It only took rumours and guilt by association to start a bank run that brought the financial system in the United States to its knees in 1907. Not that you could blame worried depositors. If a bank went under, so did your savings.
The US Federal Reserve didn’t exist to step in (some would say that’s a good thing). That particular institution wasn’t created for another six years. But this being the era of the great bankers and industrialists, there was one man who had pockets deep enough to make Janet Yellen turn green with envy – John Pierpont Morgan. Old JP (he was 70 years old by this point) took it upon himself to shore up the banking system.
The trouble began with an audacious attempt by Fritz Augustus Heinze in mid-October to corner the market in United Copper Company stock. When he failed, the market panicked, and Heinze resigned as president of the Mercantile National Bank. At this time, the Wall Street banking community was a close-knit one. It was also more or less self-regulating. So, when confidence was shaken in one bank, such as the Mercantile, it soon spread to the others, and depositors queueing out of the door to get their money back.
Charles T Barney, head of the Knickerbocker Trust Company, had been an associate of Heinze and the top brass at the Mercantile, and it wasn’t long before he found depositors lining up outside his door. On 22 October, things had got so bad that, according to the Boston Fed, $8m was withdrawn in just three hours.
That same day, JP Morgan went over the books. He decided the Knickerbocker Trust Company couldn’t be saved, but the Trust Company of America was in better nick, so he set about bailing that out. A meeting with the Treasury Secretary followed in which the government pledged to inject $25m of liquidity into the banking system. JD Rockefeller chucked in another $10m and castigated depositors for being foolish and unpatriotic – all very well for an oil magnate to say. The people outside, however, remained unconvinced. Meanwhile, entrepreneurial types were charging fellow depositors $10 a day to hold their place in the queue.
By 24 October, the Trust Company of America was taken out of intensive care and placed in the recovery ward. JP Morgan and his cabal of bankers had saved the day. Confidence slowly returned, and by November, while shaken, everyone agreed the worst of the Panic of 1907 was over. Everyone except for Charles T Barney of the failed Knickerbocker Trust Company. He killed himself a few days later.
Also on this day
On this day in 1962, the Kennedy administration issued its famous ultimatum – either the USSR removes its nuclear weapons from Cuba, or else. Read more here.