H.M. Hyndman

Commercial Crises of the Nineteenth Century

Chapter IX
The Crisis of 1890

With the rising cycle of trade which began at the end of 1887 or the commencement of 1888 we approach the last crisis of the century. The long periods of low prices, accompanied in Great Britain as well as in other countries by a low rate of discount, was felt to be coming to an end, when it was observed that the stocks of raw material and metals had run down to so low a point that even the slightest additional demand would bring about a rise of prices. The old adage that “John Bull can stand almost anything but he can’t stand 2 per cent.,” had certainly not been borne out during the five years. He had stood a low rate of discount without rushing into any new or doubtful enterprises on a large scale. That a vast deal of business had been done in spite of the bad times, at a profit to somebody, was proved conclusively by the dividends which were paid on the shares of all the good banks in London and the country, as well as by the steady rise in income-tax returns under the head of profits on trade, etc. This was the more surprising, inasmuch that agriculture as a profitable industry was going from bad to worse all the time, and the numbers employed in agriculture, which had fallen from 2,000,000 in 1861 to 1,400,000 in 1881, were still further declining. Moreover, the prices of all commodities being so very low, this income represented a purchasing power of certainly more than 15 per cent. above that which it would have represented in the previous decade, thus affording the comfortable classes a larger margin for saving than they could have relied upon having when prices were higher and trade brisker. No greater proof could be afforded of the elasticity of the capitalist system for those who are already well-to-do than the figures of income and profits for the income-receiving class in Great Britain and Ireland during that period from 1883 to 1887; when every industry was depressed so far as the amount realised for commodities was concerned; when, as has been seen, many thousands of workers were out of employment, and Ireland was suffering from famine. For investment of savings was going on in the Colonies, in India, and in South America, as well as in the United States and elsewhere, upon a scale which would have denoted a high point of prosperity in any other country. But the savings of the United Kingdom in an ordinary year being estimated at £200,000,000, out of a total gross income of £1,300,000,000, any less investment in the year betokened accumulation. When, therefore, the tide began to turn, the rush was likely to be very vigorous.

The special feature of this period of inflation, which lasted for nearly three years prior to the crash of 1890, was the establishment of trusts, and combinations, and “corners,” and promotion companies, on similar lines to those adopted in America. The word “trust,” however, has not the same signification on both sides of the Atlantic, nor does it always mean the same sort of organisation either in the United States or in England. Trusts in England are for the most part nominally investment companies, which assume to be able to average an investor’s risks better than he can do so for himself. Really, they are either companies specially created to dispose of the unmarketable securities which financiers in the city are unable to induce the public to purchase in any other way; or they are mere agencies for the promotion of other companies, which the actual promoters do not wish for any reason to figure in under their own names. There are exceptions, of course, but the majority of the trusts which have grown up in the city of London during the last few years come under one or other of these heads. Seeing that, as a rule, these trusts do not publish full lists of the securities in which they invest, it is possible for all sorts of petty frauds to be committed, and for money received to be utterly thrown away upon worthless enterprises, and still that the public at large should imagine that the directors are doing a most respectable and responsible business.

Another and more important change in regard to the city of London is the ever-increasing preponderance of the great joint-stock banks in comparison with the Bank of England. Such banks as the London and Westminster, the National Provincial, the London Joint-Stock, and many more, with their millions of deposits and their enormous business have become practically supreme in the ordinary daily affairs of London. At the same time, the whole of their ultimate reserve to meet troubled times still lies at the Bank of England, and that reserve has lately been considered insufficient and dangerous. Whether it is insufficient or not will probably never be tested until a complete crash does come. People in the city are exceedingly conservative, and slow to meet changing conditions. Their regular business does not encourage the exercise of foresight to any great extent, Indeed, it is commonly said that a man who attempts to see farther than the currency of a three months’ bill is certain to lose his money. What each has to do is to make the best of the circumstances immediately around him, and as one of those circumstances is that the Bank of England should hold for the joint-stock banks an absurdly small reserve in proportion to an enormous business, the general tone about that as about other matters is, “Well, it will last my time.”

