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FINANCIAL PANIC OF 1907

Economic Reckoning

The relatively prosperous first years of the century came to a halt in 1907 when drains on the money supply revealed a weak national financial infrastructure of banking and credit and precipitated an economic crisis that lasted nearly a year. The money supply was low because of the lack of cash flow from farmers due to a late season and was further drained by overspeculation in copper, money being diverted to the Russo-Japanese War of 1905, the rebuilding of San Francisco after the 1906 earthquake (exacerbated by huge insurance payouts), and the nationwide railroad expansion program. After the stock market fell drastically in March, prices soared, wages decreased, unemployment rose, and many businesses, including banks, failed.

The First Bank Failure

The first bank in trouble was Mercantile National, whose owner, F. Augustus Heinze, was a primary figure in the copper overspeculation. Since there was no central banking system to assist troubled financial institutions in a crisis, the bank turned for assistance to the Clearing House Association, a banking agency that cleared checks. After the bank's collapse on Wednesday, 16 October, the Clearing House Association demanded the resignation of Heinze and those who held controlling shares in the bank. The Clearing House Association also investigated the financial stability of the institution. Although the bank was found to be solvent, the panic had already begun by the time the investigation ended.

Morgan Monitors Situation

J. P. Morgan, founder of J. P. Morgan and Company, was attending a conference of the Episcopal Church in Richmond, Virginia, when the panic began. He was kept apprised of the situation in the early stages and intentionally stayed until the church convention was nearly over in order to prevent further alarm in the press that might affect the already weakening financial sector. Returning to New York by train, Morgan spent the weekend studying the situation and meeting with prominent financial leaders at his library on East Thirty-sixth Street. The situation was becoming increasingly critical as many banks and trusts were already calling in loans to back up cash reserves. By the end of the weekend the media had converged on the library, where they stayed throughout the crisis, pursuing every arriving and departing visitor for information.

Morgan Intervenes

On Monday, 21 October, Morgan asked his daughter, Louisa Morgan Satterlee, to put together a team of bankers whom he could trust for advice as examiners. Four of the members were Thomas W. Joyce of the House of Morgan, Richard Trimble of the United States Steel Corporation, Henry P. Davison of First National Bank, and Benjamin Strong of Bankers Trust Company. Morgan used this advisory team at various points throughout the crisis to gather, interpret, and convey critical data. Morgan went to the Knickerbocker Trust Company of New York, the third largest bank in New York City, which appeared to be in the most trouble. A run on the deposits had already begun that morning, and the long lines served only to induce more anxiety, creating even longer lines as the panic spread. Imminent failure loomed after an examination revealed that only 5 percent of the bank's deposits were held in reserve. The president, Charles T. Barney, was linked to the copper-speculating bankers at the failed Mercantile National and asked to resign. (Barney suffered a nervous breakdown over his resignation and committed suicide on 14 November.) An emergency meeting of the Knickerbocker's board was suggested by Morgan to develop a plan to prevent failure, but by the end of the next day the bank had failed, and panic spread throughout the city. The superintendent of banks for the state of New York, Luther W. Knott, resigned after the Knickerbocker failure, realizing the impending doom in the industry. Morgan quickly attempted to set up a group of bankers who would provide aid to carry the weaker financial institutions through the crisis, but other bankers resisted his request.

The Panic Deepens

By Wednesday, 23 October, the second largest trust company, Trust Company of America, was in deep trouble with a run on its deposits. Again Morgan assembled bankers and requested aid, finally receiving it from two national banks, First National and National City, which prevented the bank's failure. Although Morgan publicly urged depositors to keep their funds in the banks, other companies did not fare so well that day: Westinghouse failed, the Pittsburgh Stock Exchange was in suspension, and the panic took on national proportions as western banks withdrew funds vested in New York banks. But some progress had been made in abating the panic. That evening Morgan realized that it was the trust companies, more than the banks, that faced potential disaster.

