Economics and the Public Welfare. Benjamin M. Anderson
the business and that the management could handle things for the banks much better than the banks themselves could. In cases where the management was of doubtful integrity or had proved itself incompetent, the credit committees would insist on a change of management as a condition for extending the loans. Sometimes the banks would scale down the loans so as to put the businesses in a position to get new credits from purveyors of raw material. Sometimes the banks would even advance some new money to keep a business functioning, knowing very well that a functioning business might pay out ultimately, while a business that had ceased to function would rapidly disintegrate and dissipate what assets it had. It was a superb piece of credit work.
New York Aid to Rural Banks. Banking policy had many angles, and banking policy in the great financial centers had to overlook the whole country. The great New York banks had correspondent banks in every part of the nation which turned to them for help and to which they gave help, lending against whatever assets the local banks had, including the small receivables of their local customers. In the portfolio of the Chase National Bank of New York there was a note for $104, signed by John Wilhite and Lizzie his wife, secured by a chattel mortgage on Mollie—Mollie being a mare mule sixteen hands high, five years old, and broken to single and double harness—resident in the state of North Carolina. This note had come as part of the collateral to a loan for $100,000 made to a North Carolina banker.
In the first half of December 1920 the old chief of the Chase National Bank, A. Barton Hepburn, stated that he was getting very disquieting reports from the Panhandle of Texas and from Montana regarding the cattle
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situation. The farmers, under pressure to pay debts, were shipping out their cattle—not merely the fat cattle but also the lean cattle and the she-cattle, breaking up the flocks and herds. And these cattle sold under such stress were obtaining ruinously low prices in the market in Kansas City. Hepburn said, “Now I am going to scurry around and get some money out to the Texas and Montana banks so that they can lend enough to those farmers to keep the flocks and herds together.” But he wished a speech made about it which would outline a general policy that might be useful to the banks in this situation.
The speech was made in Iowa City to the bankers of Iowa late in December. After describing the situation to them, the speaker said, “If you have farmer debtors who have fat cattle which they are holding in the hope of higher prices, call their loans, make them sell. They won’t get the higher prices. If you have farmer debtors who have corn that they are holding for higher prices, call their loans. Make them sell. They won’t get the higher prices. But if you have farmer debtors who have corn and who know how to feed cattle, lend them additional money to enable them to buy these extraordinarily cheap cattle in Kansas City so as to get the lean cattle and the corn together. We must keep agriculture a going concern.”
Privately he told the country bankers individually that the Chase National Bank would make them additional loans to help them in carrying out this policy.
Hepburn’s Stock Market Pool, December 1920. At approximately the same time Hepburn revealed the existence of a pool that had been organized to engage in some operations in the stock market. There have been no references to this pool in print, and the existence of it was not widely known even in Wall Street at the time. It was a closely guarded secret. The stock market had had a boom in 1919 which culminated in a very sharp break late in the autumn. During 1920 it had been left to its own devices, struggling against tight money, liquidating its debts, but holding without violent breaks and gradually sagging until the fourth quarter, when a sharp break came. Brokers’ loans had been $1.75 billion at the end of 1919, and they had been reduced to under $700 million by the end of 1920. Hepburn said that the market was getting discouraged, and that he and a number of other men who felt responsible for the situation had decided that it needed a little support. They were not going to do much. They were going to buy 10,000 shares of United States Steel, and they were going to buy some shares of other pivotal stocks. The point was simply to steady the market. They did not expect to make any money in the pool operations, but they hoped to avoid losses. He said that the pool would begin operation the following morning, namely, December 22, 1920, and that it might be interesting to watch what the market did. The next day the market did turn up, and it continued a gradual rise into the following May, though the pool
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ceased to operate after a few weeks. It was interesting to see the explanations given by the financial writers in the New York papers, none of whom apparently had any suspicion that a pool was operating. The action of the stock market put new heart and courage into the financial community. The term pool is one which suggests a great deal of iniquity, but the present writer is unregenerate enough to believe that this was an act of financial statesmanship,
Organized Commodity Exchanges Met Shock Amazingly Well. The industrial and mercantile community met the shock with extraordinary resourcefulness. The great exchanges, the organized markets in commodities, the New York Cotton Exchange, the Liverpool Cotton Exchange, the Chicago Board of Trade, and others showed extraordinary resourcefulness in diffusing losses. The brokers kept their solvency and paid their debts. On the Liverpool Exchange, Egyptian cotton had been at a very high premium over middling cotton, and middling cotton had been at a very high price. Suddenly the basic price of middling cotton broke violently, and simultaneously the differential for Egyptian cotton practically disappeared. Information at the time was that there were no failures among the Liverpool cotton brokers.
Hedging Protected Millers and Spinners. Cotton spinners and millers normally protect themselves by short sales of the cotton or grain which they buy to work up into cloth or flour—short sales which they cover when the cloth or the flour is ready to market. If the price of wheat goes down, the price of flour will go down. The miller does not care. If the wheat and flour go up, he makes a profit on the wheat he has bought to grind, but he loses on his short sale. If the price of wheat and flour come down, he loses money on the wheat he is grinding, but he makes money on his short sale. He gives his attention to his main business, which is to get a profit out of the differential between the price of wheat and the price of flour, and avoids speculative risks by imposing on some speculator the burden of carrying the risk. But the speculator who has bought wheat for future delivery is not a philanthropist and is not a static person. He may sell the next day, and the man who buys from him may sell a few minutes later. A loss of forty cents a bushel, instead of ruining a miller, may be diffused among fifty to a hundred speculators, each of whom may lose a fraction of a cent. It is rarely necessary to waste tears over the highly organized centers of commodity speculation. They know how to take care of themselves. And they know how to take care of the industries which use them for hedge purposes.
Weak Spots Mapped and Charted by Spring 1921. Businessmen and bankers both did a very thorough job in cleaning up the weak spots and in making readjustments in prices, costs, methods, and the proportions of industrial activity. By early spring 1921 the credit weak spots were mapped and charted. The banks knew what businesses could survive and what
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businesses must go under or at all events have a readjustment of their financial setup. It was clear that the general credit situation was impregnably strong, and that the credit system would survive the shock.
Costs Rapidly Readjusted. Costs were rapidly readjusted. Raw materials, of course, had fallen drastically. Rentals were in many cases readjusted, often by voluntary negotiations. Sometimes a bank creditors’ committee in showing leniency to an embarrassed business would call into the discussion the landlard from whom the business was leasing property and make the general settlement contingent upon the landlord’s reducing the rent—a thing which was to the landlord’s interest under the circumstances. In some cases it was necessary to put a concern into bankruptcy in order to get rid of losses by impossibly high rentals. The stronger businesses, of course, carried out their contracts until the leases expired.
High Interest Rates Provided Insurance Against Losses. Very often the banks in dealing with embarrassed businesses would reduce interest rates or even waive interest for a time. But the year 1921 remained a year of high interest rates. In this was one of the elements of strength in the situation. It was definitely recognized that