Panics

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Title:     Panics
Author: Edwin Lawrence Godkin [More Titles by Godkin]

It is impossible to see, much less experience, a financial panic without an almost appalling consciousness that a new and terrible form of danger and distress has been added in comparatively recent times to the list of those by which human life is menaced or perplexed. Any one who stood on Wall Street, or in the gallery of the Stock Exchange last Thursday and Friday and Saturday (1873), and saw the mad terror, we might almost say the brute terror like that by which a horse is devoured who has a pair of broken shafts hanging to his heels, or a dog flying from a tin saucepan attached to his tail, with which great crowds of men rushed to and fro, trying to get rid of their property, almost begging people to take it from them at any price, could hardly avoid feeling that a new plague had been sent among men; that there was an impalpable, invisible force in the air, robbing them of their wits, of which philosophy had not as yet dreamt. No dog was ever so much alarmed by the clatter of the saucepan as hundreds seemed to be by the possession of really valuable and dividend-paying securities; and no horse was ever more reckless in extricating himself from the debris of a broken carriage than these swarms of acute and shrewd traders in divesting themselves of their possessions. Hundreds must really, to judge by their conduct, have been so confused by terror and anxiety as to be unable to decide whether they desired to have or not to have, to be poor or rich. If a Roman or a man of the Middle Ages had been suddenly brought into view of the scene, he would have concluded without hesitation that a ruthless invader was coming down the island; that his advanced guard was momentarily expected; and that anybody found by his forces in possession of Western Union, or Harlem, or Lake Shore, or any other paying stock or bond, would be subjected to cruel tortures, if not put to death. For neither the Roman nor the Mediaeval could understand a rich man's being terrified by anything but armed violence. Seneca enumerates as the three great sources of anxiety in life the fear of want, of disease, and of oppression by the powerful, and he pronounces the last the greatest. If he had seen Wall-Street brokers and bankers last week trying to get rid of stocks and bonds, he could not of course have supposed that they were poor or feared poverty; he would have judged from their physical activity that they were in perfect health, so that he would have been driven to the conclusion that some barbarian host, commanded by Sitting Bull or Red Cloud, was entering the city, and was breathing out threatenings and slaughter against the owners of personal property. If you had tried to explain to him that there was no conqueror at the gates, that the fear of violence was almost unknown in our lives, that each man in that struggling crowd enjoyed an amount of security against force in all its forms which no Roman Senator could ever count upon, and that the terror he witnessed was caused by precisely the same agency as the flight of an army before it has been beaten, or, in other words, by "panic," he would have gazed at you in incredulous amazement. He would have said that panic in an army was caused by the sudden dissolution of the bonds of discipline, by each soldier's losing his confidence that his comrades and his officers would stand their ground; but these traders, he would have added, are not subject to discipline; they do not belong to an organization of any kind; each buys and sells for himself; he has his property there in that tin box, and if nobody is going to rob him what is frightening him? Why is he pale and trembling? Why does he run and shout and weep, and ask people to give him a trifle, only a trifle, for all he possesses and let him go?

If you were then to set about explaining to Seneca that the way the god Pan worked confusion in our day in the commercial world was by destroying "credit," you would find yourself brought suddenly face to face with one of the most striking differences between ancient and modern, or, even as we have said, mediaeval society. The most prominent and necessary accompaniment or incident of property in the ancient world was possession. What a man owned he held. His wealth was in his farm, or his house, or his granary, or his ships. He could hardly separate the idea of property from that of possession, and the state of society strengthened the association. The frugal man hoarded, and when he was terrified he buried his money, a practice to which we owe the preservation of the greater portion of the old coins now in our collections. The influence of this sense of insecurity, of the constant fear of invasion or violence, lasted long enough in all Continental countries, as Mr. Bagehot has recently pointed out, to prevent the establishment of banks of issue until very lately. The prospect of war was so constantly in men's minds that no bank could make arrangements for the run which would surely follow the outbreak of hostilities, and, in view of this contingency, nobody would be willing to hold paper promises to pay in lieu of gold and silver.

