The
Panic of 1907, also known as the
1907 Bankers' Panic, was a
financial crisisThe term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these...
that occurred in the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
when the
New York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in lower Manhattan, New York City, New York, USA. It is the largest stock exchange in the world by United States dollar value of its listed companies' securities...
fell close to 50% from its peak the previous year. Panic occurred, as this was during a time of economic
recessionIn economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way...
, and there were numerous
runs on banksA bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
and
trust companiesA trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of...
. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into
bankruptcyBankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed or initiate a restructuring...
. Primary causes of the run include a retraction of
market liquidityIn business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
by a number of
New York CityNew York is the most populous city in the United States, and the center of the New York metropolitan area, which is among the most populous urban areas in the world. A leading global city, New York exerts a powerful influence over worldwide commerce, finance, culture, fashion and entertainment...
banks and a loss of confidence among depositors.
The crisis was triggered by the failed attempt in October 1907 to
corner the marketIn finance, to corner the market is to purchase enough of a particular stock, commodity, or other asset to allow the price to be manipulated, by analogy to the general business jargon where a company described as having "cornered the market" has a very high market share...
on
stockIn the investment world, a share of stock represents a share of ownership in a corporation ....
of the
United Copper CompanyThe United Copper Company was a short-lived United States copper mining business in the early 20th century that played a pivotal role in the Panic of 1907....
. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the
Knickerbocker Trust CompanyThe Knickerbocker Trust, chartered in 1884 by Frederick G. Eldridge, a friend and classmate of financier J.P. Morgan, figured at one time among the largest banks in the United States and a central player in the Panic of 1907. As a trust company, its main business was serving as trustee for...
—New York City's third-largest trust. The collapse of the Knickerbocker spread fear throughout the city's trusts as regional banks withdrew
reservesBank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in bank vaults . The central banks of some nations set minimum reserve requirements...
from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
The panic may have deepened if not for the intervention of financier
J. P. MorganJohn Pierpont Morgan was an American financier, banker and art collector who dominated corporate finance and industrial consolidation during his time. In 1892 Morgan arranged the merger of Edison General Electric and Thomson-Houston Electric Company to form General Electric...
, who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the
banking systemBanking in the United States is regulated by both the federal and state governments of the United States of America.The US banking sector's short-term liabilities as of October 11, 2008 are 15% of the GDP of the United States or 43% of its national debt, and the average bank leverage ratio is 12...
. At the time, the United States did not have a
central bankA central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to a lend a government its currency...
to inject liquidity back into the market. By November the
financial contagionFinancial contagion refers to the transmission of a financial shock in one entity to other interdependent entities.-History:The study of economic contagion came to prominence in the 1990s, when a wave of currency crises affected the emerging markets around the world.With the onset of the Subprime...
had largely ended, yet a further crisis emerged when a large brokerage firm borrowed heavily using the stock of
Tennessee Coal, Iron and Railroad CompanyThe Tennessee Coal, Iron and Railroad Company , also known as TCI and the Tennessee Company, was a major American steel manufacturer with interests in coal and iron ore mining and railroad operations...
(TC&I) as
collateralIn lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's risk of default - that is, any borrower failing to pay the principal and interest under the terms of a loan...
. Collapse of TC&I's stock price was averted by an emergency takeover by Morgan's U.S. Steel Corporation—a move approved by
anti-monopolistTrust-busting is any government activity designed to break up trusts or monopolies. Theodore Roosevelt is the U.S. president most associated with dissolving trusts. However, William Howard Taft signed twice as much trust-busting legislation began during his presidency.Trusts were large business...
president
Theodore RooseveltTheodore Roosevelt was the 26th President of the United States. He is well remembered for his energetic persona, his range of interests and achievements, his model of masculinity, and his "cowboy" image. He was a leader of the Republican Party and founder of the short-lived Bull Moose Party...
. The following year, Senator
Nelson W. AldrichNelson Wilmarth Aldrich was a prominent American politician and a leader of the Republican Party in the Senate, where he served from 1881 to 1911....
established and chaired a commission to investigate the crisis and propose future solutions, leading to the creation of the
Federal Reserve SystemThe Federal Reserve System is the central banking system of the United States. It was created in 1913 by the enactment of the Federal Reserve Act, largely as a response to a series of financial panics or bank runs, particularly a severe panic in 1907...
.
Economic conditions
When
U.S.The United States of America is a federal constitutional republic comprising fifty states and a federal district...
President
Andrew JacksonAndrew Jackson was the seventh President of the United States . He was military governor of Florida , commander of the American forces at the Battle of New Orleans , and eponym of the era of Jacksonian democracy...
allowed the charter of the
Second Bank of the United StatesThe Second Bank of the United States was chartered in 1816, five years after the First Bank of the United States lost its own charter. The Second Bank of the United States was initially headquartered in Carpenters' Hall, Philadelphia, the same as the First Bank, and had branches throughout the...
to expire in 1836, the U.S. was without any sort of
central bankA central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to a lend a government its currency...
, and the
money supplyIn economics, money supply or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
in New York City fluctuated with the country's annual agricultural cycle. Each autumn money flowed out of the city as harvests were purchased and—in an effort to attract money back—interest rates were raised. Foreign investors then sent their money to New York to take advantage of the higher rates. From the January 1906
Dow Jones Industrial AverageThe Dow Jones Industrial Average also referred to as the Industrial Average, the Dow Jones, the Dow 30, or simply as the Dow; is one of several stock market indices, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
high of 103, the market began a modest correction that would continue throughout the year. The
April 1906 earthquakeThe San Francisco earthquake of 1906 was a major earthquake that struck San Francisco, CA and the coast of Northern California at 5:12 A.M. on Wednesday, April 18, 1906. The most widely accepted estimate for the magnitude of the earthquake is a moment magnitude of 7.8; however, other values have...
that devastated San Francisco contributed to the market instability, prompting an even greater flood of money from New York to San Francisco to aid reconstruction. A further stress on the money supply occurred in late 1906, when the
Bank of EnglandThe Bank of England is, despite its name, the central bank of the whole of the United Kingdom and is the model on which most modern, large central banks have been based. It was established in 1694 to act as the English Government's banker, and to this day it still acts as the banker for the UK...
raised its interest rates and more funds remained in London than expected. From their peak in January, stock prices declined 18% by July 1906. By late September, stocks had recovered about half of their losses.
