Panic of 1907
The Panic of 1907, also known as the 1907 Banker's Panic, was a financial crisis in the United States. The stock market fell nearly 50% from its peak in 1906, the economy was in recession, and there were numerous runs on banks and trust companies. Its primary cause was a credit crunch that began in New York and soon spread across the nation, leading to the closings of banks and businesses. The severity of the downturn was such that it eventually led the United States Congress to form the Federal Reserve System in 1913. It was the fourth panic in 34 years.
One of the contributing factors of the Panic involved F. Augustus Heinze and his bank, Knickerbocker Trust Company. Heinze copied the speculation tactics of Charles W. Morse, who had obtained control of the Bank of North America and other banks to float consolidations and other schemes. In 1906, Heinze sold his shares in Montana copper mines for $12 million. He then moved to New York, bought Knickerbocker Trust and became a director in a national financial chain. Banking industry leaders, threatened by the developing trusts, staged a financial attack on Heinze's Knickerbocker Trust. Their motive was to sway public and congressional opinion against trusts.
In March 1907, over-expansion and poor speculation led to a stock market crash. Money became extremely tight. A second crash occurred in October 1907. This time, the crash was directly precipitated by Heinze's brothers, who had used money borrowed from Knickerbocker Trust in a failed attempt to corner United Copper. In the wake of the crash, Heinze was forced to resign as bank president. On October 21, the National Bank of Commerce ceased to honor checks of Knickerbocker Trust, causing a run on the Knickerbocker Trust. By the end of October 22, the National Bank of North America had failed and runs were sparked on nearly every trust in New York.
To bring relief to the situation, United States Secretary of the Treasury George B. Cortelyou earmarked $35 million of Federal money to quell the storm. Complete ruin of the national economy was averted when J.P. Morgan stepped in to meet the crisis. Morgan organized a team of bank and trust executives. The team redirected money between banks, secured further international lines of credit, and bought plummeting stocks of healthy corporations. Within a few weeks the panic passed, with only minimal effects on the country.
By February 1908, confidence in the economy was restored.
In May, Congress passed the Aldrich-Vreeland Act which established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking. In 1913, the commission recommended the adoption of the Federal Reserve Act, which mandated the creation of a central banking system to dampen the effects of future panics.
References
- Moen, Jon and Ellis Tallman. "Lessons from the Panic of 1907." Federal Reserve Bank of Atlanta Economic Review 75 (May/June 1990): 2-13.
- Carosso, Vincent P. The Morgans: Private International Bankers, 1854-1913. Harvard University Press, 1987.
- Friedman, Milton, and Anna 1. Schwartz. A Monetary History of the United States: 1867-1960 Princeton University Press, 1963.
- Moen, Jon, and Ellis W. Tallman. "The Bank Panic of 1907: The Role of the Trust Companies." Journal of Economic History 52 (September 1992): 611-630.
- Moen, Jon. "Panic of 1907". EH.Net Encyclopedia, edited by Robert Whaples. August 15, 2001. online version
- Sprague, Oliver M. W. "The American Crisis of 1907." The Economic Journal 18 (September 1908): 353-72.