J.P. Morgan on Crisis Response

The Panic of 1907, called the Bankers' Panic or the Knickerbocker Crisis, was a financial crisis unfolding over three weeks from mid-October, when the New York Stock Exchange suddenly dropped almost fifty percent from its previous-year peak, its Wikipedia article records. The panic occurred during a time of economic recession, with numerous runs on banks and trust companies, and it eventually spread throughout the nation as state and local banks and businesses entered bankruptcy, producing the eighth-largest decline in United States stock market history. The crisis was triggered by the failed October attempt to corner the stock of the United Copper Company; runs struck the banks that had financed the cornering scheme and spread to affiliated banks and trusts, bringing down the Knickerbocker Trust Company, New York's third-largest trust, a week later. Only the intervention of J. P. Morgan, who pledged large sums of his own money and pressed other New York bankers to match him, kept the panic from deepening.

The Knickerbocker Trust was chartered in 1884 by Frederick G. Eldridge, a friend and classmate of J. P. Morgan, and as a trust company it chiefly acted as trustee for individuals, corporations, and estates, its Wikipedia history records. Charles T. Barney, president from 1897, had the trust's funds committed in 1907 to a plan for driving up copper prices through a corner, a gamble that unraveled when millions of dollars of copper were dumped to defeat an unrelated hostile takeover. Barney sought a meeting with Morgan about assistance for the bank and was rebuffed. Once Barney admitted his part in the F. Augustus Heinze and Charles W. Morse speculations, the board called for his resignation; that same afternoon the National Bank of Commerce declared it would stop clearing the Knickerbocker's checks, touching off the depositor run that forced suspension of operations. Barney shot himself on November 14, 1907. Weeks after its forced closing the trust reopened, ultimately paying every depositor in full with interest.

Junius Morgan's London house survived its gravest test in the Panic of 1857, when the railway boom ended, prices collapsed, and London rumors spread that Peabody and Co. was on the verge of failure, with major clients suspending or failing and rivals including Barings demanding immediate payment, the biography records. Peabody declined a conditional bailout from the major London houses that would have closed the firm, instead securing an emergency line of credit of 800,000 pounds from the Bank of England. Junius became the active head of the firm in February 1859 and grew J. S. Morgan and Co., with his son's aid, into a trans-Atlantic financial empire dominant in government and railroad finance, with allied firms in New York, Philadelphia, and Paris. He died on April 8, 1890, five days after a fall left him unconscious with a broken wrist and concussion, leaving a fortune of 12.4 million dollars. His pallbearers included Anthony Joseph Drexel and Cornelius Vanderbilt II, and at his death the Morgan banks were the pre-eminent American banking house.

The panic's opening act was a stock manipulation scheme aimed at cornering F. Augustus Heinze's United Copper Company, the article records. Heinze had made a fortune as a copper magnate in Butte, Montana, moved to New York in 1906, and formed a close relationship with the notorious Wall Street banker Charles W. Morse; together they gained control of many banks, sitting on the boards of at minimum six national banks, ten state banks, five trust companies, and four insurance firms. Augustus's brother Otto devised the corner, believing the Heinzes already controlled a majority of the company and that speculators had sold short borrowed shares that could be squeezed at any price. On Monday, October 14, he began aggressively purchasing; United Copper rose in one day from 39 to 52 dollars a share. But short sellers found plenty of shares from other sources, the stock closed at 30 on Tuesday, and it fell to 10 by Wednesday. Otto Heinze was ruined, and his brokerage house, Gross and Kleeberg, went into bankruptcy.

The year 1907 brought the acquisition of its largest competitor, the Tennessee Coal, Iron and Railroad Company, an emergency purchase arranged during that year's panic to save the brokerage Moore and Schley and calm the markets; Tennessee Coal was replaced on the Dow Jones Industrial Average by General Electric, the company's Wikipedia history records. The following March, chairman Elbert H. Gary formed the Committee on Safety of United States Steel after meetings with the safety managers of the operating companies, an initiative that led to the introduction of the modern Safety First movement, intended to reduce worker accidents and to safeguard the company against criticisms and legal liability. The sequence illustrates the merged firm's posture under the Morgan bankers: stabilize competition through acquisition, then manage public and political exposure through institutionalized reform. In 1911, the same year the federal government broke up Standard Oil, prosecutors also turned antitrust law on U.S. Steel, without success.

