THE BLOG'S THREE MAIN OBJECTIVES:
~*Revealing and Getting Rid of Scams | Creating Honest Sustainable Wealth | Offering Happiness, Safety and Legitimacy*~

Thursday, 12 March 2009

The Panic of 1907

The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 50 percent from its peak the previous year. Panic occurred during a time of economic recession, when there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks, loss of confidence among depositors, and the absence of a statutory lender of last resort.

The crisis occurred after the failure of an attempt in October 1907 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—New York City's third-largest trust. The collapse of the 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.

The panic may have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system. At the time, the United States did not have a central bank to inject liquidity back into the market. By November the financial contagion had largely ended, yet a further crisis emerged when a large brokerage firm borrowed heavily using the stock of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. Collapse of TC&I's stock price was averted by an emergency takeover approved by anti-monopolist president Theodore Roosevelt. The following year, Senator Nelson W. Aldrich established and chaired a commission to investigate the crisis and propose future solutions, leading to the creation of the Federal Reserve System.

..................


The year 1907
The month March
The date 13th
The reason Credit crunch


Strained credit and wild financial speculation lead to panic in an era of bold industrial expansion at the dawn of the American Century, in the days before the Fed.

On March 13th, the New York stock market plunged, a financial crisis that led to four years of recession. The year was 1907. Easy credit, wild financial speculation, and constriction of money supply were the culprits.

The next morning, the Brooklyn Daily Eagle described the frenzy on the trading floor, “Brokers rushed here and there in an effort to unload, and thousands of shares were dumped on the market in less time than the telling of it takes.”

Such a description of selling on the floor of the New York Stock Exchange would fit any financial panic experienced in this country, and there had been several since the founding of the Republic. Though each had similar symptoms of money supply constriction, each was also the part of the fabric of their unique eras. In 1907, a boom in industry and investment was upon the United States, at the dawn of what some would call the American Century. Credit flowed to the point of leaving lenders vulnerable.

The economic crisis began as a result of drain on the money supply. The Russo-Japanese War of 1905, and the funds required for rebuilding of San Francisco following the devastating earthquake and fire of the previous year were factors. There were also several railroad expansions that required increased capital. The banking system had over-extended itself, and while speculation made the stock market soar to new heights, credit was severely strained and some banks and trust companies failed. When long-term bonds could not be sold, the constricting money supply plunged New York Stock Exchange prices into a sudden collapse March 13th.

Recovering somewhat in April, wild fluctuations continued over many months, through the remainder of that year, as world markets fell and banks failed. Remedy came from varied sources. Help for the US came from London, as the S.S. Lusitania, launched by Britain’s Cunard Line that year, carried specie from the Bank of England to relieve the American financial crisis in the US.

Financier J. P. Morgan personally worked to end the crisis after a run on New York’s Knickerbocker Trust. Morgan obtained pledges of millions of dollars from New York bank presidents and financiers to loan the City of New York to keep the city from having to default on some short-term bonds.

In an unusual move, Morgan also locked up a group of uncooperative New York trust company presidents overnight in the library of his home on East 36th Street until 5 o’clock in the morning of November 4th, until they gave their support to raise funds.

The Brooklyn Daily Eagle also noted on March 14th, the day after the initial crash, “For the past 24 hours the White House and the Treasury Department have been bombarded by frantic telegraph, telephone, and mail appeals for the government to do something to check the tumbling of stocks in Wall Street and avert a threatening panic.” At the time there was no Federal Reserve Board either to keep excesses in check or to lend direction in the economy.

President Theodore Roosevelt, despite his trust-busting fame, permitted United States Steel to acquire Tennessee Iron & Coal and despite questions as to the legality under the 1890 Sherman Anti-Trust Act. The President’s action is reported as saving the Wall Street brokerage firm of Moore & Schley from collapse. Faith in the economy was gradually restored as constriction in the money supply eased.

By the end of that tumultuous year of 1907, Wall Street's Dow Jones Industrial Average closed at 58.75, down from 94.35 at the beginning of the year, losing nearly half its value.

No comments:

Goldman Sachs Information, Comments, Opinions and Facts