The
Hepburn ActThe Hepburn Act gave the Interstate Commerce Commission the power to set maximum railroad rates and led to the discontinuation of free passes to loyal shippers. In addition, the ICC could view the railroads' financial records, a task simplified by standardized bookkeeping systems...
, which gave the
Interstate Commerce CommissionThe Interstate Commerce Commission was a regulatory body in the United States created by the Interstate Commerce Act of 1887, which was signed into law by President Grover Cleveland...
(ICC) the power to set maximum railroad rates, became law in July 1906. This depreciated the value of railroad securities. Between September 1906 and March 1907, the stock market slid, losing 7.7% of its
capitalizationMarket capitalization/capitalisation is a measurement of the size of a business enterprise equal to the share price times the number of shares outstanding of a public company...
. Between March 9 and 26, stocks fell a further 9.8%. (This March collapse is sometimes referred to as a "rich man's panic".) The economy remained volatile through the summer. A number of shocks hit the system: the stock of Union Pacific—among the most common stocks used as
collateralIn lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's risk of default - that is, any borrower failing to pay the principal and interest under the terms of a loan...
—fell 50 points; that June an offering of New York City
bondsIn finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity...
failed; in July the
copperCopper is a chemical element with the symbol Cu and atomic number 29.It is a ductile metal with very high thermal and electrical conductivity. Pure copper is rather soft and malleable and a freshly-exposed surface has a pinkish or peachy color...
market collapsed; in August the Standard Oil Company was fined $29 million for
antitrustUnited States antitrust law is the body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are designed to encourage competition in the marketplace....
violations. In the first nine months of 1907, stocks were lower by 24.4%.
On July 27,
The Commercial & Financial Chronicle noted that "the market keeps unstable ... no sooner are these signs of new life in evidence than something like a suggestion of a new outflow of gold to Paris sends a tremble all through the list, and the gain in values and hope is gone". Several
bank runA bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
s occurred outside the US in 1907: in Egypt in April and May; in Japan in May and June; in Hamburg and Chile in early October. The fall season was always a vulnerable time for the banking system—combined with the roiled stock market, even a small shock could have grave repercussions.
Cornering copper
Timeline of panic
in New York City |
Monday,
October 14 |
Otto Heinze begins purchasing to corner the stock of United Copper The United Copper Company was a short-lived United States copper mining business in the early 20th century that played a pivotal role in the Panic of 1907....
. |
Wednesday,
October 16 |
Heinze's corner fails spectacularly. Heinze's brokerage house, Gross & Kleeberg is forced to close. This is the date traditionally cited as when the corner failed. |
Thursday,
October 17 |
The Exchange suspends Otto Heinze and Company. The State Savings Bank of Butte, Montana, owned by Augustus Heinze announces it is insolvent. Augustus is forced to resign from Mercantile National Bank. Runs begin at Augustus' and his associate Charles W. MorseCharles Wyman Morse was a notorious businessman and speculator on Wall Street in the early 20th century.-Early life:...
's banks. |
Sunday,
October 20 |
The New York Clearing House forces Augustus and Morse to resign from all their banking interests. |
Monday,
October 21 |
Charles T. BarneyCharles Tracy Barney was the president of the Knickerbocker Trust Company, the collapse of which shortly before Barney's death sparked the Panic of 1907.-Early life and marriage:...
is forced to resign from the Knickerbocker Trust CompanyThe Knickerbocker Trust, chartered in 1884 by Frederick G. Eldridge, a friend and classmate of financier J.P. Morgan, figured at one time among the largest banks in the United States and a central player in the Panic of 1907. As a trust company, its main business was serving as trustee for...
because of his ties to Morse and Heinze. The National Bank of CommerceThe National Bank of Commerce was a U.S. bank of the late 19th and early 20th centuries. It first chartered as the Kansas City Savings Bank in 1865. After a controlling interest was acquired by Dr...
says it will no longer serve as clearing house. |
Tuesday,
October 22 |
A bank run A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...
forces the Knickerbocker to suspend operations. |
Wednesday,
October 23 |
J.P. Morgan persuades other trust company presidents to provide liquidity to the Trust Company of America, staving off its collapse. |
Thursday,
October 24 |
Treasury SecretaryThe United States Secretary of the Treasury is the head of the United States Department of the Treasury, concerned with finance and monetary matters, and, until 2003, some issues of national security and defense. This position in the Federal Government of the United States is analogous to the...
George CortelyouGeorge Bruce Cortelyou was an American Presidential Cabinet secretary of the early 20th century.-Early life:...
agrees to deposit Federal money in New York banks. Morgan persuades bank presidents to provide $23 million to the New York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in lower Manhattan, New York City, New York, USA. It is the largest stock exchange in the world by United States dollar value of its listed companies' securities...
to prevent an early closure. |
Friday
October 25 |
Crisis is again narrowly averted at the Exchange. |
Sunday,
October 27 |
The City of New YorkNew York is the most populous city in the United States, and the center of the New York metropolitan area, which is among the most populous urban areas in the world. A leading global city, New York exerts a powerful influence over worldwide commerce, finance, culture, fashion and entertainment...
tells Morgan associate George Perkins that if they cannot raise $20–30 million by November 1, the city will be insolvent. |
Tuesday,
October 29 |
Morgan purchased $30 million in city bonds, discreetly averting bankruptcy for the city. |
Saturday,
November 2 |
Moore & Schley, a major brokerage, nears collapse because its loans were backed by the Tennessee Coal, Iron & Railroad Company (TC&I), a stock whose value is uncertain. A proposal is made for U.S. Steel The United States Steel Corporation , more commonly known as U.S. Steel, is an integrated steel producer with major production operations in the United States, Canada, and Central Europe. The company is the world's tenth largest steel producer ranked by sales...
to purchase TC&I. |
Sunday,
November 3 |
A plan is finalized for U.S. Steel to take over TC&I. |
Monday,
November 4 |
President Theodore RooseveltTheodore Roosevelt was the 26th President of the United States. He is well remembered for his energetic persona, his range of interests and achievements, his model of masculinity, and his "cowboy" image. He was a leader of the Republican Party and founder of the short-lived Bull Moose Party...
approves U.S. Steel's takeover of TC&I, despite anticompetitive concerns. |
Tuesday,
November 5 |
Markets are closed for Election Day Election Day in the United States is the day set by law for the election of public officials.For federal offices , it occurs on the Tuesday after the first Monday of November in even-numbered years; the earliest possible date is November 2 and the latest November 8...
