The great upward and downward swings of speculative prices, herein referred to as cycles, have invariably preceded or accompanied periods of business inflation or depression. This fact, apparently so elemental, is often disregarded by that very large class of speculators which is continually looking for artificial and unpregnant explanations of price changes. There can be no doubt as to the existence of manipulation, and, in rare cases, movements of considerable importance may be traced to this source alone; but manipulation consists, in its fullest sense, of the tactics resorted to for the purpose of liquidating shares in anticipation of a decline which the long-distance thinkers believe to be inevitable; or, per contra, for the accumulation of shares prior to a great recovery or readjustment. It is seldom employed as a positive means of enhancing or depressing values. In fact, to do either by mere manipulation would be an impossibility. Every observer of great speculative movements knows that at the highest point of a movement, and during the first half of a decline everything appears roseate, while at the lowest prices, and during the first half of an advance, the reverse is true.

There are several contributory causes which operate to produce these false appearances. The primary cause is the curtailed perspective and imperfect logic of the public investor or speculator. The most difficult thing to drill into the mind of the unsophisticated is the fact that speculation cannot possibly be successfully based on appearances which are open and obvious. Such a process is a flat contradiction of the word itself. It is unseen future developments or, in some cases, hidden and submerged present truths which must be consulted. Yet we find a great majority of the public element who seek riches in the speculative arena, constantly harping on the large business of certain corporations, and the excellent state of general trade as a reason for purchasing shares. These factors have, in all probability, been discounted in current prices. Generally speaking, the present is of no more use than the past in forming opinions of future price changes. It is a certainty that sales of stocks could not be made in great volume to good advantage unless everything did look rosy, for who would purchase shares at high prices if the future appeared threatening or unpropitious, and who would sell holdings in the face of encouraging and inspiriting prospects.

This brings us to the second phase of the question—the creation of false appearances, which is, in truth, the highest form of manipulation. When so-called inside selling is going on, great business is reported by railroad and producing corporations; dividends are increased, and public expressions of confidence emanate from men of high standing in the financial world. The effect of all this expressed optimism is, market-wise, of a negative character. When it is most prevalent and most decisive, prices halt or even decline. This period and action represents selling at the only time when advantageous selling is possible. In the main the truth only is told about existent conditions, possibly about the near future. Nothing else is necessary; but nevertheless the sellers are anticipating, not the events of the next week or the next month, but of a more remote period where they see probabilities in regard to which a discreet silence is maintained.

The constantly recurring cycles of prices, the alternate inflation and depression, must therefore be traced to something far more important than the grossly exaggerated potentiality of mere manipulation.

Principal Crises of the Last Century.

That crises in the financial world have occurred at more or less regular periods is a matter of history. Since the beginning of the nineteenth century ten of these readjustments have occurred. In 1812, after ten years of prosperous conditions preceding the war of that year, business fell off materially. The real panic, however, occurred in 1814. Washington was taken by the British on August 24th, 1814, and suspension of specie payments was general in the following two weeks.

In 1824, the protective tariff enactments were followed by general inflation in all lines of business. Two years later, in 1826, a general depression occurred with many failures. The depression at this period was even greater in England than in the United States, and many writers attribute the entire trouble to European business reverses, but it is probable that we had been living beyond our means and that this fact, to say the least, aggravated the disturbance.

In 1837, after six years of good times, another crisis occurred. This depression was attributed to various causes. The great New York fire of 1835, the loss of charter by the United States Bank in 1836, and the calling in of $37,500,000 of government deposits by President Jackson, are all given due consideration. The actual panic, however, did not appear until May 10, 1837. All the banks suspended specie payments, and securities,—in fact all properties of whatever kind—fell rapidly in value. The most plausible explanation of this crisis is over-speculation in land. The other evils mentioned might easily have been rectified by the recuperative powers of a growing country, had the more serious element of wild inflation been absent.

In 1848, after a long period of prosperity, broken only by the war with Mexico, business inflation and over-speculation again brought about the logical and inevitable result. Europe also had been over-speculating again and a crisis in England soon extended to the United States. Liquidation was drastic and the depression lasted until the discovery of gold in California began to bear fruit.

In 1857, one of the most serious, as well as the most short-lived, of our crises occurred. Again speculation was extreme; December, 1856, marked the high point in securities, and prices continued to sag for some months; but it was not until August, 1857, that a panic occurred.

In 1864, came a crash in speculative prices following tremendous inflation. Between April, 1864, and April, 1865, leading stocks declined from $50 to $100 per share. As the inflation of this period was caused largely by the high prices of commodities and greatly increased railroad earnings occasioned by the events of the Civil War, most writers on the subject do not consider it in their theoretical discussions of crises.

