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ThePanicof1907andtheResponsesoftheUnitedStates ReallyGoodResearcher&Writer Econ40413 11December2012 Abstract:ThePanicof1907wasamajorfinancialcrisisinUnitedStates historybothintermsoftheeventsthatcauseditandthepoliciesthe UnitedStatesadoptedinresponsetoitsoccurrence.ThePanicof1907 happenedatatimewhentheUSeconomywasalreadyinrecession.Itwas officiallyconsideredapanicwhentheNewYorkStockExchangefellnearly fiftypercentinaday.TheeffectsofthiscrashinNewYorkquicklyspread throughouttheentirecountry.ThePanicof1907piquedmyinterest becauseIsawanopportunitytotakethetopicindifferentdirections.One focusofthispaperwillbetoexaminethecausesofthePanicof1907, includingthedecisionsbankersmadethatledtoit.Additionally,thiswasa majortimeperiodintheevolutionoftheUnitedStatesmonetarysystem, whichallowsonetoalsoexploretheresultsofthePanic,primarilywhat thecountrydidinresponsetopreventanothersuchpanicfromoccurring. ThePanicof1907wasuniqueinthesenseoftheriseofindividualactions, whichhelpedsavethecountryfrombiggerproblems,specificallyJ.P. Morgan,whoiswidelyregardedasoneofthemostinfluentialfinanciers ever.CoveringthePanicof1907willallowmetoexplorethemistakes peoplemadeleadinguptoit,whatspecificallycausedit,andhowthe countrypulleditselfoutofit.Additionally,economistsalsofindsimilarities amongthefinancialcrisesthathaveoccurredthroughouthistory,which providesanotheropportunitytopotentiallylookatsimilaritiesbetween thisoneandevenourmostrecentfinancialcrisisin2008. ReallyGoodResearcher&Writer2 ThePanicof1907andtheResponsesoftheUnitedStates ReallyGoodResearcher&Writer Abstract:ThePanicof1907wasamajorfinancialcrisisinUnitedStates historyintermsofboththeeventsthatcauseditandthepoliciesadopted bytheUnitedStatesinresponsetoitsoccurrence.ThePanicof1907came duringatimeinwhichtheUnitedStateseconomywasalreadyin recession.ItofficiallybecameapanicwhentheNewYorkStockExchange fellnearlyfiftypercentinaday.TheeffectsofthiscrashinNewYork quicklyspreadthroughouttheentirecountry.ThePanicof1907becameof interesttomeasIsawanopportunitytotakethetopicindifferent directions.Onefocusofthispaperwillbetoexaminethecausesofthe Panicof1907,andthedecisionspeople,namelybankers,madethatledto it.Additionally,thiswasamajortimeperiodintheevolutionoftheUnited Statesmonetarysystem,whichallowsonetoalsoexploretheresultsofthe Panic,primarilywhatthecountrydidinresponsetopreventanothersuch panicfromoccurring.ThePanicof1907wasuniqueinthesenseoftherise ofindividualactions,whichhelpedsavethecountryfrombiggerproblems, specificallyJ.P.Morgan,whoiswidelyregardedasoneofthemost influentialfinanciersever.CoveringthePanicof1907willallowmeto explorethemistakespeoplemadeleadinguptoit,whatspecificallycaused it,andhowthecountrypulleditselfoutofit.Additionally,economistsalso findsimilaritiesamongthefinancialcrisesthathaveoccurredthroughout history,whichprovidesanotheropportunitytopotentiallylookat similaritiesbetweenthisoneandevenourmostrecentfinancialcrisisin 2008. Introduction ReallyGoodResearcher&Writer3 ThePanicof1907,alsocommonlyknownastheBankers’Panic,provedtobe apivotaltimeinthehistoryoftheUnitedStatesmonetarysystem.Themistakesand failuresthatledtoitwereanalyzedandmajorreformssweptthenation.Although thecountrywasapprehensiveaboutestablishingacentralbankingsystemfollowing thenation’sfirsttwoattemptsatafederalbank,bankerswerefreetousemoney andhadlimitedrestrictionsonthingssuchasrequiredreserves.Previouspanicsin theUS,includingthePanicof1837,alsoledmanycitizensofthecountrytobecome skepticaloflargebanking.Additionally,thiswasatimewhenmonopolies controlledmuchofindustryintheUSandthesemonopoliesplayedapivotalrolein thepanic,aswellastheoutcomes.Itcanbearguedthat,inadditiontothebanks, monopoliesandpowerfulindividualswerethemostcriticalplayersinthePanicof 1907. ThePanicof1907wasmuchmorethanamonetarypanicthatspannedone