When the US had no central bank, one man held the keys to survival.
In short: In October 1907, the American financial system teetered on the brink of total collapse. With no Federal Reserve to provide liquidity, the nation’s wealthiest banker, J.P. Morgan, effectively became the lender of last resort, forcing rival financiers to cooperate in his private library to prevent a catastrophic economic meltdown.
The Panic of 1907 began with a failed attempt to corner the United Copper Company stock. When the scheme collapsed, it triggered runs on banks and trust companies associated with the speculators. Because the United States lacked a central bank—a system abandoned in 1836—the economy was uniquely vulnerable to liquidity shocks, especially during the autumn harvest season when money flowed out of New York.
As the crisis spread, trust companies faced massive withdrawals. J.P. Morgan, returning from a church convention, took charge of the rescue. He audited struggling institutions and organized a consortium of bankers to inject capital into the market. In one famous instance, he locked bank presidents in his library until they agreed to provide $25 million to save failing trusts, famously pocketing the key to ensure they could not leave without a resolution.
The final stage of the panic involved the brokerage firm Moore & Schley, which held Tennessee Coal, Iron and Railroad Company (TC&I) stock as collateral. To prevent the firm’s collapse, Morgan’s U.S. Steel Corporation proposed an emergency acquisition of TC&I. Because U.S. Steel already controlled 60% of the market, this required the blessing of President Theodore Roosevelt. Roosevelt, known for his trust-busting, allowed the merger to proceed, recognizing that the alternative was a total market crash.
The aftermath of the 1907 crisis was profound. The economic contraction saw industrial production fall by 11% and unemployment jump to 8%. Recognizing the limitations of relying on private financiers like Morgan, Senator Nelson W. Aldrich led a commission to investigate the panic, which ultimately paved the way for the creation of the Federal Reserve System in 1913.
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Sources
- Summary by Intellect · source: Panic of 1907
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