The Trusts

By law trust companies could engage in banking but were not subject to the strict regulations with which the national banks had to comply, leaving them more vulnerable to the threat posed by this period of instability and collapse. Meeting with the presidents of the trust companies on Thursday, Morgan urged them to do what they had failed to do only the day before: set up a fund to help institutions through the crisis. They agreed to put up $8.25 million, and Morgan committed to raise __BODY__.75 million for the fund. John D. Rockefeller also agreed to put up $10 million to aid the trust companies. The Bank of England contributed $10 million, which arrived with much fanfare on 4 November via the new ship Lusitania.

The Long Week

On the same day Morgan met with the trust company presidents, a fall in the stock market nearly caused it to close its doors for the day. By midday there was no money to purchase stocks, and thus there were no sales. Morgan asked the president of the exchange, R. H. Thomas, to keep it open to prevent further panic and managed to procure additional loans from the national banks as lending power for the exchange, which prevented several firms from failing. That evening the talk in the Morgan library centered on the issue of Clearing House Association certificates, a type of temporary loan, that would allow the banks and trusts to stay solvent. These certificates had been issued in previous panics that had created monetary scarcity. Morgan was against the idea, but they were issued and went into effect on 28 October. That same week President Theodore Roosevelt issued a statement of confidence that the panic was temporary and prosperous times would soon return, and Morgan's followers devised plans to handle the press, which had exacerbated the panic in the previous weeks. Every night during the week of 21 October the bankers met at Morgan's library with the objective of planning to get through the next day. When the end of the week came with only eight failures, the press prematurely reported that the crisis was over.

New Problems

The next week on Tuesday, 29 October, Morgan promised the mayor of New York $30 million in bonds at 6 percent interest to keep the city solvent.Then on 31 October the foreign exchange created a shift in gold from export to import. To restore the import-export balance, grain and cotton shipments to Europe had to be sent immediately. Presidential intervention was required to allow railroads to give favor to one commodity over another, a practice that was otherwise illegal. The following weekend, 2-3 November, the brokerage firm of Moore and Schley ran into credit problems and verged on a collapse that would create problems for the stock market and other weak financial firms.

The Locked Library

To save Moore and Schley, a complicated plan involving the sale of Tennessee Coal and Iron to U.S. Steel was presented to Morgan, who set about to pledge $25 million of his own firm's money to insure the sale. However, his offer was contingent on the trust company heads devising a plan to raise an additional $25 million as emergency funds. With the trust company presidents in the west room of his library and the national bank leaders in the east room, Morgan locked them inside until a viable plan was developed. The trusts' leaders hesitated to commit additional funds without conferring with their directors. Finally, Morgan confronted them with financial documents that proved they were solvent enough to develop the fund. At 4:45 A.M. on 4 November the trust presidents signed the document Morgan had drawn up and were released from the library. The next day the chairman of U.S. Steel, Elbert H. Gary, insisted on President Roosevelt's approval of the terms of the sale to avoid violating antitrust legislation. Roosevelt, who had been hunting in Louisiana during much of the panic, agreed to the antitrust waiver, and Gary called Morgan from the White House to inform him. Moore and Schley had enough money to get them through their credit problems. This news was timed perfectly, as the announcement of the sale was made just as the stock exchange opened, which helped the market stabilize.

Resolution

Morgan's strategic and financial intervention with other capitalists from the private sector and the infusion of funds from the U.S. Treasury finally eased the panic. Confidence was finally restored, though it took several weeks for the crisis to subside fully. Despite some failures, in the end twelve teetering financial institutions were saved. Fortunately, no large banks failed, and the subsequent minor decline in the economy had no major lasting financial effects. In addition to the work of Morgan and his many associates, the support of Treasury Secretary George B. Cortelyou and President Roosevelt were instrumental in resolving the crisis.

Reform

The crisis of 1907 was severe enough that changes in the national financial structure were implemented to avert future panics. The first congressional act passed to correct deficiencies in the banking system was the Aldrich-Vreeland Act in May 1908, which authorized banks to issue bonds based on securities other than federal bonds while imposing a 10 percent tax on them. The aftermath of the crisis also led to the establishment of the National Monetary Commission in 1908, a precursor to the Federal Reserve Bank, which effectively centralized the banking industry in 1913. The United States had been a debtor nation in its early history because of the economic requirements entailed in building a nation, and revamping the financial infrastructure after the Panic of 1907 was critical to the emergence of America as a world financial power and a creditor nation during World War I.