year.Whenlookingatthecrisis,onemustconsidernumerousfactors,includingthe eventsimmediatelyprecedingthepanic,thecausesofthedisaster,andthe influentialpeopleinvolvedandthedecisionstheymade.Onemustalsoexaminethe actionstakenbypeopleandinstitutionstoresolvethepanicandsettleanation,as wellasthepoliciesthatweredevelopedandadoptedinresponsetothePanicof 1907.ItisalsointerestingtocomparethePanicof1907tootherfinancialcrisesin history,aseconomistsrealizethistypeofproblemisnothingnew.Economists generallyagreethattherearesimilaritiesbetweenmosthistoricalfinancialcrises, regardlessofwhentheytakeplace.Eventhoughthemostrecentfinancialcrisisand thePanicof1907occurredslightlymorethanonehundredyearsapart,itismore ReallyGoodResearcher&Writer4 thanlikelythattheyhaveatleastonecharacteristicincommon.Themostcritical topicstoanalyzeregardingthePanicof1907areitscauses,thereactionsofthe nationduringthepanic,andthechangesthatresultedfromournation’sresponses. 19thCenturyUnitedStatesBanking The19thcenturywasanunstabletimeinUnitedStatesbanking.Thiswasa centurythatsawtheUSsufferthroughmultiplefinancialcrises.Atthistimethere werestillmanypeopleintheUnitedStatesthatwerewaryofestablishingalarge, centralizedbankingsystemintheUS,amindsetthatwentbacktotheearliestroots ofthenation.ThisleftthetaskofhandlingthemajorityofbankingtothecityofNew York.Inthe1800s,NewYorkwastheonlycentralreservecityintheentirecountry (Wicker29).Thishelpedtoalleviatetheeffectsofrecessionsinthe1800sonthe stateofNewYork,butthesefinancialproblemshadmuchgreaterimpactonvarious otherstatesacrossthecountry.Duringtheearlyrecessionsinthe19thcentury, numerousbanksaroundthecountryfailed,dueinlargeparttothefactthatthey werenotresponsiblewiththeirliquidassets(Wicker21).NewYork,howeverwas centralizedandpowerfulinbanking,andthereforeonlyfeltamuchlessereffectof thesepanicscomparedtootherstatessuchasOhio,Indiana,Illinois,Massachusetts, NewJerseyandConnecticut.Itisestimatedthattheseotherstatessufferedabout twiceasmucheconomiccontractionasNewYorkdidduringthesepanics(Wicker 29).Withsomuchofthenation’sbankingfocusedinNewYork,theNewYork ClearingHousewasessentiallythelenderoflastresortfortheUS.Thedecisionsof theNewYorkClearingHousehadmajorimpactsontheeffectsoffinancialcrisesin ReallyGoodResearcher&Writer5 the1800s.ThePanicof1907wouldultimatelybethelastdisasteritfaced,asreform promptedachangeinthelenderoflastresort. ThePre‐PanicYears UnderstandingthecausesofthePanicof1907iscrucialtodevelopinga foundationofknowledgethatallowsonetounderstandtheimpactsandresultsof thefinancialcrisis.ItisimportanttorealizethatthePanicof1907wasnotasudden occurrenceduetoproblemswithinthebankingsystem.Instead,itresultedfroma buildupofpoordecision‐making,anditwasessentiallyagamblethatwentthe wrongway.WhilebankscontributetothecausesofthePanicof1907,othermajor playersinthecreationofthepanicweretrustcompanies.Manytrustcompanies existedinNewYorkatthetimeandoperatedasaplaceforwealthierpeopleto investtheirmoney.FollowingthebankingpanicthattheUnitedStatessufferedin 1893,theNewYorkClearingHousewasstillthemajorlendertobanksas“no attempthadbeenmadeintheinterim(1893‐1907)todeviseastrategyfor preventingbankingpanics”(Wicker83).Failuretoactonthesepreviouspanicsin the1800sledtothecountry’scontinuedinabilitytopreventandsolveanewcrisis, particularlytheonethatwouldhappenin1907.AccordingtoRichardT.McCulleyin hisbookBanksandPoliticsDuringtheProgressiveEra:TheOriginsoftheFederal ReserveSystem,1897‐1913,theUnitedStateswasexperiencingatimeofexpanding businessthatwascreatingastockmarketboomanddrivingupinterestrates (McCulley121).Thiswasbeneficialforthenation’seconomy,butitbegantoputa lotofpressureonbankstomeetcashdemandsofinvestors.Inaddition,banksdid ReallyGoodResearcher&Writer6 notkeepanadequatesupplyofliquidreservesonhand,becauseregulationswere looseanddidnotforcebankstodoso(McCulley120).Thisfactoralsocontributed tothestrainonthebanks.TheUnitedStatesbegantoseewarningsignsthat