And one cloudy day somebody asked for a dollar, and not getting it promptly enough, very promptly squealed. That squeal was the signal to the chorus of the entire world, which also wanted Money! Money! Money! It is sad to want money and not get it. But to ask for your own money and not get it is the civilized man’s hell.
Thus the 1907 bank run began.
The Panic of 1907 is a story of the stupidity of a few greedy rich men attempting to corner United Copper, the failure of the Knickerbocker Trust Company, and J.P. Morgan.
Augustus Heinze, his brother Otto, and Charles Morse cooked up a scheme to corner the market in United Copper stock. To finance the scheme, they borrowed some money.
The corner began on October 14, 1907. Their plan was a short squeeze. They bought United Copper heavily, driving the price from $39 to $60, with the hope that short sellers would rush to close out positions and drive the price up further.
But their scheme failed spectacularly. Short sellers easily found shares and the price tanked. Within two days, the price of United Copper dropped to $10 and took Otto’s brokerage house down with it.
Banking is built on trust. Trust that the bankers run the bank prudently. Trust that other depositors do not panic. Trust that you’re money will be there when you need it.
Of course, today the FDIC covers deposits. It guarantees you’ll get your money back up to the $250k limit. It incentivizes trust. If your money is safe, there’s no need to panic.
But the FDIC didn’t exist in 1907. What they learned back then was how quickly trust turns to panic and what was needed to revive it.
Bank runs are an irrational fear made real as more and more people race to pull their money out of a bank. A dip in confidence is all it takes to set off a bank run and the Heinze brother’s failure was enough of a catalyst to trigger distrust.
The bank run began October 17th at the banks controlled by Augustus Heinze and Charles Morse. Augustus’s bank, The State Savings Bank of Butte, Montana held loans with United Copper stock as collateral. It was insolvent within a day. In less than a week, the run spilled over to banks merely associated with them, including the third-largest trust in New York, The Knickerbocker Trust Company.
Once the Knickerbocker Trust was hit, it failed a day later. But the bank run wasn’t done. Lending dried up and the panic reached the stock market.
It was J.P. Morgan who stepped in at the last minute to act as lender of last resort. He gathered the biggest bankers in New York to pool their money, provide the much-needed liquidity to quell the panic, and return confidence to the system.
Edwin Lefevre, of Reminiscences of a Stock Operator fame, retold the story of the Panic of 1907 four months after the event:
Now, if, as we have seen, it is the loss of over two and one-half billions of liquid capital, at a time of enormous industrial expansion, that principally is responsible for the panic of 1907, it is in all likelihood also true that it was Mr. Heinze who pushed the button and blew up a few reputations and made many unfortunate depositors spend sleepless nights. Of all that Mr. Lawson has written, the best by all odds is his sketch of the Butte man. When Mr. Heinze sold out to Mr. Rogers and came from the West with several millions, the financial East looked askance at the young Lochinvar. His speculations and his financial operations, his relations with certain banks and certain people were well known and not approved by the bankers. In October, 1907, he thought he saw a chance to punish the treason of associates, and with that end in view — and incidentally, of course, some plunder — he tried to corner United Copper. But his brokerage firm ran against the insurmountable obstacle of no money — and suspended payment. Then the “conservative bankers” thought they perceived a heaven-sent opportunity to eliminate Heinze and his associates from the banking situation of New York City. There followed certain threats the exact tenor of which has not been disclosed, but that they were effective is obvious. Mr. Heinze and his friends gladly “resigned” from their positions as presidents or vice-presidents of several banks. But the seed of fear had been implanted in the breast of the New York City mob.
In the history of every great catastrophe, you will find that some masterly bit of stupidity sets fire to the oil-soaked rags. The ousting of the adventurers from the banks of which they had obtained control had left the community so keenly apprehensive that almost anything would have stampeded it. The Bank of Commerce had been “clearing” for the Knickerbocker Trust Company in the New York Clearing House. In that capacity, the Bank of Commerce was responsible for the Knickerbocker Trust Company’s checks, and, even if it gave notice that it would not “clear” for the trust company, it was responsible for twenty-four hours thereafter. Now, the Bank of Commerce, finding some affiliation between the Knickerbocker Trust Company and some of the so-called “banking adventurers” grouped with Heinze, decided not to clear any longer, and so notified everybody through a megaphone. When, a little later, the resignation of Charles T. Barney, president of the Knickerbocker Trust Company was called for and received, the damage had been done. The run began the next day. The sins of the past were expiated in a few hours. The depositors, as usual, paid the damage. Mr. Barney paid for it with his life…
Of course, the suspension of payment by the Knickerbocker Trust Company, an institution with $62,000,000 of deposits, was the signal for runs on other institutions; and not only in New York City, but elsewhere, trust companies and banks closed their doors. After sleepless nights and much thought, the majority of the banks of the great metropolis of the United States decided to issue Clearing House certificates. Other cities followed the example of New York — anything in order not to have to pay out the money that they did not have!
The inevitable growth of unreasoning distrust blossomed logically into the hoarding habit — an inevitable phenomenon of all panics…
Great as is Mr. Morgan’s reputation as a financier, notable as are his achievements as an organizer, and dazzling his triumphs as a banker and a financial leader, yet of all his successes surely there is none so great as this: that, unanimously, all turned to him and chose him for their leader in their hour of need.
There was not needed a financial genius, an adroit banker, a great canitalist! What the occasion called for was a man — a human being who could command the respect and the confidence of the public that had grown distrustful, so that it might heed wise counsel; a man also whose bidding all bankers and financiers and captains of industry would do; in brief, that rarest of ceatures, a man who could rise above self-interest…
It was he who prevented a great stock market panic on October 24th. Money was not to be had on the Stock Exchange at any price. Stock brokers who had been called upon by banks or other lenders to pay off loans, scurried about frantically trying to find money. Not to find it, and quickly, meant insolvency — financial death. One hundred percent, two hundred percent, was offered…and no money!
Down went stocks, dividend-paying shares, standard investment stocks as well as speculation issues, breaking one, two, three points between sales because there were no buyers. And as prices declined, there came from those who were lending money on call, requests to be paid off. The margins had been impaired. But the brokers did not want collateral; they desired their own money. It was not prudence; it was plain cowardice, twin sister of their unintelligent selfishness.
The tickers began to print on the tape the first chapter of a mighty financial tragedy. Bank presidents in their offices saw clearly that somebody was about to be brutally butchered; and there was no telling who might receive a glancing blow of the knife or at least be splashed with blood. For a moment a thousand hearts felt the clutch of pity or of despair. You could have offered 1,000 percent for a million dollars, and not have found a lender. Stocks finally reached the toboggan slide. At the bottom was hell and at the top was Morgan.
One minute more without money would have bankrupted Wall Street. But Morgan was watching the ticker in his office, desirous of determining the precise time when it was not alone the stock gamblers who needed money — the breath of life — but also the people. At last he said: “Lend $25,000,000 at ten percent!”
The news was flashed through the world. And Wall Street heard it as through a blessed megaphone, and devoutly thanked the firm of J. P. Morgan for its life. Of course, it was not Mr. Morgans’ own money. But he had not waited for voluntary offers to help. He had told this man or the other, such and such a bank, that his or its particular share would be so much; please to remit at once. And the help came, for Morgan to do with it as he judged best. And so he was able to check the panic.
The Game Got Them
This post was originally published on November 6, 2019.