. |
Wednesday,
November 6 |
U.S. Steel completes takeover of TC&I. Markets begin to recover. Destabilizing runs at the trust companies do not begin again. |
The 1907 panic began with a stock manipulation scheme to
corner the marketIn finance, to corner the market is to purchase enough of a particular stock, commodity, or other asset to allow the price to be manipulated, by analogy to the general business jargon where a company described as having "cornered the market" has a very high market share...
in
F. Augustus HeinzeFritz Augustus Heinze was one of the three "Copper Kings" of Butte, Montana along with William Andrews Clark and Marcus Daly.- Early life:...
's
United Copper CompanyThe United Copper Company was a short-lived United States copper mining business in the early 20th century that played a pivotal role in the Panic of 1907....
. Heinze had made a fortune as a
copperCopper is a chemical element with the symbol Cu and atomic number 29.It is a ductile metal with very high thermal and electrical conductivity. Pure copper is rather soft and malleable and a freshly-exposed surface has a pinkish or peachy color...
magnate in
Butte, MontanaButte is a city in and the county seat of Silver Bow County, Montana, United States. In 1977, the city and county governments consolidated to form the sole entity of The City and County of Butte-Silver Bow. As of the 2000 census, Butte's population was 33,892...
. In 1906 he moved to New York City, where he formed a close relationship with notorious
Wall StreetWall Street is a street in Lower Manhattan, New York City, New York, United States. It runs east from Broadway to South Street on the East River, through the historical center of the Financial District. It is the first permanent home of the New York Stock Exchange; over time Wall Street became the...
banker
Charles W. MorseCharles Wyman Morse was a notorious businessman and speculator on Wall Street in the early 20th century.-Early life:...
. Morse had once successfully cornered New York City's ice market, and together with Heinze gained control of many banks—the pair served on at least six
national bankThe term national bank has several meanings:* especially in developing countries, a bank owned by the state* an ordinary private bank which operates nationally...
s, ten
state bankA state bank is generally a financial institution that is chartered by a state. It differs from a reserve bank in that it does not necessarily control monetary policy , but instead usually offers only retail and commercial services.-United States:In the United States the term state bank is used in...
s, five trust companies and four
insuranceInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
firms.
Augustus's brother, Otto, devised the scheme to corner United Copper, believing that the Heinze family already controlled a majority of the company. A significant number of the Heinzes'
sharesIn financial markets, a share is a unit of account for various financial instruments including stocks , and investments in limited partnerships, and REITs...
had been borrowed, and Otto believed that many of these had been loaned to investors who hoped the stock price would drop, and that they could thus repurchase the borrowed shares cheaply, pocketing the difference—a technique known as
short sellingIn finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to the lender...
. Otto proposed a
short squeezeIn finance, a short squeeze is a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock.Short squeezes result when short sellers cover their positions on a stock...
, whereby the Heinzes would aggressively purchase as many remaining shares as possible, and then force the short sellers to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and, being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then name their price.
To finance the scheme, Otto, Augustus and Charles Morse met with
Charles T. BarneyCharles Tracy Barney was the president of the Knickerbocker Trust Company, the collapse of which shortly before Barney's death sparked the Panic of 1907.-Early life and marriage:...
, president of the city's third-largest trust, the
Knickerbocker Trust CompanyThe Knickerbocker Trust, chartered in 1884 by Frederick G. Eldridge, a friend and classmate of financier J.P. Morgan, figured at one time among the largest banks in the United States and a central player in the Panic of 1907. As a trust company, its main business was serving as trustee for...
. Barney had provided financing for previous Morse schemes. Morse, however, cautioned Otto that he needed much more money than he had to attempt the squeeze and Barney declined to provide funding. Otto decided to attempt the corner anyway. On Monday, October 14, he began aggressively purchasing shares of United Copper, which rose in one day from $39 to $52 per share. On Tuesday, he issued the call for short sellers to return the borrowed stock. The share price rose to nearly $60, but the short sellers were able to find plenty of United Copper shares from sources other than the Heinzes. Otto had misread the market, and the share price of United Copper began to collapse.
The stock closed at $30 on Tuesday and fell to $10 by Wednesday. Otto Heinze was ruined. The stock of United Copper was traded outside the hall of the
New York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in lower Manhattan, New York City, New York, USA. It is the largest stock exchange in the world by United States dollar value of its listed companies' securities...
, literally an outdoor market "on the curb" (this curb market would later become the
American Stock ExchangeNYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953 it was known as the New York Curb Exchange. On January 17, 2008 NYSE Euronext announced it would acquire the...
). After the crash,
The Wall Street JournalThe Wall Street Journal is an English-language international daily newspaper published by Dow Jones & Company, a division of News Corporation, in New York City, with Asian and European editions. As of 2007, it has a worldwide daily circulation of more than 2 million, with approximately 931,000...
reported, "Never has there been such wild scenes on the Curb, so say the oldest veterans of the outside market".
Contagion spreads
The failure of the corner left Otto unable to meet his obligations and sent his brokerage house, Gross & Kleeberg, into bankruptcy. On Thursday, October 17, the New York Stock Exchange suspended Otto's trading privileges. As a result of United Copper's collapse, the State Savings Bank of Butte Montana (owned by F. Augustus Heinze) announced its insolvency. The Montana bank had held United Copper stock as
collateralIn lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's risk of default - that is, any borrower failing to pay the principal and interest under the terms of a loan...
against some of its lending and had been a correspondent bank for the Mercantile National Bank in New York City, of which F. Augustus Heinze was then president.