indicatedpotentialpanicinthemonetarysystem,andsomepeopledidinfacttryto actbeforethecrisishit.LeslieM.Shaw,wastheUnitedStatesSecretaryofthe Treasuryatthetime,pushedCongresstoconvertthetreasuryintoacentralbankin ordertogiveitmorecontrolovercontractionsandexpansionsinthemoneysupply andtoestablishitasacentralreservefund(McCulley119).Unfortunately,the FederalGovernmentwasunabletoreachanagreementonhowtoproceedand Shaw’sideasnevercametofruition. Anotherkeyaspectinthepre‐paniceraistherelationshipbetweenthe UnitedStatesbanksandbanksaroundtheworld,particularlythoseinEurope. Duringtheearly1900s,theUShadbeenborrowinglargeamountsofcapitalfrom Europeanbanks,primarilybanksinLondonandItaly.TheUnitedStatesimported goldfromLondonmostlyonaccommodationpaper,whichallowedcompaniesand bankstoborrowlargesumsofcapitalintheformofshort‐termloansthateffectively becamelong‐termloansbecausetheborrowercouldcontinuetorollthemoveras theymaturedyearafteryear(Kindleberger77).Thisformofborrowingwas developedintheearly19thcenturyinresponsetothesuspensionofthegold standard,eventhoughgoldwasstillapopularlytradedcommodity,especially betweenEuropeandtheUnitedStates.BorrowingfromtheBankofEnglandwasnot themajorissuefacingtheUnitedStates,butratherthestructuraldifferences betweenthetwobanksposedaproblem.Londonwasacentralizedbankingsystem, ReallyGoodResearcher&Writer7 whichmeantthattheLondonbankshadcontroloverthediscountrateusedto adjustitsinterestrates.Infact,thebanksinLondonusedthispowertoavoidthe financialpanicof1873thathitAustriaandGermany,aswellastheUnitedStates (Kindleberger88).NewYork,ontheotherhand,wasnotacentralbankand thereforecouldnotcontrolthis.ThismeantthatifLondonmadeachange,the UnitedStateshadnomeanstorespondinordertoavertacrisis.Forinstance,ifa problemunexpectedlyaroseinEnglandandtheyneededtoraisetheirinterest rates,theUnitedStateswouldowemoremoneyontheirdebts.However,theUS wouldhavenointernalwayofraisingthiscapital,andwouldfaceapotential disaster.Thisexampledemonstratestheneedforalenderoflastresort.Infact,this isoneofthemajorproblemstheUnitedStatesencounteredonthewaytothe financialpanic. IntheirbooktitledManias,Panics,andCrashes:AHistoryofFinancialCrises, CharlesP.KindlebergerandRobertAdlerdevoteasectiontoclearlydefiningacrash andapanic,bothofwhichcanplayapartinafinancialcrisis.Theauthorssaythata crashisa“collapseofthepricesofassets,orperhapsthefailureofanimportantfirm orbank.Apanic,‘asuddenfrightwithoutcause’mayoccurinassetmarketsor involvearushfromlessliquidsecuritiestomoneyofgovernmentsecurities” (Kindleberger110).IntheUnitedStates,thepanicwassetoffbyanaturaldisaster in1906.Anearthquakeregistering8.3ontheRichterscalestruckthecityofSan FranciscoinAprilof1906.ThiscreatedpanicintheUSmonetarysystembecause SanFranciscowasthefinancialcenteroftheWestatthattime(Odell1010).Afire accompaniedtheSanFranciscoearthquake,leavingmuchofthecityinruins.The ReallyGoodResearcher&Writer8 UnitedStatesnowdemandedhugeinflowsofcapitaltorepairthedamages,which increasedthefeelingsofpanic.Withoutacentralbankingsystem,decisionsofother countriesmagnifiedtheimpactsofthedisasterontheUnitedStates.Accordingto KerryA.OdellandMarcD.Weidenmierintheirreporttitled“RealShock,Monetary Aftershock:The1906SanFranciscoEarthquakeandthePanicof1907,”thedamage tothecityofSanFranciscoexceededonepercentofthenation’sGrossNational Product.Infact,itisestimatedthatthedamagewassomewherebetween350 millionand500milliondollars,bringingthetotaldamageintermsofGrossNational Producttosomewherebetween1.3and1.8percent(Odell1003).TheUnitedStates broughtinlargeamountsofcapitalinanattempttoproviderelief,including$30 millionfromEnglandand$20millionfromGermany,France,andtheNetherlands (Bruner14).Additionally,Englandfacedanothermajorproblem.Itsinsurancefirms comprisedabouthalfofSanFrancisco’sfireinsurancepolicies,whichleftthenation withabout50milliondollarsinlosses(Bruner14).Inresponsetothis,England