In 1872, another boom was on, particularly in Iron and Steel. The Chicago and Boston fires had not been as effective in breaking stock prices as might have been expected. Prices of stocks began going down materially in April, 1873, and in fact had been rather “toppy” during the preceding years. This panic, like most of the others, was preceded by enormous speculation and high prices. It is interesting to note that while stocks were declining, general business was booming. The trained minds of Wall Street were learning to discount the future at longer range and more accurately. The iron and steel business exceeded all former records in 1873, both in the matter of normal price and actual production.

In January, 1884, numerous failures and suspensions produced a panic which was in reality the culmination of a long decline. As in 1872, this panic was preceded by enormous general business. The steel and iron trade again broke all records in 1882, and other lines were equally prosperous.

In 1893, the period of prosperity which followed the enactment of the McKinley bill was rudely broken. Speculation had been rampant, as usual. On May 4th, 1893, the National Cordage Company went into the hands of a receiver. Only a year prior to that date, this corporation was paying 12% in dividends and the stock was selling well above par. There were many badly inflated stocks and many rotten spots in the speculative stock markets. The Distillers and Cattle Feeders shares fell from $70 to nothing, and were assessed $20 per share. The aggregate liabilities of business failures in 1893 were almost $350,000,000, over 20% greater than in 1892. Banks failed right and left, and several leading railroad companies went into the hands of receivers.

In 1903, another period of depression occurred. It is doubtful if this period can be rightly classed with the other crises already mentioned, for it was more in the nature of a drastic but orderly retrenchment than a panic, and the bull stock market of 1902 was again in full swing early in 1904.

In thus briefly detailing the crucial points of nineteenth century financial affairs, there is no intention of entering an economic discussion, and no pretence of giving anything like a comprehensive history of the events preceding or following their recurrence. The subject here discussed is speculation, and the object sought is to gain knowledge that may be of value in forming opinions as to future prices. We may gain some information of this character by analyzing the following points:

• 1—Did price declines in stocks precede, accompany, or follow
• panics, crises, or general business depression?
• 2—What are the signs which usually precede such periods?
• 3—What are the salient causes?
• 4—Can any dependence be placed in the regularity
• of these recurrences?

On the first head it will be found that in all cases the top of the stock market has been reached prior to the actual eruption in general business. Stock speculation in 1814 and 1826 was not of great volume nor importance, and cannot be given much consideration.

Beginning with the panic of 1837 we find that the highest prices for stocks were made in October, 1836, while panic conditions did not occur until May, 1837. Preceding the panic of August, 1857, highest prices were reached in the last months of 1856. Highest figures were recorded in April, 1872, just one year prior to the panic of 1873. The stock market anticipated the troubles of 1884 by 17 months of declining prices. In January, 1892, stocks began declining and continued their downward course until the panic of 1893 cleared the atmosphere. In our last period of depression (1903) stocks had reached their pinnacle in September, 1902, just one year before the market turned for the better.

We find therefore that in the majority of instances, highest prices for stocks were reached long before business troubles were openly apparent. This action represents to a certain extent the selling of stocks by men who were wise enough to foresee trouble.

Another interesting fact in regard to crises is that they are usually preceded by record-breaking business in all directions. As iron and steel may be considered the best barometer of business conditions, the following tables are instructive:

PIG IRON PRODUCTION
IN THE UNITED STATES
SINCE 1860.

It will be observed that the high record of production has been reached just prior to our greatest periods of depression, or during such periods.

The second phase of the question, “what signs usually precede such periods?” opens a wide field for the student of speculative changes. Some inspiration may be gained from an examination of the two points already considered, i.e.: priority of price movements and business inflation; but it would be extremely difficult to use them as guides unless many other factors were given consideration. If we eliminate the element of periodicity, any attempt to determine the turning point by examination of advances in prices of stocks or volume of production and consumption of commodities is futile. Using pig iron as a barometer we might, after production has gradually increased from 8,623,127 tons in 1896, to 15,878,354 in 1901, argue that a considerable reaction was due in this line, but we would be out in our calculations two years and two million tons. Neither can we accept the simple fact of a decline, or the beginning of a decline in iron or in any other single commodity as indicating lower prices for stocks; for however accurate iron may be as a barometer of general business, it is not at all a barometer of the stock market. It is practically certain that stock prices will move either to higher or lower prices long before any reasons for such movements are apparent to the ordinary observer. Future stock market movements are largely deductive, and are not founded upon ordinary industrial statistical evidence.

There is, however, one method by which some light may be thrown upon the subject of probable movements. A careful study of monetary conditions and expansion of credits will frequently reveal dangers not apparent in any other direction. It is scarcely necessary to say that such examination must not be confined to one quarter, such as New York City; or to one country, such as the United States. A comprehensive view of the world’s monetary conditions will be necessary. This subject is dealt with more fully in another chapter.