F. Augustus Heinze's association with the corner and the insolvent State Savings Bank proved too much for the board of the Mercantile to accept. Although they forced him to resign before lunch time, by then it was too late. As news of the collapse spread, depositors rushed
en masse to withdraw money from the Mercantile National Bank. The Mercantile had enough capital to withstand a few days of withdrawals, but depositors began to pull cash from the banks of the Heinzes' associate Charles W. Morse. Runs occurred at Morse's National Bank of North America and the New Amsterdam National. Afraid of the impact the tainted reputations of Augustus Heinze and Morse could have on the banking system, the
New York Clearing HouseThe New York Clearing House Association, the nation’s first and largest bank clearing house, was created in 1853, and has played a variety of important roles in supporting the development of the banking system in the nation’s financial capital. Initially, it was created to simplify the chaotic...
(a consortium of the city's banks) forced Morse and Heinze to resign all banking interests. By the weekend after the failed corner, there was not yet systemic panic. Funds were withdrawn from Heinze-associated banks, only to be deposited with other banks in the city.
Panic hits the trusts
In the early 1900s,
trust companiesA trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of...
were booming; in the decade before 1907, their assets had grown by 244%. During the same period, national bank assets grew by 97%, while state banks in New York grew by 82%. The leaders of the high-flying trusts were mainly prominent members of New York's financial and social circles. One of the most respected was
Charles T. BarneyCharles Tracy Barney was the president of the Knickerbocker Trust Company, the collapse of which shortly before Barney's death sparked the Panic of 1907.-Early life and marriage:...
, whose late father-in-law William Collins Whitney was a famous financier. Barney's
Knickerbocker Trust CompanyThe Knickerbocker Trust, chartered in 1884 by Frederick G. Eldridge, a friend and classmate of financier J.P. Morgan, figured at one time among the largest banks in the United States and a central player in the Panic of 1907. As a trust company, its main business was serving as trustee for...
was the third-largest trust in New York.
Because of past association with Charles W. Morse and F. Augustus Heinze, on Monday, October 21, the board of the Knickerbocker asked that Barney resign (depositors may have first begun to pull deposits from the Knickerbocker on October 18, prompting the concern). That day, the
National Bank of CommerceThe National Bank of Commerce was a U.S. bank of the late 19th and early 20th centuries. It first chartered as the Kansas City Savings Bank in 1865. After a controlling interest was acquired by Dr...
announced it would not serve as
clearing houseA clearing house is a financial services company that provides clearing and settlement services for financial transactions, usually on a futures exchange, and often acts as central counterparty...
for the Knickerbocker. On October 22, the Knickerbocker faced a classic bank run. From the bank's opening, the crowd grew. As
The New York TimesThe New York Times is an American daily newspaper founded in 1851 and published in New York City. The largest metropolitan newspaper in the United States, "The Gray Lady"—named for its staid appearance and style—is regarded as a national newspaper of record...
reported, "as fast as a depositor went out of the place ten people and more came asking for their money [and the police] were asked to send some men to keep order". In less than three hours, $8 million was withdrawn from the Knickerbocker. Shortly after noon it was forced to suspend operations.
As news spread, other banks and trust companies were reluctant to lend any money. The interest rates on loans to brokers at the stock exchange soared and, with brokers unable to get money, stock prices fell to a low not seen since December 1900. The panic quickly spread to two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence.
Enter J.P. Morgan
When the chaos began to shake the confidence of New York's banks, the city's most famous banker was out of town. J.P. Morgan, president of the eponymous
J.P. Morgan & Co.J.P. Morgan & Co. was a commercial and investment banking institution based in the United States founded by J. Pierpont Morgan and commonly known as the House of Morgan or simply Morgan. Today, J.P...
, was attending a church convention in
Richmond, VirginiaRichmond is the capital of the Commonwealth of Virginia, in the United States. Like all Virginia municipalities incorporated as cities, it is an independent city and not part of any county. Richmond is the center of the Richmond Metropolitan Statistical Area and the Greater Richmond area...
. Morgan was not only the city's wealthiest and most well-connected banker, but he had experience with crisis—he helped rescue the
U.S. TreasuryThe Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...
during the
Panic of 1893The Panic of 1893 was a serious economic depression in the United States that began in 1893. This panic is sometimes considered a part of the Long Depression which began with the Panic of 1873, and like that of earlier crashes, was caused by railroad overbuilding and shaky railroad financing...
. As news of the crisis gathered, Morgan returned to Wall Street from his convention late on the night of Saturday, October 19. The following morning, the library of Morgan's
brownstoneBrownstone is a brown Triassic sandstone which was once a popular building material. The term is also understood to be a terraced house clad in this material.-Brownstone dwellings:...
at Madison Avenue and 36th St. had become a revolving door of New York City bank and trust company presidents arriving to share information about (and seek help surviving) the impending crisis.
Morgan and his associates examined the books of the Knickerbocker Trust, but decided it was insolvent and did not intervene to stop the run. Its failure, however, triggered runs on even healthy trusts, prompting Morgan to take charge of the rescue operation. On the afternoon of Tuesday, October 22, the president of the Trust Company of America asked Morgan for assistance. That evening Morgan conferred with
George F. BakerGeorge Fisher Baker was a U.S. financier and philanthropist. He provided much of the initial funding for Harvard Business School. Beside that, he made several large donations to charitable causes throughout New York City and funded the construction of Baker Field, Columbia University's primary...
, the president of First National Bank,
James StillmanJames Jewett Stillman was a noted American businessman who invested in land, banking, and railroads in New York, Texas, and Mexico. The son of Elizabeth Pamela Stillman and Charles Stillman, James Stillman was born in Brownsville, Texas. Charles Stillman had significant business interests which...
of the National City Bank of New York (the ancestor of
CitibankCitibank is a major international bank, founded in 1812 as the City Bank of New York, later First National City Bank of New York. Citibank is now the consumer banking arm of financial services giant Citigroup, one of the largest companies in the world...
), and the
United States Secretary of the TreasuryThe United States Secretary of the Treasury is the head of the United States Department of the Treasury, concerned with finance and monetary matters, and, until 2003, some issues of national security and defense. This position in the Federal Government of the United States is analogous to the...