raiseditsratesongoldfrom3.5percentto4percent,andthenagainfrom4percent to6percentinanefforttokeepothernationsfromdrainingitsreserveofgold (Bruner15).AslargeamountsofcapitalflowedoutofNewYork,theNewYork StockExchangefeltasignificantimpactfromtheearthquake.Itisestimatedthe stockmarketfellabout12.5percenttotalfollowingtheearthquake,whichisequal toroughlyaonebilliondollardeclineinthevalueofthemarket(Bruner14).These estimatesareevidencethatpanicbegantoariseintheUnitedStatesin1906dueto decreasingsuppliesofdomesticcapitalandtheincreasingcostofforeigncapital, ReallyGoodResearcher&Writer9 whichresultedfromanaturaldisaster.Panicfromthenaturaldisaster,combined withacrashinthemarket,setthestagefora1907financialcrisis. ThePanicof1907 Theitemsdiscussedintheprevioussectionarethefoundationofthe financialcrisis.WhileeconomistsdoagreethattheSanFranciscoearthquake contributedtothePanicof1907,themaincauseiswidelyattributedtoadifferent setofevents.Again,thecommonthemeisthelackofacentralbankingsysteminthe UnitedStates.Withnolenderoflastresort,therewasno“reliablewaytoexpandthe moneysupplyintheUnitedStates”(Moen).Theeconomywascontracting,thestock marketwasfalling,andthelackofavailablecreditwasdrivingupinterestrates. Pricesofcommoditiesfelltwenty‐onepercent,bankruptciesclimbedbynearlyfifty percent,productionfellroughly11percent,andtheunemploymentratejumped from2.8to8percent(Bruner142).However,theUShadnomeansofrespondingto theseissues. Themaintriggertotheentirepanic,however,waswhenamannamedF. AugustusHeinzelookedtocornerthestockofamajorUnitedStatescopper company:UnitedCopperCompany.Atthetime,afirmbythenameofAmalgated CopperCompanycontrolledroughlyfiftypercentoftheU.S.coppermarketandwas regardedasamonopoly(McCulley145).Duringthefirsthalfof1907,thecopper markettookatumble,sotheAmalgatedCopperCompanysignificantlyreducedthe amountitreleasedtothemarketinanefforttosustaintheprice.TheAmalgated CopperCompanyinsteadstockpiledmostofitscopperwiththeUnitedMetals ReallyGoodResearcher&Writer10 SellingCompany,asubsidiary(McCulley145).F.AugustusHeinzewasabusiness competitortoAmalgated.HegainedcontrolofeightNewYorkbanksandusedfunds fromeachoneinanattempttomakemoneyoffthecoppermarketthroughstock. UnfortunatelyforHeinze,afterhepurchasedahugenumberofsharesofstockfrom theUnitedCopperCompany,theUnitedMetalsSellingCompanyreleasedmillionsof poundsofcopperintothemarket.Thisdrovedownthepriceofcopper,bringingthe priceofthecopperstockdownwithit(McCulley145).Thisdropinthemarket causedthosewhohadinvestedinthebanksthatHeinzecontrolledtolosefaith,and manyquicklysoughttowithdrawtheirdeposits,leavingthesebanksshorton capital. Asthepanicbegan,thesurfacestillappearedcalmbecausemanyofthe institutionsfacingpanicweretrustcompaniesandnotthebanksthemselves.Atthe time,theNewYorkClearingHouserequiredbankstoholdatleasttwenty‐five percentoftheirreservesincash.Thetrustcompanies,ontheotherhand,were understateregulationsandthereforewerenotobligatedtofollowtheguidelinesset bytheNewYorkClearingHouse.Theywerenotrequiredtokeepalloftheir reservesincash;theywereallowedtohavethemsecuredininvestments(Bruner 67).Infact,ofthefifteenpercentrequiredreserverate,thesetrustcompaniesonly hadtoholdone‐thirdincash(Bruner67).Thismeansthatthesetrustcompanies werenotequippedtorespondatatimewhencashwouldbeindemand,andthisis exactlythecaseinthePanicof1907. Whiletheeightbanksfacedscrutinyforparticipatingintheattemptto cornerthestockmarket,runsontrustcompaniesalsocontributedtothe ReallyGoodResearcher&Writer11 developmentofthepanic.ItisbelievedthatC.F.Morse,whowasinchargeofthe KnickerbockerTrustCompanylocatedinNewYork,wasinvolvedwithHeinzeinhis attempttocornerthecoppermarket(Moen).Again,thetrustcompanieswerenot directlyassociatedwiththeNewYorkClearingHouse.Duetothis,theNewYork ClearingHousewasnotresponsibleforprovidinga“bailout”tothetrustcompanies. DespitethefactthattheydidnothavingthebackingoftheClearingHouse,trust