The Panic of 1907

Today marks the 107th anniversary of the start of the Panic of 1907. Gary Alexander of Navellier Marketmail describes the tumultuous week:

This Week in History: The Panic of 1907

Here’s a day-by-day rundown of the week that made Mark Twain’s “October” prediction come true:

On Monday, October 21, 1907, depositors staged a run on Knickerbocker Trust Company, the third-largest mega-bank in New York City. John Steele Gordon wrote (in “The Great Game: The Emergence of Wall Street”), “Bedlam reigned as depositors fought to get to a teller and withdraw their assets from the bank’s imposing new headquarters on Fifth Avenue.” No luck. “The bank closed the next day after an auditor found that its funds were depleted beyond hope. The bank’s president, Charles Barney, shot himself several weeks later, prompting some of the bank’s outstanding depositors to commit suicide.”

On Tuesday, October 22, the president of Knickerbocker Trust Company bravely opened the doors of his troubled bank, but that was not a wise move. Within hours, depositors had withdrawn $8 million. By afternoon, Knickerbocker Trust Company announced its insolvency and closed its doors for good.

On October 23, lower Manhattan streets were choked with anxious bank depositors lined up in front of even the soundest of banks. On this day, the Trust Company of America looked suspect. By 1:00 p.m., they had only $1.2 million in cash on hand. By 1:20, it was down to $800,000. By 1:45, they had $500,000 and at 2:15 they were down to $180,000. About then, bank president Oakleigh Thorne (what a great name!) rushed over to J.P. Morgan’s office for help. When Morgan was convinced that the Trust Company was otherwise sound, he said, “Then this is the place to stop the trouble,” and he transferred enough cash to tide the bank over for the rest of the day. Morgan deposited roughly $30 million in major New York banks and told those banks to lend the money out to instill confidence among depositors.

On October 24, New York Stock Exchange (NYSE) officials came to Morgan and said, in effect, “Please make enough cash available to our brokers to meet their obligations or we will close the stock exchange.” Morgan called all the major bankers to his office. Within five minutes, he raised $27 million. Then, he said that any bears would be “dealt with.” That night, he called every important banker in the city to his private library on East 36th Street. After hours of indecision, the bankers came up with a plan to use clearinghouse certificates instead of cash to settle the transactions. The effect was to increase the money supply by a then-huge $84 million. As quickly as that, the Panic of 1907 was over.

On October 25, markets were back in good order, after Morgan’s defining moment. Hs partners compared Morgan’s rescue efforts to great generalship in a war. Even President Theodore Roosevelt, who railed against “the malefactors of great wealth” during the early months of 1907, said, “Those substantial businessmen acted with wisdom and public spirit.” But Morgan was 68 and in bad health. He didn’t want to do this again. He argued that Washington, DC should handle the next panic…and so the Fed was born.

P.S. The Dow Jones index kept falling, reaching a low of 38.83 on November 15, 1907, a 48.5% decline from 75.45 at the beginning of 1906. But the Dow almost fully recovered by late 1909, peaking at 73.64.

Posted by on October 21st, 2014 at 9:32 am


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