To those who are not so experienced in business, the mere theorists who regard the matter from without, it does seem somewhat ridiculous that the rate of discount at the Bank of England, which guides the rate for bills in actual daily business and not merely for advances on securities, should be moved up and down like mercury in a tube, because a few hundred thousands or millions worth of gold goes into or is taken out of the bank coffers. Still more ridiculous to the lay mind do these fluctuations appear to be when the total trade of the country is taken into consideration, and the fact that the gold withdrawn or deposited forms but a small fraction of one day’s operations at the Clearing House. The general uncertainty and doubt due to such a state of things it is needless to enlarge upon. Twenty years ago an able and cool writer, who was certainly no alarmist, pointed out the increasing danger of the situation. Though twenty years have passed, Mr. Bagehot’s fears have not been realised, and it is natural to suppose that what has been avoided in the past will be avoided in the future. But if, as seems certain, the whole capitalist system is about to undergo a crucial transformation, it would be well that as the State (which always has come to the aid of the Bank of England in critical times, and will certainly come to its aid in times still more critical), is directly interested in bringing about a peaceable and orderly change, a careful examination should be made of the position from the point of view of the entire community as well as from that of the banking and business world.

For banking is by no means the only department of our present system in which changes of kind as well as of degree are going on. While private banks are being, all of them, forced to combine to a greater or less extent, and to form limited companies, private business firms are being more and more driven in the same direction. But this extension of the company form of industrial enterprise, quite does away with any personal relation between employed and employer, and, besides that, not unfrequently turns the business from a national into an international concern. The company form of industrial enterprise, that is to say, beginning with water-works, canals, railways, cable lines, and other undertakings, which required far more capital than any single individual or firm could command, has now absorbed, or is in process of absorbing businesses which seemed to depend for their success upon the zeal and capacity of the individual heads of the house, and upon the reputation which the firm’s name carried with it in the home and foreign markets. Now, the name is retained by the company, and the partners form, for a time at any rate, a portion of the Board of Direction; but the main responsibility rests, as in the case of a great railway or a great bank, on the manager, or managing director, who receives a large salary for his services, and may or may not be a large shareholder.

The shareholders, of course, have no real control over the business. Their function is confined to holding their shares with satisfaction when they receive good dividends and their shares – theirs today, somebody else’s to-morrow – are quoted at a high price; with grumbling when dividends fall off, and their shares are reduced in saleable value. Every company of this sort which is formed extends the area of Stock Exchange transactions and introduces the element of mere gambling into purely industrial business. A company has no responsibility in a moral sense, and the old idea of the individual sagacity of the farseeing employer, who, being the fittest, survived in the furious competition of the market, manifestly cannot be held to apply to huge establishments with a vast number of shareholders; the largest owners being, perhaps, men and women who never were within two hundred miles or more of the property which by legal convention they own. The theoretical and practical effect of all this development of companies will be seen in the sequel.

Banks, mercantile and shipping companies, and great credit establishments, have long been, by the very nature of their business, international to a greater or less degree. But the development of industrial companies having branches of their industry in different countries is comparatively recent. Now, however, it is by no means unusual for great English industrial companies to have factories and workshops and mills and shipyards, created by English capital and owned by English shareholders, in foreign countries. Thus, Armstrong, Mitchell & Co. have works in Italy; Palmer & Co. have works in Spain; Cammells & Co. have works in Russia and, I believe, in America; Coats & Co. have mills in America for sewing cotton, and so on and so on; while, on the other hand, foreign sewing-machine, and type-writing, and watch companies establish branches for production as well as for distribution here. All this shows how the national form of production, notwithstanding all tariff regulations, is giving way slowly to the international form, capital being, of course, utterly indifferent to any considerations of patriotism or morality, profit being its sole end.

