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Upton Sinclair’s The Moneychangers: The Panic of 1907 parallels crisis of 2008

July 29th, 2010 · 1 Comment · Americana, Books, Wall Street

The late Pulitzer Prize winning author Upton Sinclair was a prolific writer, best remembered for The Jungle (see here and here), but one of his seemingly more overlooked books that like The Jungle carries utter relevance to this day is The Moneychangers. Published in 1908, the year after the Panic of 1907, The Moneychangers is a 200-page book (Cosimo Classics 2009) that eerily shares many similarities and parallels to the hair-raising series of  events that unfolded on Wall Street and across global financial markets in 2008, some 100 years after the book’s publishing. The book image to the left is publisher Cosimo Classics 2009 re-publishing; Cosimo Books publishes classic and niche titles. Continue reading for a selection of extracts from The Moneychangers, which your editors at Summaread feel are among the most important and thought-provoking in the book.

Admittedly, not unlike The Jungle, it happens that The Moneychangers also starts off at a somewhat slow pace, with Sinclair setting the scene, providing a wealth of background on the main actors. Skillfully, Sinclair transitions about half-way through the book from portraying the wealth-flaunting tendencies of New York’s (high) “Society,” to the bankers’ and various Trusts’ stranglehold on stock market trading and business activity.

In Chapter XIII (page 111 of Cosimo Classics’ 2009 edition), the affable, yet conniving character of Gamble (owner of an oil concern), explains how Trusts effectively monopolize business to the book’s protagonist, Wall Street lawyer Allan Montague. Fast forward to 2008 and to the present, and while we don’t have Trusts in the old sense, we do have very powerful concentrations of business, particularly in banking and non-financial bank entities (the shadow banking system).

“That’s where they get these fortunes,” he added, waving his fat little hand. “Sometimes it makes a fellow laugh to think of it. Every concern they bought was overcapitalized to begin with; I doubt if two hundred million dollars’ worth of honest dollars was ever put into the Steel Trust properties, and they capitalized it at a billion, and now they’ve raised it to a billion and a half! The men who pulled it off made hundreds of millions, and the poor public that bought the common stock saw it go down to six! They gave old Harrison a four-hundred-million-dollar mortgage on the property, and he sits back and grins, and wonders why a man can’t die poor!”

In Chapter XXI (page 183), the book is crescendoing as a major bank run is imminent, but its expose by the leading business reporter on Wall Street is stopped dead in its tracks just prior to printing. The reporter, a Mr. Bates, bemoans to Mr. Montague:

[...] “We had the greatest scoop that a newspaper ever had in this country — if only the Express were a newspaper. But Hodges isn’t publishing the news, you see, he’s serving his masters, whoever they are. I knew that it meant trouble when he bought into the Express. He used to be managing editor of the Gazette, you know; and he made his fortune selling the policy of that paper — its financial news is edited this very hour in the offices of Wyman’s bankers, and I can prove it to anybody who wants me to. That’s the sort of proposition a man’s up against; and what’s the use of gathering the news?”

On page 187, having received news of another major bank run, one which in this case involves a close friend and a significant amount of his own savings:

Montague went out, with a new set of problems to ponder. As he went home, he passed the magnificent building of the Gotham Trust Company, where there stood a long line of people who had prepared to spend the night. All the afternoon a frantic mob had besieged the doors, and millions of dollars had been withdrawn in a few hours. Montague knew that by the time he got down town the next morning there would be another such mob in front of the Trust Company of the Republic; but he was determined to stand by his own resolve. However, he had sent a telegram to Oliver [his brother], warning him to return at once.

In Chapter XXII (page 190), in the midst of the bank run, the reader learns some basic but crucial information about the trust banks that is exacerbating the run:

“You put your money in a trust company … and you know that it only keeps 5 percent reserve , and is liable to pay 100 percent of its deposits. How can you expect to do that?”

Google search terms such as “capital adequacy” and “bank leverage” and it becomes patently obvious that even today financial institutions remain over-leveraged similar to 1907. There have been 107 bank failures in the U.S. year-to-date July 28th, compared to 140 in 2009, the most since 1992. In 2008 there were 25 failures and only 3 in 2007.

Pages 194 and 195 describe a frantic scene similar to the worst days of the 2008 crash, when the credit marks froze abruptly, the government began to intervene more and more, and a Warren Buffett-type figure stepped in to loan banks a then considerable sum of $25 million at 10%, the same kind of rate (via preferred stock dividends) that Mr. Buffett attained from his emergency investments in General Electric and Goldman Sachs.

All this time the funds of the Government had been withheld from the Exchange. The Government must not help the gamblers, everyone insisted. But now had come the moment when it seemed that the Exchange must be closed. Thousands of firms would be ruined, the business of the country would be paralyzed. [...]

On page 196, the description of how the banks profited off of government (and thus the people’s) money is a carbon copy of what banks have been doing the past two years, deceitfully reporting strong, and in some cases, record earnings. See respected economist Barry Ritholtz’ article, “Record Bank Bonuses Based on Record Fraud.” Notice how easily one can transpose Goldman Sachs into the following passage, especially concerning the relationship with the U.S. Treasury.

Men were beside themselves with wonder at the generosity of Waterman in lending twenty-five millions at 10 percent. But it was not his own money — it was the money of the national banks which he was lending; and this was money which the national banks had got from the Government, and for which they paid the Government no interest at all. There was never any graft in the world so easy as the national bank graft [...] These smooth gentlemen got the people’s money to build their institutions. They got the Government to deposit money with them, and they paid the Government nothing, and charged the people interest for it. They had the privilege of issuing a few hundred millions of bank-notes, and they charged interest for these and paid the Government nothing. And then, to cap the climax, they used their profits to buy up the Government! They filled the Treasury Department with their people, and when they got into trouble, the Sub-Treasury was emptied into their vaults. [...]

Finally, in Chapter XXIII (page 201), notice how eerily accurate the fallout of the 1907 panic mirrors the 2008 crisis.

The panic may have stopped, but the business of the country lay in ruins. For a week its financial heart had ceased to beat, and through all the arteries of commerce, and every smallest capillary, there was stagnation. Hundreds of firms had failed, and the mills and factories by the thousands were closing down. There were millions of men out of work. Throughout the summer the railroads had been congested with traffic, and now there were a quarter of a million freight cars laid by. Everywhere were poverty and suffering, it was as if a gigantic tidal wave of distress had started from the Metropolis and rolled over the continent. Even the oceans had not stopped it; it had gone on to England and Germany — it had been felt even in South America and Japan.

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