The Panic of 1907

The San Francisco earthquake of 1906 had drained gold from New York to pay insurance claims, leaving the money market tight for a year. Into that tightness stepped F. Augustus Heinze, whose attempt to corner the stock of United Copper collapsed in mid-October 1907.

The corner’s failure would have been a private embarrassment except that Heinze was connected to a chain of banks and, crucially, to the Knickerbocker Trust Company — the third largest trust in New York. Trust companies took deposits like banks but held far smaller reserves, and lent aggressively against stock collateral. When depositors learned of the connection, they queued. Knickerbocker paid out $8 million in three hours and suspended.

The United States had no central bank. What it had was J. Pierpont Morgan, then seventy, who set up in his library and ran the rescue personally: auditing trusts overnight to decide which were solvent, extracting pooled money from bankers he locked in a room until they agreed, and directing it to the institutions that could be saved. The Treasury deposited funds and followed his lead.

It worked, and that was the scandal. The country had been rescued by a private citizen’s judgment, with no accountability and no successor. Congress passed an emergency currency act in 1908 that created the National Monetary Commission, and the Commission’s work produced the Federal Reserve Act of 1913. The panic that Morgan stopped is the reason America built an institution to do it next time — the institution that, twenty-two years later, would decline to.

What it cost

The rescue held the banks together; it did not spare the country the contraction. Moen and Tallman, writing for the Federal Reserve, put industrial output down 17% in 1908 and real GNP down 12%, a fall exceeded only by the Great Depression, with the real sector back on its feet in a little over a year. What broke in the meantime was the ordinary business of getting hold of cash.

• 2 in 3 American cities of more than 25,000 people whose banks restricted cash payments in the autumn of 1907; in 36 of them the banks agreed a fixed ceiling on what any customer could take out, running from $10 to $300 A. Piatt Andrew, Substitutes for Cash in the Panic of 1907, Quarterly Journal of Economics, August 1908, pp.501–502
• 2.8% → 8.0% US unemployment in 1907 and 1908 on Lebergott’s series (2.76% and 7.96%); Romer’s filtered revision of the same data gives a smaller jump, 3.57% to 6.17% Romer, Spurious Volatility in Historical Unemployment Data, Journal of Political Economy, 1986, Table 9
• 395,073 emigrant aliens who left the United States in the year to 30 June 1908, against 782,870 immigrants admitted; departures fell to 225,802 the following year, and the Commissioner-General put the surge down to men out of work going home Annual Report of the Commissioner-General of Immigration for the fiscal year ended 30 June 1908, and the corresponding report for 1909

When the banks stopped paying out cash, employers issued their own. In Pittsburgh firms drew some $47 million of pay checks on their banks in denominations as small as one and two dollars and handed them to their workers in place of wages. Shops, stores and places of amusement near where they were issued generally took them. At the height of it the clearing-house banks put on extra clerks and worked until ten at night, sorting checks that came in by the basketful.

What followed

The Knickerbocker Trust Company reopened in March 1908 after an infusion of $2.4 million in new capital. Charles T. Barney, the president its own board had dismissed on 21 October over his connection to Morse, shot himself on 14 November 1907. No administration fell over the panic.

Moen and Tallman, The Panic of 1907, Federal Reserve History, and its endnotes

Phases on show: boomdistresspanic