In the same way all raw materials, metals, etc., being now bought and sold by reference to the price ruling in the world-market, it is quite impossible for any group of men who may be desirous of making a successful combination to purchase and hold all the stocks of any article, whose price they think to raise by reducing the temporarily available supply, unless they take full account of the production in all parts of the globe. This is particularly the case with respect to articles of small bulk and weight in proportion to their average price. Now, when the shrinkage of prices had continued so long that, owing to increased demand and reduction of supply, the stocks had been brought below the level which the probable demand in the near future seemed to require for its satisfaction, it was certain that a rise of price would follow. Of all the metals in use, copper had fallen perhaps as heavily as any, except pig-iron, in relation to the price in gold which rules the market of the world. So heavy had been the fall in the prices of all metals since the decade 1871 to 1881, that all sorts of arguments were made to show that it was the scarcity of gold and not the increased power of production which had brought about the shrinkage. But now a recovery seemed possible, and a plan was formulated in Paris to make a “corner” in copper after the pattern of the monopoly in petroleum established by the Standard Oil Company in the United States, and similar monopolies, which had been very successful for those who projected them and carried them out.

The fact that such a scheme should be entertained, and its realisation attempted by powerful groups, showed that, in the opinion of the shrewdest calculators, the time was at hand for another “boom.” They, therefore, set to work in Paris to obtain control of the supply of copper in sight, and to limit the production by purchasing a limited product from certain great mines at a good price, on condition that only a certain amount should be produced. They fixed their price at £70 a ton, the price of copper when operations commenced being a little over £40 a ton. That the whole copper industry should be deranged by this action affected, of course, the speculators not at all. But they had miscalculated the market themselves. Without going into the details minutely, it is sufficient to say that had they fixed the price at £55, or possibly even £60 a ton, they might have succeeded in carrying out their plan to their own profit. The Chilian mines, for instance, cannot be profitably worked when copper falls below £55 a ton. But £70 a ton was not only a price sufficient to induce the opening of these and other mines, but it was a price high enough to persuade holders of copper in various forms to melt it down, and to supply its place with a cheaper metal wherever possible. So, within a very short time, it was discovered that, in order to keep up a price permanently so much in excess of the permanent cost of production as £70, it would be necessary to buy up all the copper mines on the planet, shut down fully half of them altogether, and limit the product of the remainder. Thereupon, down came the whole edifice, and one of the most important of the French credit establishments – the Comptoir d’Escompte – proved to have been so deeply involved that it was practically ruined, though bolstered up and set going again in another shape after the suicide of the man most responsible for its collapse.

The Salt Union, which was subscribed many times over, is an instance of a similar attempt to limit competition and permanently raise the price of a commodity, this time of a necessary of life to the consumer, by a convention between the producers. At the time when this combination was launched, the parties to it, producers and promoters alike, were for the most part in a very bad way. The producers had been steadily losing money, owing to the low prices, for many years, and some of them were under absolute threat of sale from the bankers to whom they owed money. The Union was organised and brought out successfully, the wholesale price of salt was forced up without, of course, the slightest increase of wages, and the manufacturers who were wise enough to sell their shares in time cleared themselves of their liabilities, while the public had the privilege of paying about £9 a ton retail for salt, which it costs about 6s. a ton to produce. The wholesale price has now fallen prodigiously, and the whole Union seems likely to follow the course of the “corner” in copper; though probably the public will long continue to pay the inflated prices for small quantities for the benefit of the middleman.

These two instances and the constant endeavours made to form “pools” in the iron and other industries, show that capitalists are beginning to try to limit that competition which they have hitherto upheld as beneficial, in the same way that competing banks agree upon a common rate of interest, and railways upon a common rate of transport to the same terminus.

