Nice story (if you can hold more than a week. Ooops, i broke that damn copywrite law again) thestreet.com
Commentary Features: Marrin's Chronicles: Remembering a Derailed Market of Yesteryear
By Richard B. Marrin
Special to TheStreet.com
11/29/98 12:15 AM ET
While the market's summertime tumble was accompanied
by much wailing and gnashing of teeth, old hands scoff at
the suggestion that the "crash" of 1998 represents anything
more than a hiccup in the stock market's long and violent
history. To see why, recall the many financial crises in the
last 200 years, including those in 1819, 1837, 1857, 1869,
1873, 1907, 1929 and 1987.
Most of these represented the public's sudden loss of
confidence in the financial structure, typically following a
period of feverish speculation that had driven prices to
unsupportably high levels. As always, when something
unforeseen bursts the bubble, stock values tumble as
investors scramble to convert their holdings into cash.
Sound familiar?
Consider the striking similarities -- and more than a few
differences -- between the markets of today and the
conditions leading up to the great Panic of 1873. Its major
domestic cause (like today, some of the difficulties arrive
from overseas) was a depreciated paper currency that gave
the false appearance of prosperity.
Nearly everyone -- individuals, corporations, municipalities,
states -- borrowed from banks to invest in rising stock and
bond markets. Much of it went into railroad stocks, which, in
a sense, were similar to our own high-technology stocks of
today. What was obvious to all was that, when a system of
railroads was built across the nation, American business
would make a quantum leap forward, opening new markets
and resources. The real value of the railroads to the investor
was not in today's value, but in their future earnings, and the
stock was often purchased as a speculation. But building
railroads was a very expensive and long-term proposition.
The 800 workers of Rogers & Co. of Paterson, N.J., for
example, turned out just seven locomotives a month! More
than 3,000 days of work were needed for a single engine. A
railroad would cost, from track to engines to station houses,
between $8,000 and $17,000 a mile and the work could take
over three years to complete. Huge amounts of capital were
necessary before any revenues, much less profits, could be
expected by investors. It was a market that required
confidence in the future and it could not stand much
uncertainty.
On Sept. 18, 1873, the confidence buster arrived on Wall
Street. After a summer of rising interest rates and the
hoarding of gold and other solid values, the conservative
banking house of Jay Cooke and Co., a heavy investor in
railroad stocks, failed. There were no "wires" to and from the
floor of the New York Stock Exchange. News traveled by
foot in those days and the surge of brokers, rushing from the
floor to advise their houses of the failure, stumbling over
each other and pushing as they went, was described by
contemporary accounts as a "stampede." The next day,
which was to become known as the Second Black Friday,
the firm of Fiske & Hatch also announced that it could not
meet its obligation. By now, literal panic had set in.
In a pelting autumn rainstorm, thousands of stunned
investors of all descriptions -- more than the 40,000 who had
assembled in the Panic of 1857 -- milled outside the
exchange, anxiously awaiting news of their investments.
When the news of the Fiske failure was announced, the
cries of anguish from the brokers inside on the floor could be
heard by the investors standing in the rain outside on the
street. Powerful brokers began to sell short and, by the end
of the day, some of the finest railroad stocks were off by as
much as 40%. Another 18 brokers, who could not fulfill their
contracts, collapsed. The exchange closed for the next 10
days. President Grant and the secretary of the Treasury
came to New York to meet with Cornelius Vanderbilt and
other business leaders.
Ironically it was not Grant nor the government but Jay
Gould who came to the rescue in 1873. The rogue railroad
builder, speculator, and "robber baron" who had gained
infamy for bribing state legislators and issuing illegal stock
in a successful effort to prevent Vanderbilt from gaining
control of the Erie Railroad was a very unlikely hero. It was
he and his partner, James Fisk, some would argue, who
caused the first Black Friday, just four years earlier, when
they failed in an attempt to corner the gold market. However,
when the exchange reopened, Gould, by buying hundreds of
thousands of shares of railroad stock, checked the market's
decline.
His confidence in the long-term value of railroad shares, and
backing that confidence with hard cash, quelled the panic at
a time when, had he not done so, half the Street would have
been ruined. Of course, he did not do badly for himself by
buying in at the low. For, by the time of his death six years
later, Gould controlled the Missouri Pacific Railroad, the
Western Union Telegraph Co., and the Manhattan
Elevated Railroad, among his other holdings.
Richard B. Marrin is a senior partner in the Wall Street law
firm of Ford, Marrin, Esposito, Witmeyer & Gleser. A litigator
for almost 30 years, he has been involved in numerous large
securities actions -- from Equity Funding and Franklin
National in the 1970s, to the bank failures and large
writeoffs in Texas and California of the 1980s and early
1990s. More recently, his work involves the calamities
affecting Pacific Rim investors. He is also the author of
several books on American history of the 18th and 19th
centuries. He invites you to comment on his column by
sending a letter to TheStreet.com at
commentarymail@thestreet.com. |
