Author: Colin Twiggs

Jesse Livermore made several million Dollars by shorting stocks ahead of the crash of October 1907. In Reminiscences of a Stock Operator he describes the impact on financial markets when liquidity dries up:

From the latter part of September on, the money market was megaphoning warnings to the entire world. But a belief in miracles kept people from selling what remained of their speculative holdings. Why a broker told me a story the first week of October that made me feel almost ashamed of my moderation.

You remember that money loans used to be made on the floor of the Exchange around the Money Post. Those brokers who had received notice from their banks to pay call loans knew in a general way how much money they would have to borrow afresh. And of course the banks knew their position so far as loanable funds were concerned, and those which had money to loan would send it to the Exchange. This bank money was handled by a few brokers whose principal business was time loans. At about noon the renewal rate for the day was posted. Usually this represented a fair average of the loans made up to that time. Business was as a rule transacted openly by bids and offers, so that everyone knew what was going on. Between noon and about two o’clock there was ordinarily not much business done in money, but after delivery time—namely, 2:15 p.m.—brokers would know exactly what their cash position for the day would be, and they were able either to go to the Money Post and lend the balances that they had over or to borrow what they required. This business also was done openly.

Well, sometime early in October the broker I was telling you about came to me and told me that brokers were getting so they didn’t go to the Money Post when they had money to loan. The reason was that members of a couple of well known commission houses were on watch there, ready to snap up any offerings of money. Of course no lender who offered money publicly could refuse to lend to these firms. They were solvent and the collateral was good enough. But the trouble was that once these firms borrowed money on call there was no prospect of the lender getting that money back. They simply said they couldn’t pay it back and the lender would willy-nilly have to renew the loan. So any Stock Exchange house that had money to loan to its fellows used to send its men about the floor instead of to the Post, and they would whisper to good friends, “Want a hundred?” meaning, “Do you wish to borrow a hundred thousand dollars?” The money brokers who acted for the banks presently adopted the same plan, and it was a dismal sight to watch the Money Post. Think of it!

Why, he also told me that it was a matter of Stock Exchange etiquette in those October days for the borrower to make his own rate of interest. You see, it fluctuated between 100 and 150 per cent per annum. I suppose by letting the borrower fix the rate the lender in some strange way didn’t feel so much like a usurer. But you bet he got as much as the rest. The lender naturally did not dream of not paying a high rate. He played fair and paid whatever the others did. What he needed was the money and was glad to get it.

Things got worse and worse. Finally there came the awful day of reckoning for the bulls and the optimists and the wishful thinkers and those vast hordes that, dreading the pain of a small loss at the beginning, were now about to suffer total amputation—without anaesthetic. A day I shall never forget, October 24, 1907.

Reports from the money crowd early indicated that borrowers would have to pay whatever the lenders saw fit to ask. There wouldn’t be enough to go around. That day the money crowd was much larger than usual. When delivery time came that afternoon there must have been a hundred brokers around the Money Post, each hoping to borrow the money that his firm urgently needed. Without money they must sell what stocks they were carrying on margin—sell at any price they could get in a market where buyers were as scarce as money—and just then there was not a dollar in sight.

My friend’s partner was as bearish as I was. The firm therefore did not have to borrow, but my friend, the broker I told you about, fresh from seeing the haggard faces around the Money Post, came to me. He knew I was heavily short of the entire market.

He said, “My God, Larry! I don’t know what’s going to happen. I never saw anything like it. It can’t go on. Something has got to give. It looks to me as if everybody is busted right now. You can’t sell stocks, and there is absolutely no money in there.”

“How do you mean?” I asked.

But what he answered was, “Did you ever hear of the classroom experiment of the mouse in a glass-bell when they begin to pump the air out of the bell? You can see the poor mouse breathe faster and faster, its sides heaving like overworked bellows, trying to get enough oxygen out of the decreasing supply in the bell. You watch it suffocate till its eyes almost pop out of their sockets, gasping, dying. Well, that is what I think of when I see the crowd at the Money Post! No money anywhere, and you can’t liquidate stocks because there is nobody to buy them. The whole Street is broke at this very moment, if you ask me!”

It made me think. I had seen a smash coming, but not, I admit, the worst panic in our history. It might not be profitable to anybody—if it went much further.

Finally it became plain that there was no use in waiting at the Post for money. There wasn’t going to be any. Then hell broke loose.

The president of the Stock Exchange, Mr. R. H. Thomas, so I heard later in the day, knowing that every house in the Street was headed for disaster, went out in search of succour. He called on James Stillman, president of the National City Bank, the richest bank in the United States. Its boast was that it never loaned money at a higher rate than 6 per cent.

Stillman heard what the president of the New York Stock Exchange had to say. Then he said, “Mr. Thomas, we’ll have to go and see Mr. Morgan about this.”

The two men, hoping to stave off the most disastrous panic in our financial history, went together to the office of J. P. Morgan & Co. and saw Mr. Morgan. Mr. Thomas laid the case before him. The moment he got through speaking Mr. Morgan said, “Go back to the Exchange and tell them that there will be money for them.”

“Where?”

“At the banks!”

So strong was the faith of all men in Mr. Morgan in those critical times that Thomas didn’t wait for further details but rushed back to the floor of the Exchange to announce the reprieve to his death-sentenced fellow members.

Then, before half past two in the afternoon, J. P. Morgan sent John T. Atterbury, of Van Emburgh & Atterbury, who was known to have close relations with J. P. Morgan & Co., into the money crowd. My friend said that the old broker walked quickly to the Money Post. He raised his hand like an exhorter at a revival meeting. The crowd, that at first had been calmed down somewhat by President Thomas’ announcement, was beginning to fear that the relief plans had miscarried and the worst was still to come. But when they looked at Mr. Atterbury’s face and saw him raise his hand they promptly petrified themselves.

In the dead silence that followed, Mr. Atterbury said, “I am authorized to lend ten million dollars. Take it easy! There will be enough for everybody!”

Then he began. Instead of giving to each borrower the name of the lender he simply jotted down the name of the borrower and the amount of the loan and told the borrower, “You will be told where your money is.” He meant the name of the bank from which the borrower would get the money later.

I heard a day or two later that Mr. Morgan simply sent word to the frightened bankers of New York that they must provide the money the Stock Exchange needed.

“But we haven’t got any. We’re loaned up to the hilt,” the banks protested.

“You’ve got your reserves,” snapped J.P.

“But we’re already below the legal limit,” they howled.

“Use them! That’s what reserves are for!” And the banks obeyed and invaded the reserves to the extent of about twenty million dollars. It saved the stock market. The bank panic didn’t come until the following week. He was a man, J. P. Morgan was. They don’t come much bigger.

Acknowledgement

Archive.com: Reminiscences of a Stock Operator, Edwin Lefevre