To return to the main events prior to the great crisis of 1890. Throughout the years 1888 and 1889 and the early part of 1890, there was a general recovery in every department of trade. American breweries and industrial enterprises, Argentine loans and railway concessions, Mexican railways and mines, United States railway issues, Colonial loans, were all floated off with ease, in addition to the large number of English breweries and industrial businesses which were turned into companies and occasioned transfers of capital during the same period. Promoters, stock-brokers, contractors, engineers; lawyers, and printers were all doing a splendid business, and the successful issues resulted in an increase of orders to factories and works which were already busier than they had been for years before. As business improved freights began to rise, and the idle tonnage was absorbed, until instead of the Thames and the Tyne, the Clyde, the Mersey, the Humber, and the Tees being blocked with vessels for which no employment could be found, everything in the shape of a steamer that could pound along at nine or ten knots an hour was chartered, and orders were being given in every ship-yard for larger and still speedier vessels to deal with the growing trade. Good times had come once more, and once more that same working population which it had been proposed to ship off to the Colonies as mere human surplusage was absorbed into the capitalist workshops and was even working overtime. The comparison in this respect between 1886 or 1887 and 1889 ought alone to be sufficient to convince the least observant of the absurdity of the current theories as to the causes of “over-population” and “bad times” for the mass of the people. The improvement was felt in every direction, and among other symptoms of well-being was the reduction of taxation and a lowering of the rate of interest paid on that monstrous burden – the national debt.

South America and South Africa were the two countries which chiefly participated in, and helped on, this period of inflation, which was as short as it was extraordinary. The history of the loans to the Argentine Republic, now that it has become history, is surprising indeed. A country which had a national debt of £10,000,000 in 1875, contrived to raise it to £70,000,000 in 1889. This, in addition to vast sums raised in Europe, on provincial credit, to carry out the innumerable railway concessions which were offered to, and accepted by, the eager investors in guaranteed” enterprises. All the money markets were competing with one another for a share of these good things. London, Paris, Brussels, Berlin, each was ready to outbid the other for the privilege of taking up ventures and floating loans which, at any other time, would have been regarded as very doubtful security, when the nature of the country, the character of the population, and the instability of its political institutions were carefully considered. They were not considered, however, and the investors of Great Britain, France, Belgium, and Germany had another opportunity of learning the value of Government guarantees south of the United States.

But at first and for some time all went well, especially with those to whom the loans were made. Buenos Ayres surpassed every other city in its luxury, extravagance, and wholesale squandering of wealth. There was literally no limit to the excesses of the wealthier classes. While money, luxuries, and material poured in on the one hand, crowds of immigrants from Italy and other countries flocked in to perpetuate the prosperity of the new Eldorado of the South. Railways, docks, tramways, water-works, gas-works, public buildings, mansions, all were being carried on at once in hot haste; and British and foreign contractors, engineers, and men of business did their best to increase the general eagerness to commence new undertakings.

But the facts are fresh in the minds of everyone. The character of the houses which took charge of the loans in London and on the Continent was so high that nobody could for the time doubt that all was well. That the Barings, the Murrietas and others were as careless and as greedy as houses of less name and fame, was not to be believed. It is a curious fact, as showing how little the real truth was generally appreciated, notwithstanding the warnings constantly given by the Statist newspaper, that the last railway loan successfully floated prior to the crash was subscribed for no less than eleven times over in London. And Uruguay gives only a repetition of the methods of the Argentine Republic on a smaller scale.

The real significance of this to English industry is not always appreciated fully. The money form of the loans disguises the fact that much of what is lent to the Argentine Republic, Uruguay, Brazil, Australia, etc., does not reach the borrowers in the shape of cash at all. The loan takes the form of works or manufactures of some sort, such as rails, bridges, pontoons, articles of luxury, linen, cloth, etc., which means profit for the manufacturers and employment for the workers of England. But trade of this kind, fostered by loans from the country whose goods are ordered, must, in the very nature of the case, be precarious. As the loans fall off; owing to the security having been covered and no margin remaining, the trade falls off too, and cannot revive until, if the produce of the loans has been spent in development, a natural exchange of the products of the two countries is established. So long as the period of inflation lasted, however, business was good, the workers were fully employed, and could strike for higher wages with good hope of success for the time being, as the East End of London dockers did and many others. Prices and wages had once more risen to something like their old levels; orders could not be executed in consequence of the press of business – rails, for example, could not be had; the speculation had kept pace with the general prosperity; and yet all seemed so sound – for the Argentine and Uruguay are rich countries – that people thought the market in the spring and summer of 1890 might still hold out for another twelve or eighteen months, though that South America was over-borrowing was universally admitted. As a matter of fact, the collapse had even then begun; fears of a drain of gold to South America, as the premium on gold began to rise rapidly, scared shrewd observers; and the names of great financial firms were whispered about the city as being in serious difficulties.

