1907, the year J.P Morgan stopped the panic

In 1907, there was one of the most severe bank panics in the United States. In that time, these panics were set off by bank runs or the idea that depositors were going to run to the bank and withdraw all their deposits from the system. Banks do not hold a 100% reserve on the deposits they keep, so millions of clients waiting in line to take their money will certainly make any bank panic. This has not been nor will be the only bank panic in history; however what makes this particular panic interesting was that it was focused on the trust companies in New York City.

The incident that started this episode was when F. Augustus Heinze on October 16, 1907 attempted to corner the stock of United Copper Company, but failed. Despite his failure, he unwillingly unveiled an intricate network of linking executives across banks, brokerage houses, and trust companies in New York City.

If the economy had been under normal financial conditions, this incident might not have caused any panic; but the situation was that the economy had been slowing down since earlier that year, and interest rates on credits had been rising since the previous year. The Bank of England and other European credit markets had also been raising its bank rates meaning that the regular seasonal inflows of foreign gold were not entering the country. And to top things of, this was within the National Banking Era in which there was no Federal Reserve System to save the day.

Run on 19th Ward Bank, ca. 1907-1914_J.P Morgan_financial titans_patrick dwyer merrill lynch
Image courtesy of pingnews.com at Flickr.com

When Heinze’s attempted scheme was made public, he was forced to resign from the presidency of Mercantile National Bank. Then when his involvement in the banking business was linked to one of his associates, C.F. Morse, who controlled 3 national banks directly and was director of 4 others, depositors began runs on most of these banks. However, the New York Clearinghouse, a private organization to centralize check clearing, offered to support Mercantile and the other banks if Heinze and Morse retired from New York banking altogether. So on Monday October 21, Mercantile National opened for business under new management and the runs on these banks stopped.

But that was only the calm before the storm. On Monday afternoon, the National Bank of Commerce announced that it would stop clearing checks for the Knickerbocker Trust Company, the third largest trust in New York City, after having heard of Charles Barney’s involvement in Heinze’s copper corner. This was interpreted by the depositors at Knickerbocker as an alarming sign of no confidence. And on October 22, just after noon Knickerbocker had undergone a three hour run and paid out $8 million in cash, which forced them to suspend operations immediately. Barney was also a member of the board of directors of Trust Company of America, which led to another series of runs to this other company, which within the two week run span paid out a total of $47.5 million in deposits.

Facing a serious threat to the New York money market, five leading trust companies formed a committee to assist the trusts companies who needed cash. But not all trusts were willing to cooperate so they failed to gather enough cash to provide relief to companies facing unexpected runs. So they called for someone who could help, J.P. Morgan.

J.P. Morgan & Company's_financial titans_patrick dwyer merrill lynch
Image courtesy of Aidan Wakely-Mulroney at Flickr.com

Morgan, along with James Stillman of National City Bank, George Baker of First National Bank and Benjamin Strong (who would later become president of the Federal Reserve Bank of New York ) of Banker’s Trust Company decided to channel about $3 million to Trust Company to assist them that Wednesday in an attempt to mitigate the collapse of the trusts. Thanks to this, the company was able to open for business the next day.

This decision encouraged several other sources to aid the trusts such as J.D. Rockefeller, who deposited $10 million with the Union Trust, and Secretary of the Treasury George Cortelyou deposited $25 million of the Treasury’s funds in national banks on the 24th. By mid-November the U.S. treasury had deposited $37.6 million and provided $36 million in small bills to meet runs in New York national banks, leaving the Treasury’s working capital in just $5 million.

By Thursday October 24th call money (money lent for the purchase of stock equity, with the stock itself serving as collateral for the loans) was practically unavailable, and exchange president Ransom H. Thomas called Morgan again to provide the funds because he was in control of most of the available funds. The call money exchange which had opened at 6% that morning closed at 100% that afternoon. And again on October 25, about $10 million more came from the Morgan group, $2 million from First National, and $500,000 from Kuhn, Loeb, and Company to aid the stock market.

All through the stock exchange crisis, Morgan’s efforts helped support both Trust Company of America and Lincoln Trust. Morgan also convinced other trust presidents to support a $25 million loan for these companies. And on November 4, the panic finally began to ease when Morgan managed to get the trust company presidents to form a consortium to support trust companies facing runs.

At that time, without a central bank, J.P. Morgan & Co was the only company to have enough experience and authority to act. From his private library, Morgan helped save several trust companies and a leading brokerage house from insolvency, bailed out New York City and rescued the New York Stock Exchange.

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