Panic of 1907
The Panic of 1907, also known as the 1907 Banker's Panic, was a financial crisis in the United States. It primarily affected bankers and had relatively little impact on most people, but it underscored the need for massive reform of the banking system, which was accomplished by the creation of the Federal Reserve System in 1913.
The stock market fell nearly 50% from its peak in 1906, and there were numerous runs on banks and trust companies. Its primary cause was a credit crunch that began on Wall Street and soon spread across the nation, leading to the closings of banks and businesses. It was the fourth panic in 34 years, and the first since the much worse Panic of 1893. Unlike 1893 it did not throw the nation into a depression.
One of the contributing factors of the Panic involved F. Augustus Heinze and his New York bank, Knickerbocker Trust Company. In March 1907, over-expansion and poor speculation led to a stock market crash. It became difficult to borrow large sums. 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 a copper company. On October 21, the National Bank of Commerce ceased to honor checks of Knickerbocker Trust, causing a run on the latter. On 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, Treasury Secretary George B. Cortelyou earmarked $35 million of Federal money to quell the storm. Complete ruin of the national economy was averted when banker 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.