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Panic of 1907

The Panic of 1907, the Bankers’ Panic, provided the spark for a return to central banking. the severe Panic of 1907, which caused inflation-adjusted gross national product to decline by 12 percent, more than two times the decline recorded during the Great Recession of 2007 to 2009. The Panic of 1907 was the first worldwide financial crisis of the twentieth century. It transformed a recession into a contraction surpassed in severity only by the Great Depression.

After the panic ended, there was a broad sense that reform was needed, although consensus on the exact nature of that reform was elusive. Some called for an institution similar in structure to the Bank of England at the time, with centralized power, owned and operated by the banking system. Some wanted control to be lodged with the federal government in Washington instead. Others proposed that power be distributed to regional bodies with no central or coordinating board. Still others resisted any sort of central bank.

The Panic of 1907 did not grow out of an unstable business situation, nor was it due to radically changing economic conditions. It is true that credit the world over was extended and that there had been an overproduction of securities. Capital was fully absorbed, but corporations called for more to undertake gigantic enterprises which an unprecedented prosperity seemed to demand. American railroads borrowed in every country of Europe that had a loanable surplus at rates of interest that astonished foreign bankers, and American speculators did the same.

It was reckoned that the shrinkage in the value of securities in the three months' decline culminating in the stockmarket panic of 14 March 1907 equaled the cost of the Civil War or that of the short but sanguinary conflict between Russia and Japan. This meant that the selling price of several hundred stocks and bonds of the leading railroad and industrial companies of the United States contracted about $2,000,000,000. Truly a colossal figure. It represents the total gross earnings of 190,000 miles of railroad in the last fiscal year. It is several hundred million dollars greater than our annual export trade. It equals the world's gold production between 1901 and 1907, and is twice the size of the national bank deposits in New York City. Financial history does not record another such tremendous lopping off of values in so short a time.

The great influencing cause back of the continuous decline in the price of securities was lack of public confidence in corporation management. The panic was psychological. The mental attitude of the people made it possible. This was inevitable just as soon as it was seen that the great body of investors, with more money at their disposal than ever before, refused to be baited by the numerous dividend increases on railroad and industrial shares. The exposures of the insurance investigation, the convincing arguments of Lawson, the scandals of the Harriman administration of the Chicago & Alton, the old unhealed sores made by the Beef-Trust methods, Shipping-Trust finance, Standard Oil rapacity, and Pennsylvania-Railroad grafting were a cumulative force that denied further co-operation between private investor and bankers' syndicates. The unconscious arrogance of conscious wealth, as it has been aptly described, did not set well with a democratically minded people.

During the prosperous years from 1899 to 1907 the United States witnessed great strides in the accumulation of national wealth and in the growth and size of business units. It was an era of promotions and rapid expansion of manufactures and the development of the great and varied resources of the country, such as iron, copper, lead, zinc, coal, oil, water power, and agriculture. It was also a period of rapid development in new lines of endeavor - electric power, interurbans, telephone, radio, bicycles, automobiles.

At the same time the country witnessed titanic struggles between various banking and financial groups to control these vast enterprises. The formation of the United States Steel Trust, conceived by Gary and financed by the banking house of Morgan & Co., was successfully accomplished in 1901. The great struggle between the Harriman railroad interests of the Southwest and the Hill interests of the Northwest for mastery of the railroads west of Chicago resulted in the famous corner in Northern Pacific stock in 1901. This last conflict brought a depreciation in other stocks, resulting in a Wall Street panic of short duration.

The outcome of this struggle was the organization of the National Securities Co., a holding corporation to control the securities of the properties in controversy. The right of a holding corporation to control the stocks of competing railroads was successfully challenged by the Government and an order of dissolution secured.

Then there was the great growth of the Westinghouse Co., the combinations in the bicycle industry, the reorganization of the New England cotton-yarn companies, the cotton-duck consolidations, the asphalt consolidations, the United States shipbuilding combination, the American Glue Co., the National Salt Co., the steel and wire combinatioD.£, and many others. The last mentioned led to the famous Tennessee Coal and Iron combination, which was eventually absorbed by the United States Steel Corporation.

As a consequence, this was a period of excessive speculation. The rapid growth in the size of business units led natmally into some form of combination, but the great combination movement really began during the revival of business after the depression of the 1870s. The first combinations formed were called pools, which were used in the distillery industry, the iron and steel Industry, and cordage. This was followed by the formation of trusts, started by the Standard Oil Trust of 1879, reorganized 1n 1882. The trust form of organization remained in favor until about the year 1897. The most outstanding examples were the Standard Oil Trust, the Distillery Trust, and the Sugar Trust.

During the 1890s this form of organization was declared lliegal and was followed by the creation of holding corporations, consolidations, and mergers. There has always been an inherent opposition to monopolies on the part of the people of the United States. Even prior to 1860 the States were afraid of corporations, believing they possessed monopolistic powers. The same opposition was displayed toward trusts and holding companies. At first State control and regulation were attempted, but were found to be ineffective.

The passage of the interstate commerce act of 1887 was the first effort of the Federal Government to control railroads. This was followed in 1890 by the enactment of the Sherman antitrust law, for the control and regulation of all kinds of big business. Many suits were brought under this last-named statute.

