sign in sign up
<<
Home , Panic of 1837, Panic of 1873, Panic of 1907, Shock (economics)

The and the Responses of the

Really Good Researcher & Writer Econ 40413 11 December 2012

Abstract: The Panic of 1907 was a major in United States history both in terms of the events that caused it and the policies the United States adopted in response to its occurrence. The Panic of 1907 happened at a time when the US economy was already in . It was officially considered a panic when the New York Exchange fell nearly fifty percent in a day. The effects of this crash in New York quickly spread throughout the entire country. The Panic of 1907 piqued my interest because I saw an opportunity to take the topic in different directions. One focus of this paper will be to examine the causes of the Panic of 1907, including the decisions bankers made that led to it. Additionally, this was a major time period in the evolution of the United States monetary system, which allows one to also explore the results of the Panic, primarily what the country did in response to prevent another such panic from occurring. The Panic of 1907 was unique in the sense of the rise of individual actions, which helped save the country from bigger problems, specifically J.P. Morgan, who is widely regarded as one of the most influential financiers ever. Covering the Panic of 1907 will allow me to explore the mistakes people made leading up to it, what specifically caused it, and how the country pulled itself out of it. Additionally, economists also find similarities among the financial crises that have occurred throughout history, which provides another opportunity to potentially look at similarities between this one and even our most recent financial crisis in 2008.

Really Good Researcher & Writer 2

The Panic of 1907 and the Responses of the United States

Really Good Researcher & Writer

Abstract: The Panic of 1907 was a major financial crisis in United States history in terms of both the events that caused it and the policies adopted by the United States in response to its occurrence. The Panic of 1907 came during a time in which the United States economy was already in recession. It officially became a panic when the fell nearly fifty percent in a day. The effects of this crash in New York quickly spread throughout the entire country. The Panic of 1907 became of interest to me as I saw an opportunity to take the topic in different directions. One focus of this paper will be to examine the causes of the Panic of 1907, and the decisions people, namely bankers, made that led to it. Additionally, this was a major time period in the evolution of the United States monetary system, which allows one to also explore the results of the Panic, primarily what the country did in response to prevent another such panic from occurring. The Panic of 1907 was unique in the sense of the rise of individual actions, which helped save the country from bigger problems, specifically J.P. Morgan, who is widely regarded as one of the most influential financiers ever. Covering the Panic of 1907 will allow me to explore the mistakes people made leading up to it, what specifically caused it, and how the country pulled itself out of it. Additionally, economists also find similarities among the financial crises that have occurred throughout history, which provides another opportunity to potentially look at similarities between this one and even our most recent financial crisis in 2008.

Introduction Really Good Researcher & Writer 3

The Panic of 1907, also commonly known as the Bankers’ Panic, proved to be a pivotal time in the history of the United States monetary system. The mistakes and failures that led to it were analyzed and major reforms swept the nation. Although the country was apprehensive about establishing a central banking system following the nation’s first two attempts at a federal bank, bankers were free to use money and had limited restrictions on things such as required reserves. Previous panics in the US, including the , also led many citizens of the country to become skeptical of large banking. Additionally, this was a time when controlled much of industry in the US and these monopolies played a pivotal role in the panic, as well as the outcomes. It can be argued that, in addition to the banks, monopolies and powerful individuals were the most critical players in the Panic of

1907.

The Panic of 1907 was much more than a monetary panic that spanned one year. When looking at the crisis, one must consider numerous factors, including the events immediately preceding the panic, the causes of the disaster, and the influential people involved and the decisions they made. One must also examine the actions taken by people and institutions to resolve the panic and settle a nation, as well as the policies that were developed and adopted in response to the Panic of

1907. It is also interesting to compare the Panic of 1907 to other financial crises in history, as economists realize this type of problem is nothing new. Economists generally agree that there are similarities between most historical financial crises, regardless of when they take place. Even though the most recent financial crisis and the Panic of 1907 occurred slightly more than one hundred years apart, it is more Really Good Researcher & Writer 4

than likely that they have at least one characteristic in common. The most critical

topics to analyze regarding the Panic of 1907 are its causes, the reactions of the

nation during the panic, and the changes that resulted from our nation’s responses.

19th Century United States Banking

The was an unstable time in United States banking. This was a

century that saw the US suffer through multiple financial crises. At this time there

were still many people in the United States that were wary of establishing a large,

centralized banking system in the US, a mindset that went back to the earliest roots

of the nation. This left the task of handling the majority of banking to the city of New

York. In the 1800s, New York was the only central reserve city in the entire country

(Wicker 29). This helped to alleviate the effects of in the 1800s on the

state of New York, but these financial problems had much greater impact on various

other states across the country. During the early recessions in the 19th century,

numerous banks around the country failed, due in large part to the fact that they

were not responsible with their liquid assets (Wicker 21). New York, however was

centralized and powerful in banking, and therefore only felt a much lesser effect of

these panics compared to other states such as Ohio, Indiana, Illinois, Massachusetts,

New Jersey and Connecticut. It is estimated that these other states suffered about

twice as much economic contraction as New York did during these panics (Wicker

29). With so much of the nation’s banking focused in New York, the New York

Clearing House was essentially the for the US. The decisions of

the New York had major impacts on the effects of financial crises in Really Good Researcher & Writer 5

the 1800s. The Panic of 1907 would ultimately be the last disaster it faced, as reform

prompted a change in the lender of last resort.

