When the American Economy Relied on One Man to Save It
The Panic that resulted in the establishment of the United States Central Bank.
There have been many times the financial system has been strained or fallen victim to panic. One such panic occurred over three weeks in October of 1907. It would evsicreate fifty percent from the New York Stock Exchange. And it would further solidify J.P. Morgan as one of the most brilliant financiers in history.
Ripples Set in Motion
In 1836, President Andrew Jackson made the decision to allow a charter for the Second Bank of the United States to expire. The bank had been the second federally authroized national bank in the U.S. and had been in service since 1816.
The decision left the U.S. without any sort of central bank. As a result, the money in New York became highly dependent on the annual agricultural cycle. Harvests were purchased each fall and money left the city.
To try and influence the return of money back into the city, interest raises were raised. This appealed to foreign investors who would send their money to New York to take advantage. And so it was through the early 1900s.
What Goes Up Must Come Down
As the country entered 1906, the Dow reached a high of 103. As the year progressed, the market corrected. It was accelerated by the earthquake that took place in San Francisco. Across the Atlantic, the Bank of England raised its interest rates.
The stock market was volatile and where there is volatility there is opportunity. The United Copper Company run by F. Augustus Heinze hatched a plan to corner the market. To finance their scheme, Heinze, his brother Otto, and Charles Morse met with Charles T. Barney.
Barney served as the president of the city’s third largest trust known as the Knickerbocker Trust Company. Barney had successfully funded prior schemes. When they came to Barney for money, it was more than he could afford.
Otto decided to go for the squeeze anyways. On Monday, October 14th Otto made his move. He snatched up shares of United Copper causing a surge of over $13 a share throughout the day.
Making the Wrong Play
The next day he issued a call for short sellers to return their stock. The stock price rose once more to $60. However, the short sellers found United Copper shares from other sources. Otto had made the wrong play and share prices fell.
Unable to meet the obligations, Otto’s brokerage house went into bankruptcy. The State Savings Bank in Montana that was owned by Heinze went into insolvency.
By Monday, October 21st, Knickerbocker asked Barney to resign. The next day there was a run on the bank. In three hours, $8 million was withdrawn. Before lunch Knickerbocker suspended operations.
The Economy Needs a Hero
Meanwhile, J.P. Morgan, who had rescued the U.S. Treasury during the Panic of 1893 was returning to New York. As the panic had occurred he had been attending a church convention in Richmond, Virginia.
Other banks were experiencing runs. By the 24th of October, the New York Stock Exchange was faced with a decision to close early. Morgan realized the fallout an early close would cause.
He called the presidents back to his office. He helped rally fellow bank presidents to contribute to a loan he started. The loan was to back ailing institutions.
Morgan put up $8 million of his own money. His influence was substantial. By the time they were done, they deposited $70 million to the vulnerable banks.
These actions helped to stave off the panic. They also positioned J.P. Morgan to become that much more powerful. Once things stabilized, Morgan called in the loans.
It Wasn’t All Philanthropic
In the aftermath of the panic, Morgan’s loans brought him tremendous returns. He acquired six banks, a steamship line, and the second largest steel company in the country - he already owned the largest.
Within six years of the Panic of 1907, officers at J.P. Morgan & Co. had board positions on 112 public companies. This represented 80% of the public market capitalization in the country.
It was after the Panic of 1907, and the dependence of the American financial system on a single individual, that Congress passed the Federal Reserve Act. The act crated the central bank. This was passed in 1913 as J.P. Morgan & Co. grew in power.
History for the Hurried:
August 12, 1676: King Philip’s War ended with the assassination of Metacom, leader of the Pokanokets, a tribe within the Wampanoag Indian Federation.
August 14, 1935: President Roosevelt signed the Social Security Act establishing the system which guarantees pensions to those who retire at age 65.