Panic of 1907
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The Panic of 1907, also known as the 1907 Bankers' 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 retraction of loans by some banks that began in New York and soon spread across the nation, leading to the closings of banks and businesses. The 1907 panic 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, one being J.P. Morgan, 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.
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[edit] Aftermath
Early in 1907, Jacob Schiff of Kuhn, Loeb & Co., in a speech to the New York Chamber of Commerce, warned 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."
By February 1908, confidence in the economy was restored.
In May 1908, Congress passed the Aldrich-Vreeland Act which established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking.
A meeting at Jekyll Island in November 1910 may have hastened the creation of the Federal Reserve. Following the Panic of 1907, banking reform became a major issue in the United States. Senator Nelson Aldrich, (R-RI) the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems. Upon his return, he brought together many of the country's leading financiers to the Jekyll Island Club to discuss monetary policy and the banking system, an event which some say was the impetus for the creation of the Federal Reserve.
On the evening of November 22 1910, Sen. Aldrich and A.P. Andrews (Assistant Secretary of the Treasury Department), Paul Warburg (a naturalized German representing Kuhn, Loeb & Co.), Frank A. Vanderlip (president of the National City Bank of New York), Henry P. Davison (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), left Hoboken, New Jersey on a train in view of a group of confused reporters, who were wondering why these bankers, representing about one-sixth of the world's wealth, were gathering at this particular place and time and leaving together.
Forbes magazine founder Bertie Charles Forbes 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 hundred 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 utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York’s ubiquitous reporters had been foiled... Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry... Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.[1]
In 1913, the National Monetary 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.
[edit] See also
[edit] References
- ^ Griffin, G. Edward (1998). The Creature from Jekyll Island : A Second Look at the Federal Reserve. American Media. ISBN 0-912986-21-2.
- Carosso, Vincent P (1987). The Morgans: Private International Bankers, 1854-1913. Cambridge: Harvard University Press. ISBN 0674587294.
- Friedman, Milton; Jacobson Schwartz, Anna (1963). A Monetary History of the United States: 1867-1960. Princeton: Princeton University Press.
- Moen, Jon; Tallman, Ellis (1990). "Lessons from the Panic of 1907". Federal Reserve Bank of Atlanta Economic Review 75: 2-13.
- Moen, Jon; Tallman, Ellis (1992). "The Bank Panic of 1907: The Role of the Trust Companies". The Journal of Economic History 52 (3): 611-630.
- Sprague, Oliver MW (1908). "The American Crisis of 1907". The Economic Journal 18: 353-372.
[edit] External links
- Panic of 1907 at National Public Radio
- F. Augustus Heinze and the Panic of 1907
- Account of the Panic by "The Daily Reckoning"
- Moen, Jon. "Panic of 1907". EH.Net Encyclopedia, edited by Robert Whaples. August 15, 2001. Online Version
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