The failed corner sent contagion through the banking system, the article records. The State Savings Bank of Butte, owned by Augustus Heinze, announced its insolvency, and depositors rushed the Mercantile National Bank in New York, of which Heinze was president; the New York Clearing House, afraid of the tainted reputations of Heinze and Morse, forced both men to resign all their banking interests. The contagion then reached the trust companies, whose assets had grown 244 percent in the decade before 1907, against 97 percent for national banks. On Monday, October 21, the Knickerbocker Trust's board asked its president, Charles T. Barney, to resign over his associations with Morse, and the National Bank of Commerce, a Morgan-dominated bank, announced it would no longer serve as clearing house for the Knickerbocker. The next day a classic run withdrew nearly eight million dollars in less than three hours, forcing suspension before noon. Call money rates on the exchange soared to seventy percent, and runs spread to the Trust Company of America and the Lincoln Trust.

The early 1910s marked the turning point for the shipping trust. On April 15, 1912, the Titanic, flagship of its fleet and property of the White Star subsidiary, sank during her maiden voyage. Beyond the toll of lives and money, the sinking unsettled the trust's organization: Senator William Alden Smith, through the American commission of inquiry into the disaster, attacked the combine's very principle and Morgan's combination itself, the history records. Ismay's retirement as IMM president, arranged before the Titanic went down, took effect in 1913 with Harold Sanderson succeeding him; Morgan died that March 31. Analysis of the company's financial records shows that IMM was overleveraged and suffered from inadequate cash flow, defaulting on bond interest payments in late 1914 and entering a friendly receivership in 1915, from which it emerged in 1916. The combine never managed to dominate the bulk of the North Atlantic trade, and its corporate remnants eventually re-emerged as the United States Lines.

In the Panic of 1907, the institution's history records, the city's bank and trust company presidents spent the night locked inside the library and were not released until they had agreed on a plan to stop the financial crisis, making the new building the physical stage for the rescue that capped Morgan's career. He had first used his office there in November 1906, hosting the Metropolitan Museum of Art's purchasing committee, with the decorative details completed in January 1907 and the collection relocated into the library later that year. Morgan frequently met foreign bankers in the library's study and often opted to work there rather than in his downtown office, so the crisis found him already conducting the firm's business among his books and manuscripts. Afterward, to allow people to see the library from Madison Avenue, he demolished the neighboring Dodge house in 1907 and 1908 and replaced it with a garden designed by Beatrix Farrand. He had bought two hundred cases of books, temporarily stored at the Lenox Library and moved into the new building beginning in December 1905.

In August 1861 Morgan loaned twenty thousand dollars to Simon Stevens, a well-connected New York attorney, who used it to buy five thousand Hall carbines at 11.50 dollars each from an arms dealer and immediately resell them to General John Fremont at 22 dollars. The rifles had earlier been sold off by the government for 3.50 dollars each; after the Union defeat at Bull Run placed a premium on arms, the resale became a scandal. Morgan held title to the carbines during the thirty-eight-day loan, having their barrels replaced with rifled ones before shipment, and received fifty-five thousand dollars from the Army in September, deducting the loan's face value plus expenses and interest. An 1863 report by a House select committee examining government contracts branded the profiteers worse than traitors in arms. The debate over Morgan's knowledge persisted for decades: Gustavus Myers accused him in 1910, public-relations chief R. Gordon Wasson found no evidence he knew, and historian Vincent Carosso concluded that Stevens had used Morgan's name to cover his own greed.