Those who remember the collapse of Messrs. Over-end, Gurney & Co. twenty-six years ago say, that to men brought up in the City where this great firm had enjoyed unbounded influence and credit for two generations, it seemed inconceivable that the house should ever fall, even when it was generally known that its affairs were somewhat in disorder. When it did fall, a huge blank was occasioned which has never since been filled. All that men of business felt about Messrs. Overend, Gurney & Co. in 1856, and more than all, was felt in the city of London in 1889 about, the firm of Messrs. Baring Bros. & Co. Lord Revelstoke, the head of the house, though an exceedingly arbitrary man, was looked upon as the first financier in the city. His ability, organising power, and foresight were extolled by all. Messrs. Baring had just floated Messrs. Guinness’s brewery as a Limited Company with extraordinary success and profit to the firm, and had taken the pas of Messrs. Rothschild in the matter of financing the Manchester Ship Canal. Their mercantile business brought them in enormous profits yearly, and their name and credit were at this time the first in the world. There was a feeling of satisfaction throughout the country that a purely English house should stand so high at a time when German Jews held the leading place in nearly every great continental city.

And yet, at the very time when this was the general feeling, the Barings were allowing themselves to be cajoled into the acceptance, in conjunction with their syndicate, of some of the worst financial enterprises that any third-rate firm of financial adventurers ever tried to foist upon the public; and were straining their credit to an extent which even their capital and profits could not stand. The boasted ability of the greatest men in the city was again tried and found wanting, and Lord Revelstoke allowed himself to be completely bamboozled by an American adventurer, whose sole aim and object was to make commissions for himself. The story of Moses and the gross of green spectacles was told again in Bishopsgate Street to the tune of tens of millions of pounds sterling.

Suddenly a heavy fall in stocks, in which the Barings were known to be specially interested alike as owners and agents, and a pouring of Consols upon a depressed market, informed the public of what the private letter-books of the city, if they could be thrown open, would show was known to many firms long before. Then Russia was withdrawing gold from the great house at the same time; and it shortly became known that, unless exceptional steps were at once taken, another 1866 panic would be let loose upon the city. For the bank rate of discount was rapidly advancing; the great joint-stock banks were calling in their loans; gold was flowing out from the Bank of England, which itself was reported to hold £4,000,000 of the Barings’ acceptances; and a fourth suspension of the Bank Act of 1844 was regarded as inevitable if matters were allowed to take their ordinary course. Then it was that the governor of the Bank of England, having assured himself of State support in case of need, adopted that plan of bolstering up rottenness, in the interest of the higher grade of financiers, of which the French had already given us more than one instance.

A guarantee fund was formed, in which the Bank of England took the lead, and every bank or firm of any note in the city joined, to ensure the meeting of the acceptances of Baring Brothers & Co. to the extent of £21,000,000; gold to the amount of £3,000,000 was borrowed by the Bank of England through the Rothschilds from the Bank of France, and more was obtained from Russia; the Barings’ ordinary business was turned into a limited company, and – several other important firms went into a sort of limited liquidation. It was all thought to be a great stroke of genius at the time, and Mr. Lidderdale practically received the thanks of the Government, and was presented with the freedom of the city of London. The general opinion is not quite so favourable now, and it is quite possible that, when the circumstances come to be reviewed in the dry light of history, the Baring crisis of 1890, and the way in which it was met, will be cited as an example of the break-down of capitalism in the department of high finance.

That the whole crisis will be a permanent record of the imbecility of English investors there can already be no doubt whatever. For those who held Argentine bonds, to which they had subscribed on the faith of representations made by first-rate financial houses that had secured enormous profits out of the issues, actually allowed the representatives of these very houses to form a financial caucus, specially constituted to sacrifice the public interests of investors to their own private necessities; granting the Argentine Government an unasked-for delay in paying interest for three whole years, on condition that they, the magnates of the money market, should be relieved from their obligations in connection with the rotten scheme for the water-supply of the city of Buenos Ayres. Not a single bondholder (a shareholder was represented on this great committee, of which Lord Rothschild was the chairman, and the whole affair was arranged to the ruin of the investors so as to suit the pockets of those who sat with him round the table.