,
George B. CortelyouGeorge Bruce Cortelyou was an American Presidential Cabinet secretary of the early 20th century.-Early life:...
. Cortelyou said that he was ready to deposit government money in the banks to help shore up their deposits. After an overnight audit of the Trust Company of America showed the institution to be sound, on Wednesday afternoon Morgan declared, “This is the place to stop the trouble, then".
As a run began on the Trust Company of America, Morgan worked with Stillman and Baker to liquidate the company's assets to allow the bank to pay depositors. The bank survived to the close of business, but Morgan knew that additional money would be needed to keep it solvent through the following day. That night he assembled the presidents of the other trust companies and held them in a meeting until midnight when they agreed to provide loans of $8.25 million to allow the Trust Company of America to stay open the next day. On Thursday morning Cortelyou deposited around $25 million into a number of New York banks.
John D. RockefellerJohn Davison Rockefeller was an American industrialist. Rockefeller revolutionized the petroleum industry and defined the structure of modern philanthropy. In 1870, he founded the Standard Oil Company and aggressively ran it until he officially retired in 1897. Standard Oil began as an Ohio...
, the wealthiest man in America, deposited a further $10 million in Stillman's National City Bank. Rockefeller's massive deposit left the National City Bank with the deepest reserves of any bank in the city. To instill public confidence, Rockefeller phoned Melville Stone, the manager of the
Associated PressThe Associated Press is an American news agency. The AP is a cooperative owned by its contributing newspapers, radio and television stations in the United States, which both contribute stories to the AP and use material written by its staff journalists...
, and told him that he would pledge half of his wealth to maintain America's credit.
Stock exchange nears collapse
Despite the infusion of cash, the banks of New York were reluctant to make the short-term loans they typically provided to facilitate daily stock trades. Unable to obtain these funds, prices on the exchange began to
crashA stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors...
. At 1:30 p.m. Thursday, October 24, Ransom Thomas, the president of the
New York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in lower Manhattan, New York City, New York, USA. It is the largest stock exchange in the world by United States dollar value of its listed companies' securities...
, rushed to Morgan's offices to tell him that he would have to close the exchange early. Morgan was emphatic that an early close of the exchange would be catastrophic.
Morgan summoned the presidents of the city's banks to his office. They started to arrive at 2 p.m.; Morgan informed them that as many as 50 stock exchange houses would fail unless $25 million was raised in 10 minutes. By 2:16 p.m., 14 bank presidents had pledged $23.6 million to keep the stock exchange afloat. The money reached the market at 2:30 p.m., in time to finish the day's trading, and by the 3 o'clock market close, $19 million had been loaned out. Disaster was averted. Morgan usually eschewed the press, but as he left his offices that night he made a statement to reporters: "If people will keep their money in the banks, everything will be all right".
Friday, however, saw more panic on the exchange. Morgan again approached the bank presidents, but this time was only able to convince them to pledge $9.7 million. In order for this money to keep the exchange open, Morgan decided the money could not be used for
margin salesIn finance, a margin is collateral that the holder of a position in securities, options, or futures contracts has to deposit to cover the credit risk of his counterparty...
. The volume of trading on Friday was 2/3 that of Thursday. The markets again narrowly made it to the closing bell.
Crisis of confidence
Morgan, Stillman, Baker and the other city bankers were unable to pool money indefinitely. Even the U.S. Treasury was low on funds. Public confidence needed to be restored, and on Friday evening the bankers formed two committees—one to persuade the clergy to calm their congregations on Sunday, and second to explain to the press the various aspects of the financial rescue package. Europe's most famous banker,
Lord RothschildNathan Mayer Rothschild, 1st Baron Rothschild was a British banker and politician from the international Rothschild financial dynasty.-Life and family:...
, sent word of his "admiration and respect" for Morgan. In an attempt to gather confidence, the Treasury Secretary Cortelyou agreed that if he returned to Washington it would send a signal to Wall Street that the worst had passed.
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(Clockwise from top left) John D. RockefellerJohn Davison Rockefeller was an American industrialist. Rockefeller revolutionized the petroleum industry and defined the structure of modern philanthropy. In 1870, he founded the Standard Oil Company and aggressively ran it until he officially retired in 1897. Standard Oil began as an Ohio...
, George B. CortelyouGeorge Bruce Cortelyou was an American Presidential Cabinet secretary of the early 20th century.-Early life:...
, Lord RothschildNathan Mayer Rothschild, 1st Baron Rothschild was a British banker and politician from the international Rothschild financial dynasty.-Life and family:...
, and James StillmanJames Jewett Stillman was a noted American businessman who invested in land, banking, and railroads in New York, Texas, and Mexico. The son of Elizabeth Pamela Stillman and Charles Stillman, James Stillman was born in Brownsville, Texas. Charles Stillman had significant business interests which...
. Some of the best-known names on Wall Street issued positive statements to help restore confidence in the economy. |
To ensure a free flow of funds on Monday, the New York Clearing House issued $100 million in loan certificates to be traded between banks to settle balances, allowing them to retain cash reserves for depositors. Reassured both by the clergy and the newspapers, and with bank balance sheets flushed with cash, a sense of order returned to New York that Monday.
Unbeknownst to Wall Street, a new crisis was being averted in the background. On Sunday, Morgan's associate, George Perkins, was informed that the City of New York required at least $20 million by November 1 or it would go bankrupt. The city tried to raise money through a standard bond issue, but failed to gather enough financing. On Monday and again on Tuesday,
New York MayorThe Mayor of the City of New York is head of the executive branch of New York City's government. The Mayor's office administers all city services, public property, police and fire protection, most public agencies, and enforces all city and state laws within New York City.The budget overseen by the...
George McClellan approached Morgan for assistance. In an effort to avoid the disastrous signal that a New York City bankruptcy would send, Morgan contracted to purchase $30 million worth of city bonds.
Drama at the Library
Although calm was largely restored in New York by Saturday, November 2, yet another crisis loomed. One of the exchange's largest brokerage firms, Moore & Schley, was heavily in debt and in danger of collapse. The firm had borrowed heavily, using stock from the
Tennessee Coal, Iron and Railroad CompanyThe Tennessee Coal, Iron and Railroad Company , also known as TCI and the Tennessee Company, was a major American steel manufacturer with interests in coal and iron ore mining and railroad operations...
