Stock-Market Panics

Stock-market panics can, however, take place without disturbing the country's prosperity. Their bad effects can be localized. Such flurries of fright are largely caused by the attempt on the part of daring speculators or powerful financial interests to corner certain stocks.

The Northern Pacific corner is an example of this. The late E. H. Harriman, to prevent himself from being excluded as a railroad factor from the Northwest, made an effort to buy enough shares in the open market to acquire control of the Northern Pacific. Opposing his efforts were James J. Hill and J. P. Morgan, who in turn were buying all the stock they could lay hands on to prevent Harriman's securing control. A good deal more stock was sold to both by speculators than there was authorized by the road or was outstanding, with the result that when the time for the delivery of the shares drew near the sellers began to scent the scarcity of the stock and began frantically to bid for what they had sold and could not deliver, bidding it up rapidly until it touched a price of $1,000 a share. The day will long be remembered in the annals of the New York Stock Exchange, as it was a day of intense fear and demoralization. It meant the ruin of a great many stock exchange members if they could not get the shares of Northern Pacific they sold and in turn would have dragged down to bankruptcy other members who were not concerned in the Northern Pacific speculations but were large creditors of the members who were involved. The warring financial interests were aware of the dangerous conditions and arranged matters so that a private settlement could be effected and by their efforts the danger of a great many failures was averted. The panic lasted but a day. It did not extend beyond the stock exchange. The only individuals injured were the stock market speculators. This case clearly illustrates how a panic may occur on the stock exchange and go no further.

But corners are extremely dangerous things to attempt. They very seldom succeed. A corner, to be successful, must be so operated that the security whose price was bid up to a high figure can be in turn sold readily. It happens at times that this is impossible.

Many corners have been attempted on the Chicago Board of Trade. "Old Hutch," as Mr. Hutchinson was nick-named, tried it a number of times only to find himself penniless in the end.

Young "Joe" Leiter had the idea that a certain crop of wheat would not reach its usual proportions, so he kept on buying all the wheat that the other traders were willing to sell him to be delivered to him on a certain day.

On paper his profits ran into the millions. To turn those profits into cash his corner depended upon the inability of those who sold him their wheat to make deliveries, which would force them to buy it back from him to make their contracts good.

But when the final day for delivery came around, wheat poured in upon Leiter from places where he never supposed any existed. Elevators were ransacked for wheat and it was rushed in cars to Chicago. There was such a deluge of the cereal upon the young speculator that his wheat corner was quickly knocked to pieces, and instead of having profits in the millions, Leiter lost all his fortune and a few millions which his wealthy sire had to put up to square his son's accounts.

Another spectacular speculator who came to grief on the Chicago Board of Trade as the result of his efforts to corner wheat, was "Ed" Patridge, and most of us still remember the Waterloo which overtook Sully when he attempted to corner the available cotton crop.

There have been men, though, who successfully operated corners. One of these is James Patten, the Chicago speculator. He has cornered oats, wheat, and cotton successfully in their turn and has reaped millions as his gains for his daring. He now says he has withdrawn from the market. If he holds to this resolution he will retain his millions, but should he venture back into the pit and try to repeat his speculative coups, there are many who believe he would lose what he has by trying to run a corner once too often.

It is fortunate that the stock exchange does not tolerate any attempts to corner a security, as it realizes the harm which may arise from such attempts. Through its discretionary power it can enforce private settlements and largely interfere with the profits which could be made from a corner, and this of course discourages any deliberate and preconceived plan to bring a corner about. The Northern Pacific corner served as a good lesson towards this end.

Prevention Of Panics

The practical problem that presents itself out of this discussion is the question whether it is possible to prevent the recurrence of panics. It seems that it ought to be possible to prevent stock-market panics by proper rules strictly enforced upon the exchange.

A commercial panic is a more serious and far-reaching affair. Such crises are a product of modern methods of competitive, capitalistic production, and in the last analysis result of a lack of adjustment between production and consumption. A break-down in the credit system finally precipitates the inevitable.

Panics perhaps cannot be wholly avoided. They are the price a progressive society pays for its advance. Their disastrous effects may, however, be greatly lessened by wise currency legislation giving elasticity to demands and allowing effective mobilization of credit reserves, by greater care in granting credit, and by more systematic direction of individual effort.

Panics. Test Questions

1. What are the two leading types of panics?

2. Is speculation a cause of panics? Explain.

3. What is meant by the psychological factor in a panic?

4. What are some of the signs of an approaching panic?

5. What is meant by a stock-market panic? What is its industrial effect?

6. Give examples of some famous stock-market panics.

7. Explain what steps may be taken to prevent panics.