companiesweremoreattractivetoinvestorsbecausetheybroughtmuchhigher returns.Inaten‐yearperiodendingin1907trustcompaniessawtheirassetsgrow 244percenttoreachover1.3billiondollars,whilenationalbanksgrew97percent andtheassetsinstatebanksinNewYorkgrewonly82percent(Bruner67).Many companiesencounteredproblemsduringtheperiodfollowingtherunonthecopper market.Investorsbecamesuspectofwhatwasgoingonsotheybegantorapidly withdrawtheirfundsfrombanks,leavingfinancialinstitutionsevenmorestrapped forcashatatimewhentheywerealreadystrained.Ultimately,theNewYork ClearingHousedecidedtostopclearingchecksfortheKnickerbockerTrust Company,whichleadtoitsdemise(McCulley146).AlthoughtheKnickerbocker TrustCompanycouldnotbesaved,thenationlookedforotherresponsestothe Panicof1907. Responses:J.P.Morgan ThinkingthattheNewYorkClearingHousewasactingtooslowlyand outrightdisagreeingwithitsdecisiontostopclearingchecksfortheKnickerbocker TrustCompany,amanbythenameofJ.P.Morgantooktheinitiativeinseekinga ReallyGoodResearcher&Writer12 solutiontothepanic.J.P.Morgan,oneofthemostfamousprivatebankersand financiersinUnitedStateshistory,wasseventyyearsoldatthetimeofthepanic andarguablyinthestretchrunofhisbankingcareer.Morganrealizedthat somethingneededtobedonequicklyandthattheNewYorkClearingHousewasnot movingfastenoughwithitsdecisions.HealsobelievedthattheClearingHousewas notoperatingonascalelargeenoughtosaveAmerica’sfinancialsystem.Morgan assembledateamofprivateinvestorstoessentiallyspearheadtheshort‐term response(onetotwoweeksfollowingthefirstrun)tothepanic.Theydecidedthat itwastoolatetosavetheKnickerbockerTrustCompany,andtheyinsteadshifted theirfocustowardaidingotherfinancialinstitutionsinanefforttopreventthem fromsufferingthesamefate.Morgan’stopadvisersonthecommitteewereJames StillmanfromNationalCityBankandGeorgeBakerfromFirstNationalBank (Tallman7).Inadditiontothesethree,ateamofyoungfinanciersaidedinthe processofanalyzingtheassetsandliabilitiesoffinancialfirmstodeterminewhat neededtobedonetopreventarunontheircapital.OtherfirmsincludingtheTrust CompanyofAmericaandLincolnTrustexperiencedrunsontheircapital.Infact,the TrustCompanyofAmericapaidout47.5milliondollars(Tallman8).J.P.Morgan personallypledged3milliondollarstotheTrustCompanyofAmericatoallowitto remaininoperation. FollowingthispersonalpledgefromMorgan,otherwealthyAmericansjoined hisefforttosavetrustcompanies.JohnD.Rockefellerwasonesuchperson.Hegave 10milliondollarsofhisownmoneytobailoutvarioustrustcompanies(Tallman8). Morgan’splansandactionsevengarneredthesupportoftheUnitedStatesTreasury. ReallyGoodResearcher&Writer13 TheTreasury,underthedirectionofGeorgeCortelyou,gave37.6milliondollarsin aidtonationalbanks,beforeitcouldnolongeraffordtogiveanymoreofitsassets (Tallman8). Thenextstopintheshort‐termrecoverywastofindawaytogetthestock marketmovingupagain.ThistimeMorganandhisgroupgavetenmilliondollarsto therescuecauseandtheireffortsbarelykeptthestockmarketopenfortherestof theday(Tallman9). ClearlyMorgan’sworkwasstillfarfromdone.Panicactuallycontinuedto spreadallthewaytotheNewYorkgovernment,whichneededthirtymilliondollars tofulfillitsshort‐termobligations.TheMayorofNewYork,GeorgeMcClellan, turnedtoMorganforhelp.Tosolvetheissue,Morgan,alongwithStillmanand Baker,wroteathirtymilliondollar,sixpercentbondtothecityofNewYork,again puttingtheirownassetsonthelineavertfurthercrisis(Tallman10).Majortrust companiescontinuedtohaveissuesafterthisanditwasMorganyetagainwho convincedprivateinvestorstopooltogethertwenty‐fivemilliondollarstosave thesefinancialinstitutions.Afteraboutthreeweeksoftheseoperations,panicbegan tosubsidethroughoutNewYork,astrustcompanypresidentsfinallycametogether toformasupportnetworkforcompaniesexperiencingruns. TheworkofJ.P.MorganwassoincrediblycrucialtotheUnitedStates recoveringfromthepanic.Injustthreeweeks,Morganwasabletoformplansthat