(TC&I) as collateral. With the value of the thinly-traded stock under pressure, many banks would likely call the loans of Moore & Schley on Monday and force an
en masse liquidation of the stock. If that occurred it would send shares of TC&I plummeting, devastating Moore and Schley and causing a further panic in the market.
In order to prevent the collapse of Moore & Schley, Morgan called an emergency conference at his library Saturday morning. A proposal was made that the U.S. Steel Corporation, a company Morgan had helped form through the merger of the steel companies of
Andrew CarnegieAndrew Carnegie was a Scottish industrialist, businessman, entrepreneur, and a major philanthropist....
and
Elbert GaryElbert Henry Gary was an American lawyer and corporate officer. He was a key founder of U.S. Steel in 1901, bringing together partners J. P. Morgan, Andrew Carnegie, and Charles M. Schwab. The city of Gary, Indiana, a steel town, was named for him when it was founded in 1906...
, would acquire TC&I. This would effectively save Moore & Schley and avert the crisis. After the executives and board of U.S. Steel studied the situation and, recognizing a positive role they could play during the panic, they offered to either loan Moore & Schley $5 million, or buy TC&I for $90 a share. By 7 P.M. an agreement had not been reached and the meeting adjourned.
By then, J.P. Morgan was drawn into another situation. There was a major concern that the Trust Company of America and the Lincoln Trust could fail to open on Monday due to continuing runs. On Saturday evening 40–50 bankers had gathered at the library to discuss the crisis, with the clearing-house bank presidents in the East room and the trust company executives in the West room. Morgan and those dealing with the Moore & Schley situation had moved to the librarian’s office. There Morgan told his counselors that he would agree to help shore up Moore & Schley only if the trust companies would work together to bail out their weakest brethren. The discussion among the bankers continued late Saturday night but without any real progress. Then, around midnight, J.P. Morgan informed a leader of the trust company presidents of the Moore & Schley situation that was going to require $25 million, and that he was not willing to proceed with that unless the problems with the trust companies could also be solved. This indicated that the trust companies would not be receiving further help from Morgan and that they had to reach their own solution.
At 3 a.m. about 120 bank and trust company officials were assembled to hear a full report on the status of the failing trust companies. While the Trust Company of America was barely solvent, the Lincoln Trust Company was probably $1 million short of what it needed to pay depositors. As the discussions continued, the bankers realized that Morgan had locked them in the library and pocketed the key to force a solution, the type of tactic he had been known to use in the past. Morgan then entered the talks and told the trust companies that they must provide a loan of $25 million to save the weaker institutions. The trust presidents were still reluctant to act, but Morgan informed them that if they did not it would result in a complete collapse of the banking system. Through his considerable influence, at about 4:45 a.m. he persuaded the unofficial leader of the trust companies to sign the agreement, and the rest of them followed. With this assurance that the situation would be resolved, Morgan then allowed the bankers to go home.
On Sunday afternoon and into the evening, Morgan, Perkins, Baker and Stillman, along with U.S. Steel's Gary and
Henry Clay FrickHenry Clay Frick was an American industrialist and art patron, once known as "America's most hated man"...
, worked at the library to finalize the deal for U.S. Steel to buy TC&I and by Sunday night had a plan for acquisition. But, one obstacle remained: the anti-trust crusading President
Theodore RooseveltTheodore Roosevelt was the 26th President of the United States. He is well remembered for his energetic persona, his range of interests and achievements, his model of masculinity, and his "cowboy" image. He was a leader of the Republican Party and founder of the short-lived Bull Moose Party...
, who had made breaking up
monopoliesIn economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it...
a focus of his presidency.
Frick and Gary traveled overnight by train to the
White HouseThe White House is the official residence and principal workplace of the President of the United States. Located at 1600 Pennsylvania Avenue NW in Washington, D.C., it was built between 1792 and 1800 of white-painted Aquia sandstone in the late Georgian style and has been the residence of every...
to implore Roosevelt to set aside the principles of the
Sherman Antitrust ActThe Sherman Antitrust Act requires the United States Federal government to investigate and pursue trusts, companies and organizations suspected of violating the Act...
and allow—before the market opened—a company that already had a 60% market share to make a massive acquisition. Roosevelt's secretary refused to see them, yet Frick and Gary convinced
James Rudolph GarfieldJames Rudolph Garfield was an American politician, lawyer and son of President James Abram Garfield and First Lady Lucretia Garfield.-Early life:...
, the
Secretary of the InteriorThe United States Secretary of the Interior is the head of the United States Department of the Interior.The US Department of the Interior should not be confused with the concept of Ministries of the Interior as used in other countries...
, to bypass the secretary and allow them to go directly to the president. With less than an hour before markets opened, Roosevelt and
Secretary of StateThe United States Secretary of State is the head of the United States Department of State, concerned with foreign affairs. The Secretary is a member of the President's Cabinet and the highest-ranking cabinet secretary both in line of succession and order of precedence. The current Secretary of...
Elihu RootElihu Root was an American lawyer and statesman and the 1912 recipient of the Nobel Peace Prize. He was the prototype of the 20th century "wise man", who shuttled between high-level government positions in Washington, D.C...
began to review the proposed takeover and absorb the news of a potential crash if the merger was not approved. Roosevelt relented, and he later recalled of the meeting, "It was necessary for me to decide on the instant before the Stock Exchange opened, for the situation in New York was such that any hour might be vital. I do not believe that anyone could justly criticize me for saying that I would not feel like objecting to the purchase under those circumstances". When news reached New York, confidence soared. The
Commercial & Financial ChronicleThe Commercial & Financial Chronicle was a business newspaper in the United States founded by William Buck Dana in 1865. Published weekly, the Commercial & Financial Chronicle was deliberately modeled to be an American take on the popular business newspaper The Economist, which had been founded...
reported that "the relief furnished by this transaction was instant and far-reaching". The final crisis of the panic had been averted.