As the chaos began shaking the confidence of New York's banks, their most famous practitioner was away at a church convention in Richmond, Virginia, the article records. Morgan returned to Wall Street late on the night of Saturday, October 19, and the following morning the library of his brownstone at Madison Avenue and 36th Street had become a revolving door of bank and trust company presidents seeking help. Morgan and his associates examined the Knickerbocker's books, judged it insolvent, and declined to intervene; its failure, however, triggered runs on healthy trusts, prompting Morgan to take charge of the rescue. After an overnight audit showed the Trust Company of America to be sound, Morgan declared this was the place to stop the trouble, then assembled the other trust companies' presidents and held them in meeting until midnight, when they agreed to provide 8.25 million dollars in loans to keep it open. On Thursday Treasury Secretary Cortelyou deposited around twenty-five million dollars in New York banks, and John D. Rockefeller deposited ten million more.

Despite the cash infusions, New York banks were reluctant to make the short-term loans that facilitated daily stock trades, and prices crashed for lack of funds, the article records. At half past one on Thursday, October 24, Ransom Thomas, the exchange's president, rushed to Morgan's offices to say he would have to close early; Morgan was emphatic that an early close would be catastrophic. He summoned the city's bank presidents, informing them that as many as fifty stock exchange houses would fail unless twenty-five million dollars was raised in ten minutes. By 2:16 p.m., fourteen bank presidents had pledged 23.6 million dollars; the money reached the market at 2:30, and nineteen million had been loaned by the close. Friday brought renewed panic, and Morgan raised only 9.7 million in pledges. The New York Clearing House then issued one hundred million dollars in loan certificates to settle interbank balances, and Morgan contracted to purchase thirty million dollars of city bonds to keep New York from bankruptcy.

On Saturday, November 2, with the brokerage Moore and Schley near collapse under loans collateralized by Tennessee Coal and Iron stock, Morgan called an emergency conference at his library, proposing that U.S. Steel acquire TCI, the article records. That evening, with runs still threatening the Trust Company of America and the Lincoln Trust, forty to fifty bankers gathered, the clearing-house presidents in the East room and the trust executives in the West room. Around midnight Morgan informed a leader of the trust presidents that saving Moore and Schley would require twenty-five million dollars he would not commit unless the trusts also rescued their weakest members. As discussion stalled, the bankers realized Morgan had locked them in and pocketed the key. At three in the morning about one hundred twenty officials assembled for a full report, and by 4:45 a.m. Morgan had persuaded the trusts' leader to sign, the rest following. Next day Elbert Gary and Henry Clay Frick won Roosevelt's assent to the TCI purchase less than an hour before the exchange opened, and the final crisis was averted.

At the depths of the Panic of 1893, around 1895, the United States Treasury nearly depleted its gold reserves, Morgan's biography records. Morgan proposed that the federal government purchase gold from his own and allied European banks; when Washington declined in favor of public bond sales, he demanded a meeting with President Grover Cleveland, warning that the government could default that same day absent action. Morgan then reached for an old Civil War statute under which he and the Rothschilds sold 3.5 million ounces of gold straight to the Treasury for a thirty-year bond issue. The Treasury was saved, but Cleveland's standing with the populist agrarian wing of his party was ruined, ending his political career. Bankers faced William Jennings Bryan's withering attacks in the 1896 election, and Morgan donated heavily, like many of his peers, to the Republican William McKinley.

In 1902 J.P. Morgan and Co. financed the creation of the International Mercantile Marine Company, an Atlantic shipping trust that swallowed several major American and British lines in a bid to monopolize the carrying trade, his biography records. Morgan's design was mastery of transatlantic shipping through interlocking directorates and railroad contracts, an ambition defeated by the unscheduled nature of sea transport, American antitrust law, and an agreement with the British government. He had reserved a luxury suite with private promenade deck aboard the RMS Titanic, property of the trust's White Star Line subsidiary, and planned to sail on the ill-fated maiden voyage before changing those plans. The famous sinking became a financial disaster for the combine: its financial records show over-leveraging and inadequate cash flow, which drove a default on bond interest payments. Morgan purportedly responded that monetary losses amounted to nothing in life, and that it was the loss of life that counted.