avertedmajordisaster.TheNewYorkClearingHousewasnotonlyactingslowly, butalsofoolishlyinitsdecisionsnottohelptrustcompanies.ItwasMorganwho recognizedthedangersoflettingtheselargecorporationsfailandwhatitmight ReallyGoodResearcher&Writer14 possiblymeanforthefutureofthecountry.Bypledginglargesumsofhisown money,hewasabletogainthesupportofotherpowerfulindividualsinAmericato saveitsfinancialinstitutions.Hisworkwasextremelydiversified,asheimpacted multiplesectorsoftheeconomy,usingtheskillsetthathelpedhimachievepersonal success.Morganwasalreadyconsideredoneofthegreatestfinanciersofhistime, buthisworkinthethreeweeksfollowingthefirstrunsontrustcompanies cementedhislegacyasabankingherointheUnitedStates.Today,itis acknowledgedthathesinglehandedlysavedthenationduringthispanic. Hisworksolvedmanyofthecountry’sshortrunproblems.Tosolvethe problemstheUSwouldfaceinthelongrun,includingavoidingasimilarfuturecrisis requiredadifferentsetofsolutions.Manyofthesesolutionscameintheformof newpolicy. Responses:PoliciesandtheFederalReserve J.P.Morgan’seffortswerecrucialtotheshort‐termsuccessoftheUnited Statesandkeptfinancialinstitutionsafloat.However,manypeoplerealizedthat long‐termchangeswereneededinordertoavoidanothercrisisinthefuture.Itwas apparenttothecitizensofUnitedStatesthatacentralbankingsystemwasneeded. Thelackofalenderoflastresortwasarecurringissueamongthepanicsofthelate 1800sandearly1900s,butacentralbankwouldactasalenderoflastresort.Atthe timemanyAmericanswereskepticalofalarge,centralizedbank,astheyfearedthe possibleeffectsofheavygovernmentinvolvementinthemonetarysystem.Itwas decided,however,thatasystemofsmall,undiversifiedbankswasmoreproneto ReallyGoodResearcher&Writer15 panicandcrisisthanacentralizedbankingsystem(Bruner161).TheUnitedStates coulduseacentralizedbanktoactasshockabsorbertotheeconomyandtoprotect thefinancialsystem. NelsonW.Aldrichwasthefirsttobeginthemovementforacentralized bankingsystem.In1908,CongresspassedtheAldrich‐VreelandAct(Bruner143). Theactsetupafundofemergencycurrencytoprovidetobanksbasedonthe reservestheyheld.TheNationalReserveAssociationwasappointedtomonitorand distributethesefundsasneeded,anditwasthelargestholderofthenation’s reserves(McCulley238).Unfortunately,Aldrich’splanwasneverfullyrealized, becausepeoplefearedthatthebankingclasswouldobtainfullcontroloverthis organization.Inhisarticle“BankingReformintheUnitedStates”thatappearedin TheAmericanEconomicReview,E.W.Kemmerernotesthat,“thegreatobstacletothe reformhasbeenthefearthattheNationalReserveAssociationwouldbecontrolled andselfishlyexploitedbyfinancialinterests”(Kemmerer53).Thefearofalarge, centralizedpowerstillinfluencedthethoughtsandactionsofmanypeople.Thefear ofasinglegroupinsocietygaininganadvantagethroughtheuseofagovernment systemseverelyslowedtheprogresstowardestablishingacentralizedbankinthe UnitedStates.Everyattempttoestablishsuchaninstitution,includingthefirstand secondbanksoftheUnitedStates,failedtobecomepermanentmainstaysinthe country. Additionally,Aldrichtriedtobeaspoliticallyneutralaspossibleinhis approachtocraftinghisplan.Heaimedtokeeptheroleofgovernmentinhis bankingsystemverylimited.Henearlywantedthegovernmenttobeanon‐existent ReallyGoodResearcher&Writer16 factorintheNationalReserveAssociation.Unfortunately,thiswasalsoadownfallin hisplan.ForthistobeasuccesshewouldneedthesupportoftheRepublicanparty butit“ignoredtheplan,probablyinpart,becauseitwasthedesireoftheleadersto keepthequestionofbankingreformoutofthepoliticalarena”(Kemmerer53).The lasthopefortheAldrichActtobecomepermanentintheUnitedStatesfadedwith the1910Congressionalelection,inwhichtheDemocraticpartytookamajorityof theUnitedStatesCongress(Bruner146).TheDemocraticpartyadmittedtherewas aneedforreforminthebankingsystem,butsimplydidnotagreewiththeplanlaid outintheAldrichAct.However,peoplestillrecognizedtheneedforalenderoflast resort.IntheyearsfollowingthefailureoftheAldrichAct,theUnitedStatespassed