It is therefore in England and America, the two countries possessing not only most commercial enterprise, but most security against invasion, that the paper money has come into earliest and widest use. To the paper of the banks have been added the checks and bills of exchange of private individuals, until money proper plays a greatly diminishing part in the operations of commerce. Goods are exchanged and debts paid by a system of balancing claims against claims, which really has almost ceased to rest on money at all. So that a man may be a very rich man in our day, and have really nothing to show for his wealth whatever. You go to his house, and you find nothing but a lot of shabby furniture. The only thing there which Seneca would have called wealth is perhaps his wife's jewels, which would not bring a few thousand dollars. You think his money must be in the bank, but you go there with him and find that all he has there is a page on the ledger bearing his name, with a few figures on it. The bank bills which you see lying about, and which look a little like money, are not only not money in the sense Seneca understood the term, but they do not represent over a third of what the bank owes to various people. You go to some safe-deposit vaults, thinking that it is perhaps there he keeps his valuables, but all you find is a mass of papers signed by Thomas Smith or John Jones, declaring that he is entitled to so many shares of some far-off bank, or that some railroad will pay him a certain sum some thirty years hence. In fact, looked at with Roman eyes, our millionaire seems to be possessed of little or nothing, and likely to be puzzled about his daily bread.

Now, this wonderful change in the character and incidents of property may be said to be the work of the last century, and it may be said to consist in the substitution of an agency wholly moral for an agency wholly material in the work of exchange and distribution. For the giving and receiving of gold and silver we have substituted neither more nor less than faith in the honesty and industry and capacity of our fellow-men. There is hardly one of us who does not literally live by faith. We lay up fortunes, marry, eat, drink, travel, and bequeath, almost without ever handling a cent; and the best reason which ninety-nine out of every hundred of us can give for feeling secure against want, or having the means of enjoyment or of charity, is not the possession of anything of real value, but his confidence that certain thousands of his fellow-creatures, whom he has never seen and never expects to see, scattered, it may be, over the civilized world, will keep their promises, and do their daily work with fidelity and efficiency. This faith is every year being made to carry a greater and greater load. The transactions which rest on it increase every year in magnitude and complexity. It has to extend itself every year over a larger portion of the earth's surface, and to include a greater variety of race and creed and custom. London and Paris and Berlin and Vienna now tremble when New York is alarmed. We have, in short, to believe every year in a greater and greater number of people, and to depend for our daily bread on the successful working of vast combinations, in which human character is, after all, the main element.

The consequence is that, when for any reason a shade of doubt comes over men's minds that the combination is not working, that the machine is at some point going to give way, that somebody is not playing his part fairly, the solid ground seems to shake under their feet, and we have some of the phenomena resulting from an earthquake, and among others blind terror. But to anyone who understands what this new social force, Credit, is, and the part it plays in human affairs, the wonder is, not that it gives way so seldom, but that it stands so firm; that these hundreds of millions of laborers, artisans, shopkeepers, merchants, bankers, and manufacturers hold so firmly from day to day the countless engagements into which they enter, and that each recurring year the result of the prodigious effort which is now put forth in the civilized world in the work of production should be distributed with so much accuracy and honesty, and, on the whole, with so much wise adjustment to the value of each man's contributions to civilization.

There is one fact, however, which throws around credit, as around so many others of the influences by which our lives are shaped, a frightful mystery. Its very strength helps to work ruin. The more we believe in our fellow-toilers, and the more they do to warrant our belief, the more we encourage them to work, the more we excite their hopefulness; and out of this hopefulness come "panics" and "crashes." Prosperity breeds credit, and credit stimulates enterprise, and enterprise embarks in labors which, about every ten years in England, and every twenty years in this country, it is found that the world is not ready to pay for. Panics have occurred in England in 1797, 1807, 1817, 1826, 1837, 1847, 1857, and there was very near being a very severe one in 1866. In this country we have had them in 1815, 1836, 1857, and 1877, and by panics we do not mean such local whirlwinds as have desolated Wall Street, but wide-spread commercial crises, affecting all branches of business. This periodicity is ascribed, and with much plausibility, to the fact that inasmuch as panics are the result of certain mental conditions, they recur as soon as the experience of the previous one has lost its influence, or, in other words, as often as a new generation comes into the management of affairs, which is about every ten years in the commercial world both in England and here. The fact that this country seems to be only half as liable to them as England, is perhaps due to the fact that the extent of our resources, and the greater ratio of increase of population make it much harder to overdo in the work of production here than in England, and to this must be added the greater strength of nerves produced by greater hopefulness. In spite of the enormous abundance of British capital and the rashness of the owners in making investments, there hangs over the London money market a timidity and doubtfulness about the future which is unknown on this side of the water, and which very slight accidents develop into distrust and terror.

