Synopsis
Why do markets crash and bank panics happen? Conventional wisdom has gathered, like iron filings, at two intellectual poles: at one extreme is a hodge-podge of idiosyncratic, period-specific causes and at the other is a host of all-encompassing "single bullet" theories. In The Panic of 1907, authors Robert Bruner and Sean Carr offer an alternate perspective through a detailed narrative of one of the worst crises in modern financial history—one which ultimately transformed the American financial system and resulted in the establishment of the modern Federal Reserve.
Drawing from rare source materials, Bruner and Carr take you day by day through the crisis in 1907, revealing what happened, why it matters, and what we can learn from it. Beginning with a catastrophic earthquake in San Francisco and culminating in the shocking suicide of the deposed president of one of New York's leading financial institutions, this book will draw you into the central issues surrounding the panic of 1907. Throughout this journey, you'll not only become familiar with the events of the crisis, but you'll also discover how larger-than-life figures, such as the inestimable J. Pierpont Morgan, took it upon themselves to provide leadership—and inspire confidence—at a time of great uncertainty and instability.
Filled with in-depth insights, The Panic of 1907 offers a deeper understanding of what influences financial markets—both then and now. Through this engaging case study of the panic and crash, Bruner and Carr provide a useful framework for understanding these events, suggesting that major financial crises can be the result of a convergence of certain, uniqueforces—the forces of the market's "perfect storm"—that can cause investors to react with alarm.
When the many elements of the next financial storm converge, will you be ready? With The Panic of 1907 as your guide, you'll be prepared to assess, understand, and anticipate the factors that can lead to a crisis.
Table of Contents
Acknowledgments.
Prologue.
Introduction.
Chapter 1. Wall Street Oligarchs.
Chapter 2. A Shock to the System.
Chapter 3. The "Silent" Crash.
Chapter 4. Credit Anorexia.
Chapter 5. Copper King.
Chapter 6. The Corner and the Squeeze.
Chapter 7. Falling Dominoes.
Chapter 8. Clearing House.
Chapter 9. Knickerbocker.
Chapter 10. A Vote of No Confidence.
Chapter 11. A Classic Run.
Chapter 12. Such Assistance As May Be Necessary.
Chapter 13. Trust Company of America.
Chapter 14. Crisis on the Exchange.
Chapter 15; A City in Trouble.
Chapter 16. A Delirium of Excitement.
Chapter 17. Modern Medici.
Chapter 18. Instant and Far-Reaching Relief.
Chapter 19. Turning the Corner.
Chapter 20. Ripple Effects.
Lessons. Financial Crises as a Perfect Storm.
Appendix A. Key Figures After the Panic.
Appendix B. Key Definitions.
References.
Notes.
About the Authors.
Index.
Excerpts
Responding to the call issued by Heinze, however, and much to his surprise, every one of the 20 brokers produced the stock that had been called. There were no defaults, and United Copper stock was pentiful on the market. Heinze had been wrong. In fact, the brokers were producing so much stock that Heinze was eventually forced to refuse delivery.
(...)
The brokers, unable to transfer their shares to the Heinzes, had thrown all their sares on the market, and the corner attempt was crushed.
Unlike most European countries, the United States did not have a central bank to manage its national money supply.
In 1907 three types of banks were in operation: national banks, which were authorized to receive federal deposits and issue government-licensed currency; state banks, which were chartered by state legislatures; and private banks, which ranged from international houses such as J.P. Morgan & Company and Kuhn, Loeb, to immigrant bankers, who ran their businesses out of grocery stores and saloons.
While there was no central bank to give liquidity to the financial system in periods of strain, the U.S. Treasury, trough a network of subtreasuries, would often shift gold and curency to different regions and deposits the funds in banks that would then relend the funds to debtors.
By day's end, widespread fear and uncertainty would spread like a brush fire.
At 10. a.m. the interest rate on call money at the Exchange was fairly normal - around 6 percent. Yet sometime later in the morning a bid was made for 60 percent and still no money was offered. By 1 p.m., call money was being loaned at the extreme rate of 100 percent.
Again, the panic-stricken trust companies were calling their loans, which caused an acute shortage of money. By noon, interest rates on the money market reached 150 percent.
At the library on Friday evening, Morgan and his associates acknowledged they could not continue bailing out the banks and forming money pools to assist the Exchange. They turned their attention toward reassuring the public.
(...)
They also appointed a second committee to reach out directly to the clergy, encouraging them to make reassuring statements to their congregations over the weekend.
Only six of 6,412 national banks failed in the panic, fewer than in any other panic of the National Banking era.
The U.S. crisis in 1907 had been associated with financial crises in Egypt (January to May), Hamburg (October), Chile (October), Holland and Genoa (September), and Copenhagen (winter).
In 1908 banks finally lifted their suspension of payments. The subsequent recession ended in June 1908, followed by buoyant economic growth in the United States for the next 18 months.
These successors to Morgan, Stillman, and Baker essentially designed the Federal Reserve System. Ironically, the Fed, one of the landmark achievements of the Progressive Era, was a child of the "money trust" that the Progressive feared, though (..) the Democrats would later claim the credit for establishing the Fed.
In effect, the report (of the National Monetary Commission) advocated reversing the monetary system in the United States, founded on the vision of an agrarian society held by President Thomas Jefferson and the antipathy toward a central bank held by President Andrew Jackson.
An important insight of the field of system dynamics is that systems can display surprising nonlinearities - this means that orderly systemic structures may produce unpredictable behavior.
Morgan attempted to use the press, and even the pulpits, to shape public perceptions about the safety and soundness of the financial system.
Milton Friedman and Anna Schwartz emphasized the importance of leadership in managing financial system liquidity during a crisis.
Economist Glenn Donaldson has noted that "market liquidity, or the lack thereof, is a primary element - perhaps the primary element .- in determining the length and severity of a panic."
The twentieth century saw 15 stock market crashes.
If markets are rational, the sock that triggers a financial crisis will probably have the following attributes:
- Real, not domestic
- Large and costly
- Unambiguous
- Surprising
