STATE OF BUSINESS: War and Commerce

In Manhattan, Thursday, July 30, 1914 dawned chill and damp. Europe had whelped the first World War and the morning sun, hidden from Wall Street behind a grey overcast, stippled with afternoon gold the dusty packs of Austrian infantrymen marching down to Servia and Armageddon. After the Stock Exchange had closed for the day, Manhattan’s top-flight bankers gathered in the office of young (46) J. P. Morgan who 16 months before on the death of his late great father had become head of the most powerful banking house in the U. S. They gathered to discuss ways & means of safeguarding U. S. business if a European war (fighting had already begun) should come.

That morning, dangling his withered left hand on a shiny sabre-hilt, Wilhelm II was considering an ultimatum to Russia (sent the following day): cease mobilization in twelve hours or Germany will fight. Stock exchanges in Paris, Brussels, Berlin, St. Petersburg were already closed in panic. But the London Exchange had had business as usual that Thursday. Many a U. S. businessman waved away Wilhelm’s ultimatum as “pure bluff.” At 23 Wall Street Mr. Morgan & friends emerged from meeting after three hours, confident there would be no World War. They announced the New York Exchange would remain open as long as there were buyers. Then they left dank Manhattan.

Friday at dawn, lights were still burning in the Stock Exchange where a skeleton summer clerical staff was compiling the transactions of the biggest trading day (1,306,690 shares) since October, 1911. The New York Times average of 50 stocks, standing at $64.69 on Monday, had dropped 10% to $57.77 by Thursday. European holders of U. S. stocks were jettisoning their financial cargoes and the panic had spread to U. S. investors. By 9 a. m., brokers were swamped by a tidal wave of selling orders.

Earlier that morning the transatlantic cable had flashed the news: the London Exchange had been closed. By 9:45, 15 minutes before the Exchange was to open, President Henry G. S. Noble had managed to gather together 36 of its 42 governors. In Wall Street the bankers were meeting again. From all over the U. S. demands that the Exchange be closed poured in on the bankers’ meeting. At the last minute, the telephone connection set up between Exchange governors and the bankers failed to work. In the excitement the bankers forgot to man their end of the line.

With five minutes to go the Exchange governors took a hurried, panicky vote. The acting chairman was in his balcony above the Exchange floor and worried dealers were waiting for the gong to begin trading. (Noble had said it was not to ring until he gave the word.) Four minutes before 10 o’clock the word came: The Exchange had been closed. It did not reopen until November 28 (under restrictions not entirely removed until April 1, 1915). By that time the panic had passed, the New Federal Reserve act was in effect (Nov. 16, 1914) and the U. S. was beginning to grow fat on war business.

World War I came as a severe shock to U. S. business. World War II, following a full year of alarms and a fortnight of intense crisis, was no shock. There was no selling panic, no steep drop in prices. The Dow-Jones industrial average of 30 industrial stocks which had dropped almost 7 points to 135.11 in the week ending August 19 oscillated without great excitement. Its low was 133.31 on August 24. Then it began to climb as war became a virtual certainty.

U. S. investors had got the scare out of their systems before the first bomb was dropped by Hitler’s airmen on the Vistula bridges. Before the ink was dry on the first war extras, the stockmarket zoomed. One day’s listless market (457,890 shares) became peacetime financial history. The next morning as the Germans entered Poland, 1,970,000 shares (1939’s daily average 720,072 shares; 1939’s biggest day, 2,888,000 shares) changed hands on the New York Stock Exchange. War babies (steel, metals, aircrafts) led the advance. Bethlehem Steel, Santa Claus to many a World War I investor, zoomed 7: points (to 65), Anaconda Copper was up 4â…œ (to 28â…›). Aircraft stocks all took off, registered gains of 7.5% to 18.1%. The Dow-Jones industrial average hit 135.25 (still 19.65 below the 1939 high of last January).

Saturday’s preholiday two-hour trading session showed clearly that U. S. investors were eager to cut themselves into war profits. War stocks continued to zoom and the Dow-Jones industrial average hit 137.97, helped by war babies, unhurt by nonwar stocks, which generally stood still or picked up small gains. Between 10 o’clock and noon 1,791,250 shares changed hands.

