Context
The Panic of 1907 represents the last major financial crisis in the United States to be resolved through the intervention of a private individual rather than a central bank. The crisis exposed the fundamental vulnerability of the American financial system: its stability depended entirely on the willingness and ability of one elderly banker to act.
The panic originated when Otto Heinze and Charles W. Morse attempted to manipulate the stock of United Copper Company in October 1907. When the scheme failed, the banks associated with Heinze and Morse faced immediate runs. The contagion spread as depositors, unsure which institutions were exposed, rushed to withdraw funds from trust companies throughout New York City. Trust companies operated with fewer regulations and lower reserves than traditional banks, making them especially vulnerable.
The Panic
J. Pierpont Morgan, then seventy years old and semi-retired, assumed the role of lender of last resort, organizing a consortium of bank presidents to provide the liquidity necessary to stop the contagion. The crisis unfolded over two terrifying weeks in which Morgan personally decided which institutions would live and which would die.
Morgan’s crisis management relied on his personal prestige and the physical marshaling of resources. When the Knickerbocker Trust collapsed after a massive run, Morgan determined that the Trust Company of America was solvent and decided to support it, drawing a “line in the sand.” He raised $25 million from bank presidents in less than fifteen minutes to keep the New York Stock Exchange open. In a famous all-night session at his private library, Morgan locked the doors and refused to let trust company presidents leave until they pledged a $25 million support pool.
Consequences
The event demonstrated the fragility of the American banking system and the danger of relying on a single private citizen to guarantee its stability. Morgan’s ability to “lock the doors” and force financial leaders into agreements at his private library became legendary, but it also became politically untenable in a developing democracy. The panic served as the immediate catalyst for the National Monetary Commission and the subsequent passage of the Federal Reserve Act of 1913.
The crisis also revealed the systemic risks posed by trust companies—lightly regulated financial institutions that competed with banks. The lesson that financial stability requires formal institutional arrangements, rather than private ad hoc intervention, shaped American monetary policy for the next century.
Key Developments
- October 14, 1907: The failed corner of United Copper Company stock by Otto Heinze and Charles W. Morse begins, causing their affiliated banks to face immediate runs.
- October 19, 1907: J.P. Morgan rushes back to New York from a church convention in Richmond, Virginia, to deal with the spreading crisis.
- October 21, 1907: The National Bank of Commerce announces it will stop clearing checks for the Knickerbocker Trust Company, the city’s second-largest trust.
- October 22, 1907: The Knickerbocker Trust collapses after a massive run, suspending operations after paying out $8 million in three hours.
- October 23, 1907: Morgan determines that the Trust Company of America is solvent and decides to support it, drawing a “line in the sand” to stop the panic.
- October 24, 1907: The New York Stock Exchange nearly closes as liquidity vanishes; Morgan raises $25 million from bank presidents in less than fifteen minutes to keep the market open.
- November 2, 1907: Morgan organizes a rescue of the brokerage firm Moore & Schley, which is burdened by $25 million in debt used to carry Tennessee Coal and Iron stock.
- November 3, 1907: In a famous all-night session at his library, Morgan locks the doors and refuses to let trust company presidents leave until they pledge a $25 million support pool.
- November 4, 1907: President Theodore Roosevelt grants an antitrust exemption, allowing U.S. Steel (a Morgan creation) to acquire Tennessee Coal and Iron to settle the Moore & Schley debt.
- May 1908: Congress passes the Aldrich-Vreeland Act, creating the National Monetary Commission to study banking reform.
- November 1910: Senator Nelson Aldrich and a group of bankers meet in secret at Jekyll Island, Georgia, to draft a plan for a national reserve association.
- December 23, 1913: President Woodrow Wilson signs the Federal Reserve Act, creating a new central banking system as a direct response to the 1907 panic.