Outside those who are actually engaged in a financial panic--such as brokers, bankers, merchants and manufacturers, who have loans to pay or receive, or acceptances falling due, and who are therefore too busy and too sorely beset to moralize on it or look at it objectively, as the philosophers say--there is a large body of persons who are not immediately affected by it, such as professional men, owners of secure investments, persons in receipt of well-assured salaries, ministers, newspaper writers, speculative economists, financiers, and farmers, to whom it is a source of secret enjoyment. They are obliged, out of sympathy with their neighbors, to look blue, and probably few of them are entirely exempt from the general anxiety about the future, but, nevertheless, they are on the whole rather gratified than otherwise by the thing's having happened. In the first place, all those persons who give their attention to the currency question are divided into two great schools--the paper men and the hard-money men; and every panic affords each of them what it considers a legitimate ground of triumph. The paper men say that the crisis is due to failure to issue more paper at the proper moment, and the hard-money men ascribe it to the irredeemability of what is already issued; and each side chuckles over the convulsion as a startling confirmation of its views, and goes about calling attention to it almost gleefully. There is a similar division on the banking question. Indeed the feud between the friends of free banking and restricted banking is fiercer than that between the two currency schools, and has raged longer, and every monetary crisis feeds the flame. It is maintained, on the one hand, that if banks were let alone by the state their issues would be proportioned to the exact wants of business; and, on the other, that if the state would only restrict them more rigidly business would be kept within proper limits, and all would go well. Each disputant draws from a panic about the same amount of support for his views, because in the great variety of circumstances which surround it there are always some which favor any theory of its origin. In one thing, however, both sets of observers are apt to agree thoroughly, and that is in believing the "thing will not blow over," and that "we are going to feel it for a long time." They have long foreseen it, and have only been surprised that it did not come sooner; and they lower their voices to a hoarse whisper while telling you this.

But there is no class of observers which extracts so much solid comfort from a panic as that large body of social philosophers who are hostile to luxury, and believe that the world is going to the dogs through self-indulgence. It may even be said that two-thirds of the community, or indeed all except the very few, hold this opinion with a greater or less degree of strength. The farmers hold it strongly with regard to the city people, the artisans with regard to merchants, bankers, brokers, and manufacturers, and among the latter nearly every man is inclined to it with regard to persons of more means than himself. Moreover, it would probably astonish us if we knew how large was the number of those who fancy that their more well-to-do neighbors, if they do not belong to the category of millionaires, are living beyond their means. Every man whose own means are small, or even moderate, finds himself rather hard put to it to make both ends meet, and is constantly harassed by desires which he is unable to gratify. When he sees others gratifying them, his self-love drives him often unconsciously into ascribing it to recklessness and improvidence. Very close people, too, who have a constitutional repugnance to spending money freely for any purpose, and especially for purposes of personal enjoyment, can hardly persuade themselves that other persons who do so, spend it honestly. And then behind these come the large army of lovers of simplicity and frugality on moral and religious grounds, who believe that material luxury contains a snare for the soul, and that true happiness and real virtue are not to be found in gilded saloons. They write to the newspapers denouncing the reluctance of young people to marry on small incomes, and urging girls to begin life as their mothers began it, and despise the silly chatter of those who think luxurious surroundings more important than the union of hearts.