Commodity exchanges went war-wild. Sugar and wheat, essentials for warring nations and their armies, got away in front and by the first day’s end had advanced the maximum permissible limits set by the Commodity Exchange Administration (5 to 8 for wheat, for sugar). Popeyed at the spurt but calculating on still further rises, many a holder of wheat and sugar pulled out of the market, determined to hang on to his investment for still higher prices. As a result many buying orders were unfilled. Hides and lard boomed as they had not done since World War I, copper was up to 10, crude rubber up 2.28 to 18.9, highest since 1937. Next day, permissible limits were hit again. In two days untabulated millions of bushels of wheat changed hands. Brokers saw in World War II a drain down which the U. S. could pour its back-breaking crop surpluses at a handsome profit (except for cotton, no war commodity).

Then & Now. Last week J. P. Morgan, who in 1914 helped stem war’s invasion of the market place, had no part in doing so again. With his 72nd birthday only a week off, he was on the high seas (on his way home from grouse shooting in Scotland), cut off from all communication with the world as the Queen Mary, with radio silenced, sped toward New York.

This time the chief guardian of U. S. markets was George L. Harrison, president of the Federal Reserve Bank of New York. To aid him he had a crisis committee of nine, and after a fashion history repeated itself: as a member of the committee (as a representative of investment bankers) sat J. P. Morgan’s son, slickhaired, tightlipped, amiable Henry Sturgis Morgan (aged 38) of Morgan Stanley & Co.

The one immediate crisis that Mr. Harrison and his committee had to face was not in stocks but in U. S. Government bonds. Inflation-minded investors who wished to shift to stocks unloaded Governments. Both for the sake of the Treasury and of U. S. member banks, 70% of whose investments are in direct and guaranteed Government obligations, the market could not be allowed to slide too far.

The Federal Reserve announced that it would lend on Governments at par, not only to member banks but to any U. S. bank, at the member bank rate (1% in New York, 1% elsewhere). Meantime, the Federal Reserve bought Governments on the New York Stock Exchange. It did such a rushing business that the Exchange allowed trading in Governments to continue 25 minutes after closing time. For that day at least the bulk of trading in Governments returned from the over-the-counter market to the Exchange. Sales jumped in one day from $411,000 to $8,170,000 as the Federal Reserve took all open, offers preserving an orderly market although prices declined to more than 1 points.

Foreign Orders. By week’s end, war commodities were booming. The basis for this boom, as for better stock prices, was the calculation of the funds which foreign Governments have for purchases in the U. S. Belligerents who have defaulted on U. S. loans cannot borrow in the U. S. in ordinary ways, but the Export-Import Bank has funds that it can lend to exporters of U. S. products. Last week RFC announced it would be glad to help, too.

But before they need to borrow in the U. S. foreign purchasers can spend their existing U. S. credits. Last week Government estimates revealed that foreign investments (roughly 50% British, Canadian and French) amount to some $8,300,000,000. This includes $2,600,000,000 in bank deposits and short term credits; $4,000,000,000 in marketable securities; $1,700,000,000 in direct investments. By taking over the holdings of their nations, belligerent Governments will thus have over $4,000,000,000 for war purchases. In addition Britain is believed to have a gold reserve of approximately $2,500,000,000 and France of $3,153,000,000, making a grand total of more than $9,000,000,000 which, in a prolonged war, might in greater part be spent for U. S. goods.

Controls. For these reasons the Roosevelt Administration was less worried about market collapse than market runaways. But to deal with either, the Government has many a potent weapon which did not exist in 1914.

SEC has pre-emptory power to suspend dealings for ten days in any misbehaving security, to suspend all dealings on any U. S. exchange for 90 days upon proclamation by the President of an emergency. The Commodity Exchange Administration has control over grain futures markets, can set permissible limits beyond which no future can rise in a single day. And the President, in addition to his power to cut he dollar to 50% of its old gold-standard ralue (it is now 59%) has the power to regulate or prohibit all dealings in foreign exchange.

In peacetime U. S. businessmen did not relish many of these Government powers.But last week it appeared that the New Deal’s peacetime powers were rather well suited to wartime conditions.