Aftermath
The panic of 1907 occurred during a lengthy economic contraction—measured by the
National Bureau of Economic ResearchThe National Bureau of Economic Research is a US private, nonprofit research organization dedicated to studying the science and empirics of economics, especially the American economy. It is "committed to undertaking and disseminating unbiased economic research among public policymakers, business...
as occurring between May 1907 and June 1908. The interrelated contraction, bank panic and falling stock market resulted in significant economic disruption. Robert Bruner and Sean Carr cite a number of statistics quantifying the damage in
The Panic of 1907: Lessons Learned from the Market's Perfect Storm. Industrial production dropped further than after any bank run before then, while 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3%. Immigration dropped to 750,000 people in 1909, from 1.2 million two years earlier.
Since the end of the
Civil WarThe American Civil War , also known as the War Between the States and several other names, was a civil war in the United States of America. Eleven Southern slave states declared their secession from the United States and formed the Confederate States of America...
, the United States had experienced panics of varying severity. Economists Charles Calomiris and Gary Gorton rate the worst panics as those leading to widespread bank suspensions—the panics of
1873The Panic of 1873 was the start of the Long Depression, a severe nationwide economic depression in the United States that lasted until 1879. It was precipitated by the bankruptcy of the Philadelphia banking firm Jay Cooke & Company on September 18, 1873...
,
1893The Panic of 1893 was a serious economic depression in the United States that began in 1893. This panic is sometimes considered a part of the Long Depression which began with the Panic of 1873, and like that of earlier crashes, was caused by railroad overbuilding and shaky railroad financing...
, and 1907, and a suspension in 1914. Widespread suspensions were forestalled through coordinated actions during both the
1884The Panic of 1884 was a panic during the Recession of 1882-85. Gold reserves of Europe were depleted and the New York City national banks, with tacit approval of the U.S.Treasury Department halted investments in the rest of the United States and called in outstanding loans. A larger crisis was...
and the
1890The Panic of 1890 was an acute depression that was less serious than other panics of the era precipitated by the near insolvency of the Baring Brothers Bank in London due mainly to poor investments in Argentina. The Bank of England bailed out the Baring Brothers which prevented a larger depression...
panics. A bank
crisis in 1896The Panic of 1896 was an acute economic depression in the United States that was less serious than other panics of the era precipitated by a drop in silver reserves and market concerns on the effects it would have on the gold standard. Deflation of commodities prices drove the stock market to new...
, in which there was a perceived need for coordination, is also sometimes classified as a panic.
The frequency of crises and the severity of the 1907 panic added to concern about the outsized role of J.P. Morgan which led to renewed impetus toward a national debate on reform. In May 1908, Congress passed the
Aldrich–Vreeland ActThe Aldrich-Vreeland Act of May 30, 1908, was passed in response to the Panic of 1907 and established the National Monetary Commission, which recommended the Federal Reserve Act of 1913....
that established the
National Monetary CommissionNational Monetary Commission was a study group created by the Aldrich Vreeland Act of 1908. After the Panic of 1907 American bankers turned to Europe for ideas on how to operate a central bank. Senator Nelson Aldrich, Republican leader of the Senate, personally led a team of experts to major...
to investigate the panic and to propose legislation to regulate banking. Senator Nelson Aldrich (
RThe Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the Grand Old Party or the GOP, despite being the younger of the two major parties. In the U.S...
–
RIRhode Island and Providence Plantations, more commonly referred to as Rhode Island , is a state in the New England region of the United States. It is the smallest U.S. state by area...
), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems.
Central bank
A significant difference between the European and U.S. banking systems was the absence of a
central bankA central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to a lend a government its currency...
in the United States. European states were able to extend the
supply of moneyIn economics, money supply or money stock, is the total amount of money available in an economy at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circulation and demand deposits....
during periods of low cash reserves. The belief that the U.S. economy was vulnerable without a central bank was not new. Early in 1907, banker
Jacob SchiffJacob Henry Schiff, born Jacob Hirsch Schiff was a German-born New York City banker and philanthropist, who helped finance, among many other things, the Japanese military efforts against Tsarist Russia in the Russo-Japanese War.From his base on Wall Street, he was the foremost Jewish leader in...
of
Kuhn, Loeb & Co.Kuhn, Loeb & Co. was a bulge bracket, investment bank founded in 1867 by Abraham Kuhn and Solomon Loeb. Under the leadership of Jacob H. Schiff, it grew to be one of the most influential investment banks in the late 19th and early 20th centuries, financing America's expanding railways and growth...
warned in a speech to the New York Chamber of Commerce that "unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history".
Aldrich convened a secret conference with a number of the nation's leading financiers at the
Jekyll Island ClubThe Jekyll Island Club was a private club located on Jekyll Island, on the Georgia coastline. It was founded in 1886 when members of an incorporated hunting and recreational club purchased the island for $125,000 from John Eugune du Bignon. The original design of the Jekyll Island Clubhouse, with...
, off the coast of
GeorgiaGeorgia is a state in the United States. One of the original Thirteen Colonies that revolted against British rule in the American Revolution, it had been the last of the Thirteen Colonies to be established, in 1733. Georgia was the fourth state to ratify the United States Constitution, on January...
, to discuss monetary policy and the banking system in November 1910. Aldrich and
A. P. AndrewAbram Piatt Andrew Jr. was a United States Representative from Massachusetts.-Biography:Born in La Porte, Indiana, he attended the public schools and the Lawrenceville School...
(Assistant Secretary of the Treasury Department),
Paul WarburgPaul Moritz Warburg was a Jewish-German-American banker and early advocate of the U.S. Federal Reserve system.- Early life :...
(representing Kuhn, Loeb & Co.),
Frank A. VanderlipFrank A. Vanderlip was an American banker. From 1897-1901, Vanderlip was the Assistant Secretary of Treasury for President of the United States William McKinley's second term, 1897-1901. In that office he negotiated with National City Bank a $200 million loan to the government to finance the...
(James Stillman's successor as president of the National City Bank of New York),
Henry P. DavisonHenry Pomeroy Davison was an American banker and philanthropist.-Biography:...
(senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), produced a design for a "National Reserve Bank".