During the Panic of 1907, with major New York banks on the verge of bankruptcy and no mechanism in existence to rescue them, Morgan stepped in to help resolve the crisis, his biography records. Treasury Secretary George B. Cortelyou earmarked thirty-five million dollars of federal money for deposit in New York banks, and Morgan summoned the nation's leading financiers to his New York mansion, compelling them to work out a rescue plan, with James Stillman, president of the National City Bank, at the center of the effort. A team of bank and trust executives that Morgan organized shifted money from bank to bank, opened further international lines of credit, and purchased the plummeting shares of healthy corporations. When the brokerage Moore and Schley, deeply invested in the Tennessee Coal, Iron and Railroad Company, threatened a larger collapse, Morgan proposed merging TCI into U.S. Steel; President Roosevelt promised legal immunity, U.S. Steel paid thirty million dollars for the stock, and by November 7, 1907, the panic was over.

What separates the Panic of 1907 from earlier panics, explains the Federal Reserve History essay by Jon Moen and Ellis Tallman, is the central part played by New York City's trust companies. Trust companies were state-chartered intermediaries that competed with banks for deposits but were not central to the payments system and cleared few checks, so they held cash reserves of roughly five percent against deposits, compared with twenty-five percent for national banks. Because their deposits were payable in cash on demand, trusts were just as susceptible to runs as banks. The trusts loaned large sums directly into New York equity markets, extending uncollateralized day loans to brokers, who then used the securities they purchased as collateral for call loans from nationally chartered banks. Runs on trust deposits short-circuited their role as the initial liquidity provider to the stock market. The essay draws the structural parallel to the shadow banks of 2007-09: both crises started outside the institutions at the center of the payments system.

The Federal Reserve History account details the decision that turned the Knickerbocker Trust into the panic's detonation point. After news broke on October 18 that its president, Charles T. Barney, was an associate of Charles Morse, and runs had begun, on Monday, October 21, the National Bank of Commerce asked the New York Clearing House for a loan on the Knickerbocker's behalf. The Clearing House refused, its resources being reserved for member institutions, and the Knickerbocker stood outside the membership. A request for aid was then made to J. P. Morgan, who asked Benjamin Strong, then a vice president at Bankers Trust and later the first head of the New York Federal Reserve Bank, to examine the Knickerbocker's books and determine its condition. In the time available, Strong could make no definitive determination of solvency, and Morgan therefore refused to aid the trust. That day the board dismissed Barney, the National Bank of Commerce withdrew as clearing agent, and after nearly eight million dollars of withdrawals the Knickerbocker suspended operations.

An upward spike in call money rates was among the first signals of distress, the Federal Reserve History essay records. On the day the Knickerbocker closed, October 22, the annualized rate on overnight loans against stock collateral jumped from 9.5 percent to seventy percent, reaching one hundred percent two days later; at moments nobody offered credit at any price. That the New York Stock Exchange stayed open at all was largely the work of what the essay calls Morgan's legendary actions: he solicited cash from large financial and industrial institutions and had it delivered straight to the loan post on the exchange floor, supporting brokers as they extended credit. On Saturday, October 26, after an unusual five-day delay, the New York Clearing House Committee formed a panel to issue clearing-house loan certificates, the predecessor to Federal Reserve discount window lending, and the clearing house banks restricted the convertibility of deposits into cash. The restriction produced a currency premium and a substantial influx of gold imports from abroad, which appear to have been instrumental in spurring the New York market's recovery.

The panic's real effects were severe, the Federal Reserve History essay notes: industrial output fell seventeen percent in 1908 and real gross national product twelve percent, a contraction surpassed only by the Great Depression, though the real sector recovered rapidly, in little over a year. The Knickerbocker Trust itself reopened in March 1908 after an infusion of 2.4 million dollars in new capital, having suspended rather than failed. The essay emphasizes that the panic occurred before the Federal Reserve, deposit insurance, or securities regulation existed, when only the National Banking Acts and the private New York Clearing House structured crisis response. It records the argument of Moen and Tallman that the experience changed how Clearing House bankers judged the value of a central bank, since the panic's grip fell mainly on trust companies outside their membership. The 2008 rescue of Bear Stearns, bought by JPMorgan Chase with a Federal Reserve loan, is compared to the Clearing House support for the Mercantile National in 1907, and the Knickerbocker suspension is set beside the failure of Lehman Brothers.