The Panic of 1907: How J.P. Morgan Locked Bankers In to Save the Economy

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In October 1907, Otto Heinze tried to corner the stock of United Copper and failed within hours. Because his family was tied to several banks, the collapse set off runs that reached the Knickerbocker Trust Company, the third largest trust in New York, which lost roughly 8 million dollars in under three hours and suspended operations on October 22. This episode explains why trust companies were so fragile: they took deposits like banks but kept almost no cash in reserve, and the country had no central bank to help.

Into that vacuum stepped J.P. Morgan, semi-retired and in his late sixties. From the library of his Madison Avenue brownstone he reviewed the books of failing firms, chose which to save, and pressed bankers, the Treasury, and John D. Rockefeller for cash. The story builds to the night he locked the trust company presidents in his library and to a dawn visit to Theodore Roosevelt's White House. It ends with the reform that followed: the Federal Reserve Act of December 1913.

• The system was already strained before the panic. Cash left New York each autumn to finance the harvest, and the 1906 San Francisco earthquake had drained liquidity through insurance payouts.
• When the president of the New York Stock Exchange warned he would have to close early, Morgan gave bank presidents minutes to pledge 25 million dollars to keep it open.
• On the night of November 2, Morgan locked the library doors and pocketed the key. At 4:45 in the morning the trust presidents signed a 25 million dollar bailout pool.
• To rescue the brokerage Moore and Schley, U.S. Steel had to buy Tennessee Coal, Iron and Railroad. Roosevelt, the trust buster, agreed not to prosecute hours before the market opened.
• Questioned later by the Pujo Committee, Morgan insisted that the basis of credit is character, not money or property.