Confronting the panic of an economy in crisis

The history of economics and finance of the United States of America has experienced ups and downs, but the involvement of some people has allowed the bad times are overcome. This is the case of a family that had three generations of bankers, businessmen and visionaries with the ability to cope with the crisis to reach prosperity.

Junius Spencer Morgan was born in April 14th in 1813, he was from Holyoke (Massachusetts), and passed away in April 8th in 1890. He was an American businessman and banker, he is mostly known on the financial market, because he founded J.S. Morgan & Co. bank. He was the father of John Pierpont Morgan. At his death, he left an estimated at about  $ 10 million fortune.

Morgan began his business career in 1829 entering at the service of Alfred Welles in Boston. He had inherited the wealth of his father, Joseph Morgan, and showed great ability for business. Soon he was invited to become a partner in the house of JM Beebe & Co., one of the largest retailers in Boston and one of the largest importers of dry goods and jobbing houses in the country. After a few years, he met George Peabody, the well-known London banker. Shortly after the meeting, in 1854, Morgan entered the thriving business of Peabody, George Peabody & Co. as a partner. Ten years later, in 1864, Morgan would become owner of Peabody and changed its name to J.S. Morgan & Co. During the Civil War the United States, the firm was named financial representative in England of the US government.

The Commercial and financial chronicle_J.P.Morgan and co. patrick dwyer_american financial titans
Image courtesy of Internet Archive Book Images at Flickr.com

J.S. Morgan & Co. came to real prominence in 1871 when they undertook the issue of a French war loan during the Franco-Prussian War. On the death of Junius in 1890, Pierpont became the senior partner of the London firm. By 1910 all the firm’s Morgan family partners were resident in the US and to reflect this the London partnership was restructured with J. P. Morgan & Co. in the US assuming a 50% ownership of the London business which was reconstituted as Morgan Grenfell & Co. in recognition of the senior London-based partner, Edward Grenfell.

To find opportunities in crises

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, the 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.

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 New York bankers to do the same, to shore up the banking system. At the time, the United States did not have a central bank 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.

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

When the chaos began to shake the confidence of New 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.

Take a look to this article to learn about the legacy of a family that had a specialty of seeing opportunities in the crisis.

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