J.P. Morgan on IPO and Capital Markets

The National Monetary Commission was created by the Aldrich-Vreeland Act of 1908 after the Panic of 1907 and chaired by Senator Nelson Aldrich, a Republican Senate leader, its Wikipedia article records. Aldrich personally led a team of experts to the major European capitals, where they were stunned by how much more efficient the European financial system appeared and how much more important than the dollar the pound, franc, and mark were in international trade. The commission issued thirty reports between 1909 and 1912, a detailed and authoritative survey of the era's banking systems published by the Government Printing Office. Its plan provided for local associations of banks grouped into regional associations and a national reserve association headquartered in Washington, holding the country's bank reserves, issuing an elastic currency based on commercial assets, and rediscounting commercial paper. The plan failed to win strong public support because of its resemblance to a central bank and popular suspicion of Aldrich, but many of its features were incorporated in the Federal Reserve Act, enacted December 23, 1913.

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.

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.

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.