The occurrence of a panic fills the breasts of all these with various degrees of rejoicing. They always take a very dark view of it, and laugh contemptuously at those who consider it a "Wall-Street flurry," or ascribe it to any vice in the currency or in the banking system. Extravagant living they believe to be at the bottom of it, and, like the hard-money men, they are only surprised that it has not come sooner, and they believe most firmly that it is going to effect a sort of social revolution, and bring the world more nearly to their own ideal of what it ought to be. The amount of "rottenness" which they expect it to reveal is always enormous, and they look forward to the exposure and the general coming-down of their guilty neighbors to "the hard pan" with the keenest relish. They have long, for instance, been unable to imagine where the multitude of people who live in brown-stone houses get the money to keep them. There was something wrong about it, they felt satisfied, though they could not tell what, and when the panic comes they half fancy that the murder will out, and that there will be a great migration of fraudulent bankrupts from Fifth Avenue and its neighborhood into tenement-houses on the East and North Rivers. How Mrs. Smith, too, dressed as she did, and where Smith got the money to take her to Sharon every summer, and how Jones managed to entertain as he was doing, have often been puzzling problems, which "the crash" in the money market is at last going to solve. It is also highly gratifying to those who consider yachting a senseless amusement to reflect that the panic will probably diminish the number of yachts, and they even flatter themselves that it may stop yachting in future, and reduce the general style of living among rich young men. "We shall now," they say, "have fewer fast horses, and less champagne, and less gaudy furniture, and more honest, hard work, and plain, wholesome food." They accordingly rejoice in the panic as a means adopted by Providence to bring a gluttonous and ungodly generation to its senses, and lead it back to that state of things which is known, as "republican simplicity."

The curious thing about this expectation is that it has survived innumerable disappointments without apparently losing any of its vigor. It was strong after 1837, and strong after 1857, and stronger than ever after 1861. The war was surely, people said, to bring back the golden age, when all the men were prudent, sober, and industrious, and all the women simple, modest, and homekeeping. The war did nothing of the kind. In fact, it left us more extravagant and lavish and self-indulgent than ever; yet the ancient and tough belief in the purifying influence of a stringent money market still lasts, and is at this moment cropping out in the moral department of a thousand newspapers.

The belief belongs to what may be called the cataclysmal theory of progress, which improves the world by sudden starts, and clings so fondly to liquor-laws, and has profound faith in specific remedies for moral and political diseases. What commercial panics and great national misfortunes do not do, particular bits of legislation are sure to do. You put something in the Constitution, or forbid something, or lose a battle, or have a "shrinkage of values," or have a cholera season, and forthwith the community turns over a new leaf, and becomes moral, economical, and sober-minded. We doubt whether this theory will ever die out, however much philosophers may preach against it, or however often facts may refute it, because it gratifies, or promises to gratify, one of the deepest longings of the human heart--the desire which each man feels to have a great deal of history crowded into his own little day. None of us can bear to quit the scene without witnessing the solution of the problems by which his own life has been vexed or over which he has long labored. Indeed a great many men would find it impossible to work with any zeal to bring about results which would probably not be witnessed until they had been centuries in the tomb.

We accordingly find that the most eager reformers are apt to be those who look for the triumph of virtue by the close of the current year. Of all dreams of eager reformers, however, there is probably none more substantial than that which looks for a restoration of that vague thing called "simplicity of manners." Simplicity and economy are, of course, relative terms. The luxurious gentleman in the fourteenth century lived in a way which the well-to-do artisan in our own time would not tolerate; and when we undertake to carry people back to ancient ways of living we find that there is hardly a point short of barbarism at which we can consistently stop. A country in which money is easily made and abounds, will be one in which money will always be freely spent, and in which personal comfort and even display will occupy men's and women's thoughts a great deal. We can no more prevent this than we can prevent the growth of wealth itself; and our duty is, instead of wasting our breath in denouncing extravagance, or hailing panics as purging fires, to do what in us lies to give rich people more taste, more conscience, more sense of responsibility for curable ills, and a keener relish of the higher forms of pleasure. Extravagance--or, in other words, the waste of money on sensual enjoyment, the production of hideous furniture or jewelry, or of barbarous display--has to be checked not by the preaching of poor people, but by the rich man's own superiority to these things, and his own repugnance for them. This repugnance can only be inspired by education, whether that of school and college, or that of a refined and cultivated social atmosphere. Much would be done in this direction if public opinion exacted of the owners of large fortunes that they should give their sons the best education the country affords; or, in other words, send them to college, instead of setting them up in the dry-goods business or the grocery business. A man who has made a large fortune in honest trade or industry has not contributed his share to moral and intellectual interests by merely making donations. It is his duty, also, if he leaves children behind him, to see to it, as far as he can, that they are men who will be an addition to the general culture and taste of the nation, and who will stimulate its nobler ambition, raise its intellectual standard, quicken its love of excellence in all fields, and deepen its faith in the value of things not seen.

[The end]
Edwin Lawrence Godkin's essay: Panics

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