Instead of holding that the Anti-Trust Act included all contracts, reasonable or unreasonable, in restraint of interstate trade, the ruling should have been that the contracts there present were in themselves unreasonable restraints of interstate trade, and, therefore, within the scope of the act. Congress did not intend by that act to reach and destroy those minor contracts in partial restraint of trade, which the long course of decisions at common law had affirmed were reasonable and ought to be upheld. . . . Wherever a departure from common law rules and definitions is claimed, the purpose to make the departure should be clearly shown,
The importance of this position, taken as it was by a single justice, will be obvious when it is considered that a transfer of his vote to the other side would have resulted in a verdict for the company. Thus stated, it was plain that any future case coming before the Court would be ruled upon on its individual merits rather than by a sweeping generalization. It was not at all illogical, this being so, that people who had feared the instant application of the law to other companies such as those referred to should have been instantly reassured. This feeling of reassurance found expression in the market.
In the course of a week or so after the handing down of the decision, another and very singular cause for the response of the market to the Court's decision came in view. It was observed, from the very day when the Court handed down its decision in the case, that Union Pacific stock was the most active and aggressive on the market. The reason presently developed. When the Circuit Court in April, 1903, decided against the Northern Securities merger, it enjoined that company against either voting the stock of the railway companies controlled, or receiving dividends on such stock; and it added:
But nothing herein contained shall be construed as prohibiting the Northern Securities Company from returning and transferring to the stockholders of the Northern Pacific Railway Company and the Great Northern Railway Company, respectively, any and all shares of stock in either of said railway companies which