The Panic of 1907 – also
known as the 1907 Bankers' Panic or Knickerbocker Crisis – was a
United States financial crisis that took place over a three-week period
starting in mid-October, when the New York Stock Exchange fell almost 50% from
its peak the previous year. Panic occurred, as this was during a time of
economic recession, and there were numerous runs on banks and trust companies.
The 1907 panic eventually spread throughout the nation when many state and
local banks and businesses entered bankruptcy. Primary causes of the run
included a retraction of market liquidity by a number of New York City banks and a loss of confidence
among depositors, exacerbated by unregulated side bets at bucket shops. The
panic was triggered by the failed attempt in October 1907 to corner the market
on stock of the United Copper Company. 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 Company—New York City 's
third-largest trust. The collapse of the Knickerbocker spread fear throughout
the city's trusts as regional banks withdrew reserves from New York City banks. Panic extended across
the nation as vast numbers of people withdrew deposits from their regional
banks.
Wall Street during the panic in October, 1907
The panic might have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money, and convinced otherNew
York bankers to do the same, to shore up the banking
system. This highlighted the impotence of the nation's Independent Treasury
system, which managed the nation's money supply, yet was unable to inject
liquidity back into the market. By November, the financial contagion had
largely ended, only to be replaced by a further crisis. This was due to the
heavy borrowing of a large brokerage firm that used the stock of Tennessee
Coal, Iron and Railroad Company (TC&I) as collateral. 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-monopolist president Theodore
Roosevelt. The following year, Senator Nelson W. Aldrich, father-in-law of John
D. Rockefeller Jr., established and chaired a commission to investigate the
crisis and propose future solutions, leading to the creation of the Federal
Reserve System.
When the chaos began to shake the confidence ofNew York 's
banks, the city's most famous banker was out of town. J. P. Morgan, the
eponymous president of J.P. Morgan & Co., was attending a church convention
in Richmond , Virginia . Morgan was not only the city's
wealthiest and most well-connected banker, but he had experience with other
similar financial crises—he had helped rescue the U.S. Treasury during the Panic
of 1893. 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 brownstone 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 and decided it was insolvent, so they 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 ofAmerica asked
Morgan for assistance. That evening Morgan conferred with George F. Baker, the
president of First National Bank, James Stillman of the National City Bank of
New York (the ancestor of Citibank), and the United States Secretary of the
Treasury, George B. Cortelyou. 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 ofAmerica ,
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. Rockefeller, the wealthiest man in the United States ,
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 Press, and told him that he would pledge
half of his wealth to maintain U.S.
credit.
Despite the infusion of cash, the banks ofNew York
were reluctant to make the short-term loans they typically provided to
facilitate daily stock trades. Prices on the exchange began to crash, owing to
the lack of funds to finance purchases. At 1:30 p.m. Thursday, October 24,
Ransom Thomas, the president of the New York Stock Exchange, 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 sales. The volume of trading on Friday was 2/3 that of Thursday. The markets again narrowly made it to the closing bell.
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 Rothschild, 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.
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 flush with cash, a sense of order returned toNew 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 ofNew
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
Mayor 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.
Although calm was largely restored inNew 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 shares of the Tennessee Coal,
Iron and Railroad Company (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
firm's stock. If that occurred it would send TC&I shares plummeting,
devastating Moore
and Schley and triggering further panic in the market.
To avert 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 Carnegie and Elbert Gary, would acquire TC&I. This would effectively save Moore & Schley and avert the crisis. The executives and board of U.S. Steel studied the situation and 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, Morgan was drawn into another situation. There was deep concern that the Trust Company ofAmerica and the
Lincoln Trust might fail to open on Monday due to continuing runs by
depositors. On Saturday evening 40–50 bankers 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 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 into Saturday
night but without much progress. Around midnight, J. P. Morgan informed a
leader of the trust company presidents that keeping Moore & Schley afloat
would require $25 million, and he would not commit those funds unless the
problems with the trust companies could also be resolved. The trust company
executives understood they would not receive further help from Morgan; they
would have to finance any bailout of the two struggling trust companies.
At 3 a.m. about 120 bank and trust company officials assembled to hear a full report on the status of the failing trust companies. While the Trust Company ofAmerica was barely solvent, the
Lincoln Trust Company was probably $1 million short of what it needed to cover
depositor accounts. As discussion ensued, the bankers realized that Morgan had
locked them in the library and pocketed the key to force a solution, the sort
of strong-arm tactic he had been known to use in the past. Morgan then entered
the talks and advised 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 lead
to 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 remainder of the bankers
followed. Having received these commitments, Morgan 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 Frick, 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 Roosevelt, who had made breaking up monopolies a focus of his presidency.
Frick and Gary traveled overnight by train to the White House to imploreRoosevelt
to set aside the application of the Sherman Antitrust Act and allow—before the
market opened—a company that already held a 60% share of the steel market to
make a large acquisition. Roosevelt 's
secretary refused to see them, but Frick and Gary convinced James Rudolph
Garfield, the Secretary of the Interior, to bypass the secretary and arrange a
meeting with the president. With less than an hour before the Stock Exchange
opened, Roosevelt and Secretary of State Elihu Root began to review the
proposed takeover and appreciate the crash likely to ensue if the merger was
not approved. Roosevelt relented; 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 Chronicle reported that "the relief furnished by this
transaction was instant and far-reaching". The final crisis of the panic
had been averted.
Wall Street during the panic in October, 1907
The panic might have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money, and convinced other
J.P. Morgan
When the chaos began to shake the confidence of
Morgan and his associates examined the books of the Knickerbocker Trust and decided it was insolvent, so they 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
As a run began on the Trust Company of
Despite the infusion of cash, the banks of
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 sales. The volume of trading on Friday was 2/3 that of Thursday. The markets again narrowly made it to the closing bell.
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.
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 flush with cash, a sense of order returned to
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
Although calm was largely restored in
To avert 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 Carnegie and Elbert Gary, would acquire TC&I. This would effectively save Moore & Schley and avert the crisis. The executives and board of U.S. Steel studied the situation and 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, Morgan was drawn into another situation. There was deep concern that the Trust Company of
At 3 a.m. about 120 bank and trust company officials assembled to hear a full report on the status of the failing trust companies. While the Trust Company of
On Sunday afternoon and into the evening, Morgan, Perkins, Baker and Stillman, along with U.S. Steel's Gary and Henry Clay Frick, 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 Roosevelt, who had made breaking up monopolies a focus of his presidency.
Frick and Gary traveled overnight by train to the White House to implore