Panic of 1907

The Panic of 1907, also known as the 1907 Banker's Panic, was a financial crisis in the United States. It primarily affected bankers and had relatively little impact on most people, but it underscored the need for massive reform of the banking system, which was accomplished by the creation of the Federal Reserve System in 1913.

The recovery from the depression of 1893 was maintained by speculation and investments in merging and expanding corporations. The currency supply was expanded by new discoveries of gold in Alaska, the Yukon, South Africa, and Australia, and from the use of new extraction and reclamation technologies. Nonetheless, the currency supply was not expanding as quickly as the economy. The short-fall for a while was made up by gold transfers from European banks. By 1906, European bankers had turned bearish on this steady drain on their gold reserves and increased their interest rates (The Bank of England for example raised its discount rate from 3.5% to 6% between August and November 1906). This reversed the flow of gold. Investors in the US grew bearish as well, the stock market topped and began to decline. The falling stock market affected US business confidence and production slowed.

The stock market fell nearly 50% from its peak in 1906, and there were numerous runs on banks and trust companies. Its primary cause was a credit crunch that began on Wall Street and soon spread across the nation, leading to the closings of banks and businesses. It was the fourth panic in 34 years, and the first since the much worse Panic of 1893. Unlike 1893 it did not throw the nation into a depression.

Troubles mounted in summer 1907. U.S. Steel, by far the largest industrial corporation, reported an sharp drop in business; railroad earnings suddenly began to sag; the money market tightened up, making it difficult top raise large sums and leading to fears that it would be difficult to finance the fall harvest of major crops. The collapse of Charles W. Morse's shipping combination added to anxiety as did the failure of the City of New York to sell its bonds in Wall Street. In October came the failure of the whole Heinze-Morse chain of banks, and a run on the Knickerbocker Trust Company, the failure of the National Bank of North America and runs on the Trust Company of America, the Lincoln Trust Company, and a dozen other financial institutions. Each disasters had repercussions in other major cities and pulled down private firms and brokers. The accompanying panic in the stock market completed the havoc. By late October the panic was on.

Trust companies rather than the banks were the key to the panic. Since 1898 they had quadrupled in size because ordinary banks were required by law to maintain large cash reserves but trust companies were not. With only 2% or 3% of their assets lying idle in the form of cash, trust companies could afford to pay high interest rates to depositors. Suddenly, with the collapse of the Knickerbocker Trust, depositors became frightened. Trust companies, with their low reserves, would be hard pressed by even a moderate panic among their depositors. Still worse, there was no organization among them comparable to the Clearing House, which operated as a bulwark of mutual defense for hard-pressed banks.

To bring relief to the situation, Treasury Secretary George B. Cortelyou earmarked $35 million of Federal money to quell the storm. Banker J.P. Morgan now took personal charge, meeting with the nation's leading financiers with a plan to meet the crisis. James Stillman, president of the National City Bank, also played a central role. Morgan organized a team of bank and trust executives which redirected money between banks, secured further international lines of credit, and bought plummeting stocks of healthy corporations. A delicate political issue arose regarding the brokerage firm of Moore and Schley, which was deeply involved in a speculative pool in the stock of the Tennessee Coal, Iron and Railroad Company. Moore and Schley had pledged over six millions of the Tennessee Coal and Iron (TCI) stock for loans among the Wall Street banks. The banks had called the loans, and the firm could not pay. If Moore and Schley should fail, a hundred more failures would follow and then all Wall Street might go to pieces. Morgan decided they had to save Moore and Schley. TCI was one of the chief competitors of U.S. Steel and it owned valuable iron and coal deposits. Morgan controlled U.S. Steel and he decided it had to buy the TCI stock from Moore and Schley. Judge Gary, head of US Steel, agreed, but would there be antitrust implications that could cause grave trouble for US Steel, which was already dominant in the steel industry? Morgan sent Gary to see President Roosevelt, who promised legal immunity for the deal. U.S. Steel thereupon paid $30 million for the TCI stock and and Moore and Schley was saved. The announcement had an immediate effect; by November 7, 1907, the panic was over.

By February 1908, full confidence in the economy was restored.

In May 1908, Congress passed the Aldrich-Vreeland Act which established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking. In 1913, the commission recommended the adoption of the Federal Reserve Act, which mandated the creation of a central banking system to dampen the effects of future panics.

The panic gave momentum to trust-busters in Washington. In his last two years as President Theodore Roosevelt had his Justice Department bring suits against numerous industrial trusts, notably Standard Oil and American Tobacco. Later, suits were instituted against U.S. Steel, International Harvester, and others. When William Howard Taft became President in 1909,

References

• Carosso, Vincent P. The Morgans: Private International Bankers, 1854-1913 (1987).
• Friedman, Milton, and Anna J. Schwartz. A Monetary History of the United States: 1867-1960 (1963). excerpt and text search Portions also available on GoogleBooks.
• Garraty, John A. Right-Hand Man: The Life of George W. Perkins (1960), ch. 11. online edition
• Moen, Jon, and Ellis W. Tallman. "The Bank Panic of 1907: The Role of the Trust Companies." Journal of Economic History 52 (September 1992): 611-630. in JSTOR
• Moen, Jon, and Ellis W. Tallman. "Clearinghouse Membership and Deposit Contraction during the Panic of 1907," The Journal of Economic History 60, No. 1 (March 2000): 145-163. in JSTOR
• Moen, Jon. "Panic of 1907." EH.Net Encyclopedia, edited by Robert Whaples. August 15, 2001. online version
• Moody, John. The Masters of Capital: A Chronicle of Wall Street (1921), ch 8, pp 131-54. online edition
• Strouse, Jean. Morgan: American Financier (1999). excerpt and text search
• Sprague, Oliver M. W. "The American Crisis of 1907." The Economic Journal 18 (September 1908): 353-72. in JSTOR

External links

• F. Augustus Heinze and the Panic of 1907
• Account of the Panic by "The Daily Reckoning"

See also

• Panic of 1819
• Panic of 1837
• Panic of 1857
• Panic of 1873
• Panic of 1890
• Panic of 1893
• Great Depression