I recently listened to the Great Courses series of lectures entitled, Crashes and Crisis: Lessons form a History of Financial Disasters, hosted by Professor Connel Fullenkamp. Although the lecture series focused on economic disasters, I found many leadership lessons embedded in the lecture. In prior podcasts, host Richard Lummis and myself have considered the Dutch Tulip Bubble from the 1630s, the South Sea Bubble of 1720 and the Mississippi Bubble of 1720. Today we conclude with the Panic of 1907 and see how one person’s integrity and leadership can actually work to stop a panic and save a national economy.
Some of the primary causes of the Panic included a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops. The Panic was triggered by the failed attempt in October 1907 by the Knickerbocker Trust Company to corner the market on stock of the United Copper Company. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company, which was then New York City’s third-largest trust. The collapse of Knickerbocker spread fear throughout the city’s trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
Fullenkamp said of the Panic, “From American independence through the 19th and early 20th centuries, panics were a recurring feature of the domestic financial market. They occurred with astonishing regularity and often were followed by serious recessions, and even depressions. This lecture digs into the concept of financial panics by focusing on one that changed the course of American economic policy: the panic of 1907, which introduces us to one of the most famous financiers in American history—John Pierpont Morgan—and brought about an end of the era of financial panics.”
The Panic was caused by a series of steps, initiated by the principals of Knickerbocker which led to a run on the financial house. As news spread, other banks and trust companies were reluctant to lend any money. The interest rates on loans to brokers at the stock exchange soared to 70% and, with brokers unable to get money, stock prices fell to a low not seen since December 1900. The panic quickly spread to two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence.
This is where JP Morgan stepped. Initially, he injected $3MM into the Trust Company of America to keep it solvent. Two days later, the US Secretary of the Treasury contacted Morgan and placed $25 million at his disposal for injection into the monetary system. The money was a surplus from federal import tariffs that the government had not spent. Two days after that pledge, the president of the New York Stock Exchange informed Morgan that at least 50 brokerages would fail that day if $25 million weren’t made immediately available and that he planned to close the exchange early that day. This was dire news, because the brokerages would fail, possibly causing the panic to spiral out of control. Morgan covered the full amount. Morgan later put another $10MM into the NY banking system to shore it up.
While there were obviously many moving parts to stopping the Panic of 1907, with the personal integrity of JP Morgan and his knowledge of the domestic and international financial markets, it is very doubtful the Panic could have been stopped. If the Panic had been allowed to spread unchecked it likely could have brought down the entire US economy. This example shows that the right person, at the right place, at the right time can make all the difference.