In fact, the period under discussion became known as the "trust busting" period. The Government failed to secure an order of dissolution against the United States Steel Corporation, but succeeded against the Northern Securities Co., and later secured orders of dissolution against the Standard Oil Trust and the American Tobacco Trust. However, the Government's effort to regulate competition by orders of dissolution eventually failed, because it was found that through the use of interlocking directorates the control still re- mained in the hands of the few.

One of the prevalent theories at this time was that publicity would do much to curtail the abuses and unfair practices of big business, and to this end the Government established a Bureau of Corporations in the Department of Commerce and Labor in 1903. However, in spite of publ1city by this bureau, by Government litigation, and by various investigating committees, of which the famous Armstrong insurance committee of the New York Legislature was the outstanding example, pools, mergers, and combinations of all kinds continued to thrive.

The formation of business combinations and mergers by various promoters brought many confiicts of interests, and since financial backing was a necessary adjunct to such promotions the formation of rival financial groups naturally followed. The rivalry thus created in the last analysis resulted in a bankers' war, culminating in the panic of 1907.

The most successful promoters of the period were the great banker, J. Pierpont Morgan, and his associates, Robert Bacon and George W. Perkins, of the J.P. Morgan Co.; William Rockefeller and Henry H. Rogers, of Standard Oil; Frick and Gary, of steel; J. J. Hill, of the Great Northern Railroad; James Stillman, president of the National City Bank, and others. Some of the successful promotions of this group were railroad mergers, the United States Steel Corporation, and Amalgamated Copper. A secondary group of outstanding promoters of the period were John W. Gates, with his Steel-Wire Trust and Tennessee Coal & Iron Co.; Heinze, with his United Copper Co.; and Morse, with his shipbuilding corporations.

J.P. Morgan, with his associates, controlled the most powerful group of banks in America, and in addition had powerful foreign banking connections. Not being able to use the Morgan financial Institutions for their purposes, Gates, Heinze, and Morse were instrumental in building up a formidable chain of banks, of which the Knickerbocker Trust and the Trust Co. of America were important links.

Gates had incurred the bitter enmity of Morgan by a deal involving the Louisville & Nashville Railroad. Knowing that the Morgan group needed this railroad to protect their other railroad interests, he quietly purchased control, thereby forcing Morgan to buy at his price. Gates followed this by organizing the Tennessee coal & Iron Co., which among other things controlled great beds of iron ore coveted by the United States Steel Co. Heinze had incurred the bitter enmity of Rogers and the Standard on group by his manipulations in the copper industry and his organization of the United Copper Co. in opposition to the Amalgamated Copper interests. Morse, who had a genius for organization, with his shipping combinations and his chain of banks, was also in disrepute.

The financial warfare carried on between these groups of promoters and bankers was not open warfare. In fact, such warfare was never conducted in the open. The usual strategy employed was to carefully withhold from the public (which was but a pawn in all such conflicts} authentic information and disseminate misinformation through rumors arising from mysterious sources. The general directing the attack is seldom known until the enemy is routed. This warfare was no exception to the rule. Bear raids started on the stocks of the Gates-Heinze-Morse enterprises the attack was shifted to the financial institutions carrying their collateral.

In 1907, at the psychological moment, the more conservative bankers agreed to call all loans on securities of enterprises associated with the Heinze-Marse banks, which eventuated in the closing of the doors of the Knickerbocker Trust and precipitated the panic. Later the Trust Co. of America, which held the collateral of the Tennessee Coal & Iron Co., was forced to suspend. Gates, Morse, and Heinze were all driven from Wall Street, and the Tennessee Coal & Iron Co. was taken over by the United States Steel Corporation, this last on the theory that it was the only way to stop the panic of 1907. After this transfer the warfare ceased, but it took a year to recover from the harmful effects of manipulation of the financial and credit fabric of the country.

The alleged causes of the panic of 1907 and the following depression are many and varied, and while the foregoing is only a sketchy pictme of the methods used by bankers and promoters during the period leading up to the depression, yet it is apparent that these men and their manipulations materially affected the situation.

Excessive speculation, stock manipulation, gambling, over-capitalization, and abuse of credit, as disclosed by the many failures among both the financial institutions and commercial enterprises, destroyed public confidence, paralyzed industry, and stretched the credit system of the country to the breaking point.

The depression brought a sharp decline in commodity prices and a reduction in wages, also a sharp decline in railroad and industrial stocks and bonds, the bottom being reached in the summer of 1908. Money was very tight the latter part of 1907 and did not ease up until the latter part of 1908. Good crops throughout the United States aided in a revival of business and a return to prosperity in the latter part of 1908 and 1909. This depression was accompanied by a similar condition throughout the nations of the world.

There were several mini-panics, averted or stopped by infusions of Treasury money, after 1900; but the Panic of 1907 frightened the banks into calling for a new central banking system. Wall Street and the Morgans could not save the New York banks themselves. There was general speculation of specie payment throughout the country, and premiums of currency over deposits. Again, the Treasury was called upon to intervene. The Wall Street banks now knew that they could not cope, and federal government cartellization and support for fractional reserve banking would be necessary.

The Wilson administration finally established central banking with the creation of the Federal Reserve System in 1913 — the symbolic end of the Jacksonian hard-money heritage in the Democratic Party. From 1913 until 1933, the United States would be formally under a gold standard, but actually governed by a Federal Reserve System designed to inflate uniformly and bail out banks in trouble. The banking systems would now be pyramiding on the U.S. issue of paper money.

By December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise—a decentralized central bank that balanced the competing interests of private banks and populist sentiment.