What was the Panic of 1907?

Published by Thomas Herold in Banking, Economics, Investments, Laws & Regulations

'Panic of 1907' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Panic of 1907 is also referred to as the Knickerbocker Crisis and the 1907 Bankers’ Panic. This represented an earlier financial crisis within the United States. It occurred during a three week long time frame that began mid October of 1907 as the NYSE New York Stock Exchange plummeted nearly 50 percent from the prior year peak.

Naturally this touched off a first regional and then nationwide panic since this happened in a period of economic recession. This led to numerous runs on both national and regional banks, as well as trust companies. In time, this Panic of 1907 spread all across the country as a number of the state-chartered and local community banks as well as businesses throughout the region went into bankruptcy.

Leading causes of the panic and bank runs were due to a pull back of the market makers in the NYSE that caused liquidity from a great number of New York City banks to dry up. This led to a rapid deterioration in confidence with bank depositors. The under regulated bucket shops and side bets on the market only made matters worse.

The event which triggered the Panic of 1907 turned out to be a botched effort from October in 1907 in which speculators failed to corner the full market on the United Copper Company stock. As the bid went awry, many of the banks that had loaned out money in the cornering the stock market scheme became victims of runs on the bank that next infected affiliated trusts and banks. A week after this seminal event, the Knickerbocker Trust Company failed because of the bank runs. This represented the third biggest trust in New York City at the time of its sudden collapse.

The fall of Knickerbocker then caused fear to spread all throughout the city’s many trust companies as the regional banks immediately began to withdraw their cash reserves from the New York City based banks. Throughout the U.S., panic ensued with huge numbers of savers attempting to pull out their own bank deposits from the regional and local banks. This turned quickly into a self-fulfilling prophecy.

The Panic of 1907 actually started in the summer of 1907. The American economy had already demonstrated consistent signs of weakness as a range of Wall Street-based brokers and business had declared bankruptcy. When both the Westinghouse Electric Company and Knickerbocker Trust of New York City also failed, investors spooked and began the chain reaction of events that rocked the nation in the infamous Panic of 1907.

As these critical businesses failed completely, the levels of stock markets began to collapse all the while depositors engaged in their panicked run on the country’s many banks. The American Treasury Department began pumping millions of dollars into the wounded banks in a desperate effort to save them all from collapse, yet still a string of failed institutions mounted around the United States.

It was the legendary and respected J.P. Morgan who took the effective action which ultimately restored order to the markets and the national economy. He called on all of the country’s important bankers and financial experts alike. They came to his home and met in his library as if it were a war room office. For three weeks, Morgan and colleagues strove to move money from the stronger banks to the weaker ones to try to provide them with a much needed lifeline to keep them financially afloat.

In the several weeks which followed, the combined efforts of J.P. Morgan and his business leader colleagues alongside that of the Treasury Department massively improved material conditions in the U.S. The crisis passed eventually and the blame game began in earnest. Reformers in both main political parties felt that the banking system of the United States had become flawed at the core and required a sea change. Roosevelt and Congress enacted some progressive banking legislation such as the Aldrich-Vreeland Act of 1908 and the Owen-Glass Federal Reserve Act of 1913 as a result. The leaders of big business became embittered as they believed that over-regulation had overturned the economy’s natural rhythm.

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The term 'Panic of 1907' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.