Since then the city of London has been in what may be called a state of permanent though suppressed panic. What is much more important, trade has steadily fallen off, and prices have, of course, as steadily shrunk. The exports to South America have gone down to such an extent that one great line of freight-carrying steamers, Messrs. Lamport & Holt’s, has been practically without freight from this country for months past. The stagnation in the export trade, due to this South-American crisis; to the cessation for the time being of those Australian loans which likewise called for English produce; to the M’Kinley tariff in the United States, which has ruined the rough woollen trade of Bradford and the tin-plate trade of South Wales; to the increasing competition of foreign countries in the neutral markets; and to the disappointments in connection with South and Central Africa – this stagnation, though it may be brightened by temporary gleams of prosperity, threatens to be for a long time very prejudicial to the interests of the mass of the people.

During the short but sharp inflation of 1887 to 1890 the workers had been able to obtain advances of wages in many trades; and strikes for improved conditions of labour, of which the dockers’ strike was the most famous, had been the rule rather than the exception. But mere strikes or Trade Union combinations can no more change or influence the course of international commerce than a lecture on economics to a Zulu tribe. So long as the sole object of the production of wealth is the creation of surplus-value and profit, so long will the periods of bad trade follow periods of inflation, and so long will the workers who imagine that they have secured permanent advantages to-day find that, if dependent for the retention or those advantages merely on their own organisations, they have laid up for themselves uncertainty and disappointment for to-morrow.

Already the counter effects of the crisis of 1890 are making themselves felt in the money markets and industrial centres of France, Germany, Belgium, and other countries. The harmful conditions which permanently weigh upon the European situation – the vast loans raised for war purposes superadded to the already excessive indebtedness; the withdrawal of the flower of the population on the Continent at the most critical time of life from civil associations; the effect of American competition on agriculture, small and large; the undoubted fact that, with the increased power of machinery working at full speed, markets for commodities may be glutted in an incredibly short space of time – all these permanent causes for anxiety have been still further aggravated by the famine in Russia and the revolutionary movement in China, the consequences of which none can fully foresee. More than a year after the crisis of 1890 and the careful arrangements made to avoid a panic, the whole financial firmament of England is darkened by a cloud of distrust, and, in spite of a protracted period of caution and taking in of sail; there is all the doubt and uncertainty, or more than all the doubt and uncertainty, which would have followed had the crisis pursued the same course as those of 1857 and 1866.

Any attempt to fully analyse the effects of the crisis upon other countries would extend this little volume beyond the limits of its original plan. But it is apparent already that the extraordinary harvest in the United States, now having a population of 62,000,000, with 200,000 miles of railway, as well as the proportionately good harvest in Canada, must, in spite of all hostile tariffs, have a beneficial effect on the situation temporarily at least. It is even possible that the natural resources of the Argentine Republic, with its 90,000,000 sheep, 25,000,000 cattle, 7,000,000 acres of tilled land, and 7,000 miles of railway, may enable the comparatively sparse population to cope in part with its enormous load of debt if political quiet is maintained.

But the main facts of our modern industrial system remain unchanged by even the development of such vast natural wealth as that of North and South America. In the former great country the pressure of mortgages upon the farmers of the West, the vast railroad rings and industrial monopolies which have been built up, the impossibility so far of obtaining any control for or by the people of the huge machine of capitalism even under democratic and republican forms, leave the mass of the producers as much at the mercy of the money-lords as they are in Europe, and the crises of the United States have been in some respects worse than those of the old world. In the Argentina, difficulties have but just begun; but there also, what is perhaps the finest undeveloped country in the world, has not protected some of the most industrious, sober, and thrifty immigrants that ever went out to seek their fortune from undergoing starvation and misery, where they looked for well-being and happiness in return for hard work.

Last updated on 29.7.2007