arguablyoneofthemostimportantreformsinitshistory. Knowingthatmajorfinancialreformswerenecessary,thenationlookedto setupasystemtoprotecttheUScurrency.OnDecember22,1913,Congresspassed theFederalReserveAct,whichservedas“anacttoprovidefortheestablishmentof FederalReserveBanks,tofurnishanelasticcurrency,toaffordmeansof rediscountingcommercialpaper,toestablishamoreeffectivesupervisionof banking,andforotherpurposes”(Bruner146).Theactestablishedthreemaingoals fortheFederalReserve.Thesewereasfollows:tomaximizeemploymentinthe UnitedStates,tokeeppricesstable,andtocontrollong‐terminterestrates.The creatorsoftheFederalReserveActdividedthenationintotwelvedistricts,each withitsownregionalreservebank.Thisdivisionwasmeanttopreservethesense thatthecentralizedbankingsystemhadlimitedpower.However,eachofthese bankswouldhavethesamepowers,whichincludedtheabilitytoprintcurrency. ReallyGoodResearcher&Writer17 Writingthisactwascomplicated.Thewritershadtobalancethe divisionofpowerandresponsibilitiesbetweenpublicandprivateparties.This balancewasnecessaryinordertopreventthegovernmentfromhavingtoomuch influenceovertheFederalReserve.However,thewritersalsoneededtobesurethe FederalReservefollowedtheguidelinesforreserverequirementsandsoon.One provisionestablishedoftheFederalReserveBoard.Thisteamofpeoplerepresented thepublic’sinterestswithregardtotheFederalReserve.Itwastheresponsibilityof thisBoardto“overseetheoperationofthesystem”(Toma).Thebalanceinthe FederalReserveiswellestablished.ItdoesnotneedapprovalfromtheUnited Statesgovernmenttotakeactiononanissue,butatthesametime,itisresponsible foritsownfundingandshouldnotlooktoCongressforcapital. OnemajorbreakthroughwiththeFederalReserveActwasthatitconvinced bankstoholdtheirreserveswiththeregionalbanksoftheFederalReserve (McCulley297).Thispreventedbanksfromlockinguplargeamountsoftheir reservesinnon‐cashassets.ThisalsogavetheFederalReservetheopportunityto helpallbanksinatimeofpanicorcrisis,ratherthanjustthelargerbanks.Again,the mainpurposeoftheFederalReservewastoserveasalenderoflastresortwho couldprovideassistancetobanksintimesofpanic.Thelate1800sandearly1900s sawahandfulofbankingcrises.Witheachoneitbecamemoreandmoreapparent thattheUnitedStatesneededsomeformoflenderoflastresorttoprovidecapitalin timesofcrises,aswellashandletaskssuchasadjustthediscountrateinattemptto preventafinancialcrisisfromhappeninginthefirstplace.Overtime,theUnited Stateshasexperienceddifferenteconomicshocks,aswellasexpansionand ReallyGoodResearcher&Writer18 diversificationinitsfinancialsystem.Additionally,theFederalReservehasevolved, withitsstructureandresponsibilitieschangingasneeded.Itsfoundingprinciples stillexist,butnewassembliesofpeoplesuchastheFederalOpenMarketCommittee havearisenwiththeneedfortheFederalReservetotakeonnewresponsibilities. PassingtheFederalReserveActwasacrucialtimeinourhistoryasithashelpedto lessentheeffectsoffinancialcrisesandstabilizethecurrencyoftheUnitedStates. Comparison:ThePanicof1907relativetootherCrises Ifthereisonethingthateconomistscanagreeon,itisthatfinancialcrises arenothingnew.Financialcriseshavebeeninexistenceaslongasmoneyhas.While eachoneisaseparateeventwithuniquecausesandeffects,economistsoftenfind similaritiesamongthem.Forexample,asdiscussedearlier,afinancialcrisisdoes notspringoutofnowhere.Theyallstartwithsomeformofpanic.Inthefinancial crisisof2008,thetroublestartedwhenabubbleinthehousingmarketeventually burst.Thepanicamonginvestors,however,startedwheninvestorsdiscoveredhigh potentialfordefaultamongsubprimemortgagesgivenouttopeopletofinancetheir homes(Tucker).In1906,anearthquakethatdestroyedmuchofSanFranciscoleft thecountryinfinancialtroubleduetohighdemandforcapitalaroundtheworld. Thesepanicsalsosharedsomeothersimilarities.Weoftenfindthatpanicscome withwavesofthebusinesscycle.Inbothcases,1907and2008,thepanicsandcrises