The Panic of 1907

Claims Supported by This Source

1. Trust companies were state-chartered, not central to the payments system, and held cash reserves of about 5% against deposits (national banks held 25%). Their deposits were payable on demand, making them vulnerable to runs.
2. Trust companies made uncollateralized intraday loans to stockbrokers, who then used those securities as collateral to obtain call loans from national banks. Trusts were the initial liquidity providers to the stock market.
3. October 16, 1907: An attempt by Heinze and Morse to corner United Copper stock failed. A run began on associated banks, and four days later, the NYCH announced the soundness of its member banks and forced out the management.
4. October 18: Reports that Barney of Knickerbocker Trust was an associate of Morse triggered a run. October 21: The NYCH refused to lend to the trust, a non-member, and Morgan also refused aid (as a brief investigation by Strong could not determine its solvency). October 22: It suspended operations after about $8 million in withdrawals.
5. The call money rate rose from 9.5% to 70% annually on October 22, and to 100% two days later. Morgan collected cash from large corporations and financial institutions and delivered it to the stock exchange's loan post.
6. After a five-day delay, on October 26, the NYCH decided to issue clearing house loan certificates and restricted the conversion of deposits to cash on the same day. A premium on cash emerged, and gold inflows from abroad spurred recovery.
7. Deposits at trust companies fell by over 36% between August 22 and December 19, 1907, while deposits at national banks increased (note 12). In 1908, industrial production fell by 17% and real GNP by 12% (note 16). The recovery was rapid, taking just over a year (note 17).
8. Knickerbocker reopened in March 1908 with a $2.4 million capital increase (note 5). Barney committed suicide on November 14, 1907 (note 10).
9. Authors' interpretation: The trust companies of 1907 correspond to the shadow banks of 2007–09, and both crises began outside the center of the payments system. The experience of 1907 led NYCH bankers to recognize the value of a central bank, leading to the currency reform movement and the establishment of the Federal Reserve System.
10. The National Banking Act provided no guidance for panics, and the Treasury intervened at the Secretary's discretion without explicit authority (note 18).

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