ForbesForbes is an American publishing and media company. Its flagship publication, Forbes magazine, is published fortnightly. Its primary competitors in the national business magazine category are Fortune, which is also published fortnightly, and Business Week...
magazine founder
B. C. ForbesBertie Charles Forbes was a Scottish financial journalist and author who founded Forbes Magazine.-Early life:B.C. Forbes was born in New Deer, Aberdeenshire, in Scotland...
wrote several years later:
Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written.
The final report of the National Monetary Commission was published on January 11, 1911. For nearly two years legislators debated the proposal and it was not until December 22, 1913, that Congress passed the
Federal Reserve ActThe Federal Reserve Act is the act of Congress that created the Federal Reserve System, the central banking system of the United States of America, which was signed into law by President Woodrow Wilson.-Background:...
. President
Woodrow WilsonThomas Woodrow Wilson was the 28th President of the United States. A leading intellectual of the Progressive Era, he served as President of Princeton University from 1902 to 1910, and then as the Governor of New Jersey from 1911 to 1913...
signed the legislation immediately and the legislation was enacted on the same day, December 22, 1913, creating the
Federal Reserve SystemThe Federal Reserve System is the central banking system of the United States. It was created in 1913 by the enactment of the Federal Reserve Act, largely as a response to a series of financial panics or bank runs, particularly a severe panic in 1907...
.
Charles HamlinCharles Sumner Hamlin was an American lawyer and the first Chairman of the Federal Reserve.He was born in Boston, Massachusetts on August 30, 1861, and graduated from Harvard University in 1886. From 1893 to 1897 and again from 1913 to 1914 he was the Assistant Secretary of the Treasury. He twice...
became the Fed's first chairman, and none other than Morgan's deputy Benjamin Strong became president of the
Federal Reserve Bank of New YorkThe Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
, the most important regional bank with a permanent seat on the
Federal Open Market CommitteeThe Federal Open Market Committee , a component of the Federal Reserve System, is charged under United States law with overseeing the nation's open market operations. It is the Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply....
.
Pujo Committee
Although Morgan was briefly seen as a hero, widespread fears concerning
plutocracyPlutocracy is rule by the wealthy, or power provided by wealth. The combination of both plutocracy and oligarchy is called plutarchy.In a plutocracy, the degree of economic inequality is high while the level of social mobility is low...
and concentrated wealth soon eroded this view. Morgan's bank had survived, but the trust companies that were a growing rival to traditional banks were badly damaged. Some analysts believed that the panic had been engineered to damage confidence in trust companies so that banks would benefit. Others believed Morgan took advantage of the panic to allow his U.S. Steel company to acquire TC&I. Although Morgan lost $21 million in the panic, and the significance of the role he played in staving off worse disaster is undisputed, he also became the focus of intense scrutiny and criticism.
The chair of the House Committee on Banking and Currency, Representative
Arsène PujoArsène Paulin Pujo , was a member of the United States House of Representatives best known for chairing the "Pujo Committee", which sought to expose an anticompetitive conspiracy among some of the nation's most powerful financial interests.-Biography:Pujo practiced law in Louisiana, and was elected...
, (
DThe Democratic Party is one of the two major contemporary political parties in the United States, along with the Republican Party. It is the oldest political party in continuous operation in the United States and it is one of the oldest parties in the world. In the U.S...
–
La.The State of Louisiana is a state located in the southern region of the United States of America. Its capital is Baton Rouge and largest city is New Orleans. Louisiana is the only state divided into parishes, which are local governments equivalent to counties...
7thThe 7th Louisiana congressional district is located in southwestern Louisiana and contains the cities of Lake Charles, Sulphur, Lafayette, Opelousas and Crowley, Louisiana.The seat is currently held by Charles Boustany, a Republican....
) convened a special committee to investigate a "money trust", the
de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade, and found that the officers of
J.P. Morgan & Co.J.P. Morgan & Co. was a commercial and investment banking institution based in the United States founded by J. Pierpont Morgan and commonly known as the House of Morgan or simply Morgan. Today, J.P...
also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the
New York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in lower Manhattan, New York City, New York, USA. It is the largest stock exchange in the world by United States dollar value of its listed companies' securities...
was then estimated at $26.5 billion).
Although suffering ill health, J.P. Morgan testified before the Pujo Committee and faced several days of questioning from
Samuel UntermyerSamuel Untermyer , also known as Samuel Untermeyer was a Jewish-American lawyer and civic leader as well as a self-made millionaire. He was born in Lynchburg, Virginia but after the death of his father the family moved to New York where he studied law...
. Untermyer and Morgan's famous exchange on the fundamentally psychological nature of banking—that it is an industry built on trust—is often quoted in business articles:
- Untermyer: Is not commercial credit based primarily upon money or property?
- Morgan: No, sir. The first thing is character.
- Untermyer: Before money or property?
- Morgan: Before money or anything else. Money cannot buy it ... a man I do not trust could not get money from me on all the bonds in Christendom.
Associates of Morgan blamed his continued physical decline on the hearings. In February he became very ill and died on March 31, 1913—nine months before the "money trust" would be officially replaced as lender of last resort by the Federal Reserve.
In fiction
In October 1912,
Owen JohnsonOwen McMahon Johnson was an American writer best remembered for his stories and novels cataloguing the educational and personal growth of the fictional character Dink Stover....
commenced a serial novel about the Panic in
McClure'sMcClure's or McClure's Magazine was an American illustrated monthly periodical popular at the turn of the 20th century. It was often compared to The Atlantic Monthly. The latter magazine is still published.Founded by S. S...
, entitled the
Sixty-first Second. McClure's published many of the works of the muckrackers and other
progressivesIn U.S. history, the term progressivism refers to a broadly-based reform movement that reached its height early in the 20th century, generally considered to be left wing in nature. The initial progressive movement arose as a response to the vast changes brought by the Industrial Revolution...
, and Johnson's novel mirrors many of the criticisms that the progressives expressed concerning the Panic and the Money Trust in general. J. P. Morgan appears under the name of "Gunther." The scene at the Morgan Library, which is quite effectively drawn, is in Chapter XVIII. The novel was republished in book form by Frederick A. Stokes in 1913.