followedperiodsofeconomicgrowth.TheUnitedStatessawstrongeconomic growthintheearly1900s,precedingthePanicof1907,andsawstronggrowth ReallyGoodResearcher&Writer19 againfromthelate1990sintotheearly2000spriortothatcrisis.Withmore foresight,itisthoughtthatperhapsbothcrisescouldhavebeenavoidedaltogether. Thepanicsof1907and1873shareothersimilaritiesaswell.Infact,both developedintointernationalcrises(Kindleberger137).AswiththePanicof1907, thePanicof1873occurredatatimewhencountriesaroundtheworlddemanded capital.Muchofthiscapitaldemandcameascountriesbeganinvestinginmore foreigngoods,suchastheGermansinvestinginAmericanRailroadsandUnited StatesexportinggoodstoEuropeanmarkets(Kindleberger138).Anothercommon linkbetweenthetwocrisesisthattheUnitedStateshadnocentralizedbanking systemduringeitherpanic.Expertsbelievethathavingacentralizedbankcould havelessenedthepanicsorpreventedthemaltogether,muchasEnglandwasable tosteerthemselvesawayfromthecrisisintheearly1900s.OncetheFederal Reservewasputinplace,theUnitedStateshadamuchbetterchanceofpreventing financialpanicbecauseitnowhadasystemtocontrolinterestratesandprotect capital.Ifpeoplehadnotbeenreluctanttoactandformacentralbank,perhapsthe Panicof1907wouldnotevenbeapartofUSeconomichistory. Conclusion ThePanicof1907wasarevolutionarytimeinUnitedStatesfinancialhistory. Thepanicwasafinancialcrisisthatcameontheheelsofanaturaldisaster.It followedaperiodofbusinessgrowthandeconomicexpansionintheUS,andit markedatimeofsignificantchangeintheUnitedStatesmonetarysystemthatisstill ineffecttoday.Poordecision‐makingbyindividualscombinedwithpoorpolicyin ReallyGoodResearcher&Writer20 thecountryleadtooneoftheworstfinancialpanicsinUShistory.Trustcompanies failed,theUnitedStatesTreasurynearlywentbroke,andvariousotherindustries felttheeffectsasunemploymentroseandindustrialproductiondeclined. Thoughthecrisishadanegativeimpactonmanypeople,numerouspositive thingscameaboutasaresultofit.J.P.Morgan,arguablythemostfamousbankerin UnitedStateshistory,cementedhisplaceasoneofthemostimportantand influentialaswell.HiseffortstopreservecompaniesandbanksinAmericawere criticaltothesuccessandsustainabilityofthenation,atatimewhenthethreatof thecountrydefaultingonitscurrencywasarealpossibility. Inresponsetotheseproblems,thenationdevelopedoneofthemost importantpoliciesinUShistory:thecreationoftheFederalReserve.SincetheUS experiencedseveralfinancialcrisesinthe1800sandearly1900s,itbecame apparentthattheUnitedStateswouldneedacentralizedbanktobackitscurrency andprovidealenderoflastresort.TheFederalReservepolicyworkedoutwellfor theUnitedStates,andithasanevenmoreextensiveroleinthemonetarysystem today. ThesignificanceofthePanicof1907washowtheUnitedStatesresponded.It wasaturningpointinthecounty’shistoryintermsofmovingpastthenation’sfear oftoomuchgovernmentcontrolinthewrongplaces.Previously,problemswere ignoredandnochangesweremadeinresponsetootherfinancialcrises.Atthis time,however,thenationlookedforchangestopreventfutureissues.Someofits mostinfluentialcitizensactedasleadersduringthiscrisis. ReallyGoodResearcher&Writer21 WhilemanythingswentwrongfortheUnitedStatesandmanyregardthe Panicof1907asoneoftheworstfinancialcrisesinthenation’shistory,alotof positivechangegrewfromit.Peopleprogressedandpoliciesemergedthatshaped theUnitedStatesintothepowerfulfinancialinstitutionitistoday. ReallyGoodResearcher&Writer22 WorksCited Bruner,RobertF.,andSeanD.Carr.ThePanicof1907:LessonsLearnedfromthe Market'sPerfectStorm.Hoboken,NJ:JohnWiley&Sons,2007. Kemmerer,E.W."BankingReformintheUnitedStates."TheAmericanEconomic Review3.1(1913):52‐63.JSTOR.Web.8Nov.2012. http://www.jstor.org/stable/1803457. Kindleberger,CharlesP.Manias,PanicsandCrashes:AHistoryofFinancialCrises. Hoboken:JohnWiley&Sons,2005. McCulley,RichardT.BanksandPoliticsduringtheProgressiveEra:TheOriginsofthe FederalReserveSystem,1897‐1913.NewYork:GarlandPub.,1992. 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