There is much difference of opinion among writers and students of economics as to the cause of depressions. Bagehot attributes it to the fact that, “at particular times a great many stupid people have a great deal of stupid money.” This writer contends that occasionally money accumulates abnormally and craves an investment outlet. To use his own words, “This blind capital seeks for some one to devour it, and there is plethora; it finds some one, and there is speculation; it is devoured, and there is a panic.” Horace White attributes panics to over-speculation. Bonamy Price says: “A vast outlay in new enterprises involving a large consumption of food and materials, whether in the way of pure waste or temporary unproductiveness, ought always to suggest a feeling of danger. This excess occurs in seasons of prosperity.” John B. Clark holds that it is due to an excess of production; or an excess of production in one line with a deficiency in others. Leone Levi: “The main cause for the occurrence of crises is the sudden realization of an insufficiency of capital to meet present demands.” Thorold Rogers says: “The cause exists in the function of exchange; in the expectation of unreasonable profits and in incorrect calculation.” It was the late Henry George’s theory that depressions are brought about by higher prices of land. He held that workers thrive as they have easy access to natural opportunities for production, and are impoverished as they are deprived of such opportunities. All periods of speculation and inflation end in higher land values. Landlords call for a larger percentage of the product than workers can afford to pay, and both labor and capital become idle until there is a readjustment. Prof. W. S. Jevons, and a host of others, attribute crises to sun spots and their effects on harvests. And so on through a long line of theories.

The consensus of opinion appears to favor the theory of over-speculation, whether in realty, commodities, or the shares of corporations, and this leads up to the question of periodicity. That there has been a recurrence of these troubles about once in ten years is not a debatable question. Nevertheless, many thinkers scout the idea of this repetition at marked periods being other than fortuitous. As prominent a student as Thorold Rogers, for example, ridicules the theory of periodicity. Many hopeful people believe that in time we will find means to avoid these bad spots; that the United States is a young and enthusiastic country, and that we will gradually sober down in both methods and effects. But against this theory lies the cold fact that these cycles have occurred with as charming regularity in France and England as they have in our own country, which would indicate that age and seasoning does not produce any appreciable improvement.

It is probable that the most acceptable theory as to the causes of periodicity is the psychological contention. Human nature is much the same throughout the civilized world. We suffer from a panic and a period of depression, and we grow wary and conservative. This course results in sound methods and accumulation. The business structure rests on a firmer foundation. Gradually the hard lessons of the past are forgotten by the older generation, and are entirely unlearned by the new business generation, all of whom are optimists. Again we expand our enterprises, again fortune favors us; the appetite for gold grows greater as wealth accumulates; men who were economical and satisfied on modest incomes now live extravagantly, and some of them dream of millions. Capital is spread out thinly. Story after story is erected on one foundation, and that foundation, sound enough at first, eventually gives way. Then we must begin our careful building once more. The ten year periods, therefore, may represent with more or less accuracy, the lapse of time between wisdom and folly,—the yard-stick of human intellect and experience.

Many of the writers on this subject seem to strive for tangible reasons for each depression. They dive into the subject for a cause and emerge with an effect, or a handful of effects. For example, the depression following 1893 was not caused by the failures of banks and other business institutions, but the failures were caused by the depression. It matters not that the failures ante-dated the bad conditions. Again, the depression itself was produced by prior inflation. It was the illness after over-stimulation. And so, in turn, we can ask what caused the inflation; and the answer is “Human greed and human folly.” This last analysis brings us around in a circle to the original theory of a psychological cause.

It is submitted that a dependence on periodicity of any kind, either in the ten year cycles or in year to year events is fraught with danger and cannot be adopted by the speculator. It is chart-playing pure and simple, and the man who disposes of his stocks for no better reason than that a depression appeared ten years ago, is liable to find himself in the position of the chart-enthusiast, who, after tracing a marked uniformity in movements for a period of years, runs into reverses and loses all.

It is not meant to say that a knowledge of the past is without value. Inductive reasoning is almost as important as deductive reasoning, when properly employed and applied. If we scrutinize the history of past crises and great movements with a view to determining the salient causes therefor, a great deal has been gained, for we may apply this knowledge to existent elements lying parallel to those which caused trouble in the past, and thus decide what is probable in the future. If, on the other hand, we place dependence on mere repetition, we gain nothing in education and stand in constant danger.

It may be contended that the active speculator has little to do with ten year cycles or their causes, but this is not the case. A correct understanding of the reasons for the great cycles will simplify the study of smaller intermediate movements. Much knowledge applicable to year to year movements will be gained. Monetary troubles, for example, occur almost annually, and their effects on market movements are usually, (not always), similar to those of more widely separated periods, but, of course, in a lesser degree.