The Pre‐Panic Years

Understanding the causes of the Panic of 1907 is crucial to developing a

foundation of knowledge that allows one to understand the impacts and results of

the financial crisis. It is important to realize that the Panic of 1907 was not a sudden

occurrence due to problems within the banking system. Instead, it resulted from a

buildup of poor decision‐making, and it was essentially a gamble that went the

wrong way. While banks contribute to the causes of the Panic of 1907, other major players in the creation of the panic were companies. Many trust companies existed in New York at the time and operated as a place for wealthier people to invest their money. Following the banking panic that the United States suffered in

1893, the New York Clearing House was still the major lender to banks as “no attempt had been made in the interim (1893‐1907) to devise a strategy for preventing banking panics” (Wicker 83). Failure to act on these previous panics in the 1800s led to the country’s continued inability to prevent and solve a new crisis, particularly the one that would happen in 1907. According to Richard T. McCulley in his book Banks and Politics During the : The Origins of the Federal

Reserve System, 1897‐1913, the United States was experiencing a time of expanding business that was creating a boom and driving up interest rates

(McCulley 121). This was beneficial for the nation’s economy, but it began to put a lot of pressure on banks to meet cash demands of investors. In addition, banks did Really Good Researcher & Writer 6 not keep an adequate supply of liquid reserves on hand, because regulations were loose and did not force banks to do so (McCulley 120). This factor also contributed to the strain on the banks. The United States began to see warning signs that indicated potential panic in the monetary system, and some people did in fact try to act before the crisis hit. Leslie M. Shaw, was the United States Secretary of the

Treasury at the time, pushed Congress to convert the treasury into a in order to give it more control over contractions and expansions in the and to establish it as a central reserve fund (McCulley 119). Unfortunately, the

Federal Government was unable to reach an agreement on how to proceed and

Shaw’s ideas never came to fruition.

Another key aspect in the pre‐panic era is the relationship between the

United States banks and banks around the world, particularly those in .

During the early 1900s, the US had been borrowing large amounts of capital from

European banks, primarily banks in London and Italy. The United States imported gold from London mostly on accommodation paper, which allowed companies and banks to borrow large sums of capital in the form of ‐term loans that effectively became long‐term loans because the borrower could continue to roll them over as they matured year after year (Kindleberger 77). This form of borrowing was developed in the early 19th century in response to the suspension of the , even though gold was still a popularly traded commodity, especially between Europe and the United States. Borrowing from the was not the major issue facing the United States, but rather the structural differences between the two banks posed a problem. London was a centralized banking system, Really Good Researcher & Writer 7

which meant that the London banks had control over the discount rate used to

adjust its interest rates. In fact, the banks in London used this power to avoid the

financial that hit Austria and , as well as the United States

(Kindleberger 88). New York, on the other hand, was not a central bank and

therefore could not control this. This meant that if London made a change, the

United States had no means to respond in order to avert a crisis. For instance, if a

problem unexpectedly arose in England and they needed to raise their interest

rates, the United States would owe more money on their debts. However, the US

would have no internal way of raising this capital, and would face a potential

disaster. This example demonstrates the need for a lender of last resort. In fact, this

is one of the major problems the United States encountered on the way to the

financial panic.

In their book titled Manias, Panics, and Crashes: A History of Financial Crises,

Charles P. Kindleberger and Robert Adler devote a section to clearly defining a crash and a panic, both of which can play a part in a financial crisis. The authors say that a crash is a “collapse of the prices of assets, or perhaps the failure of an important firm

or bank. A panic, ‘a sudden fright without cause’ may occur in asset markets or

involve a rush from less liquid securities to money of government securities”

(Kindleberger 110). In the United States, the panic was set off by a natural disaster

in 1906. An earthquake registering 8.3 on the Richter scale struck the city of San

Francisco in April of 1906. This created panic in the US monetary system because

San Francisco was the financial center of the West at that time (Odell 1010). A fire accompanied the San Francisco earthquake, leaving much of the city in ruins. The Really Good Researcher & Writer 8

United States now demanded huge inflows of capital to repair the damages, which increased the feelings of panic. Without a central banking system, decisions of other countries magnified the impacts of the disaster on the United States. According to

Kerry A. Odell and Marc D. Weidenmier in their report titled “Real , Monetary

Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907,” the damage to the city of San Francisco exceeded one percent of the nation’s Gross National

Product. In fact, it is estimated that the damage was somewhere between 350 million and 500 million dollars, bringing the total damage in terms of Gross National

Product to somewhere between 1.3 and 1.8 percent (Odell 1003). The United States brought in large amounts of capital in an attempt to provide relief, including $30 million from England and $20 million from Germany, , and the Netherlands

(Bruner 14). Additionally, England faced another major problem. Its firms comprised about half of San Francisco’s fire insurance policies, which left the nation with about 50 million dollars in losses (Bruner 14). In response to this, England raised its rates on gold from 3.5 percent to 4 percent, and then again from 4 percent to 6 percent in an effort to keep other nations from draining its reserve of gold

(Bruner 15). As large amounts of capital flowed out of New York, the New York

Stock Exchange felt a significant impact from the earthquake. It is estimated the stock market fell about 12.5 percent total following the earthquake, which is equal to roughly a one billion dollar decline in the value of the market (Bruner 14). These estimates are evidence that panic began to arise in the United States in 1906 due to decreasing supplies of domestic capital and the increasing cost of foreign capital, Really Good Researcher & Writer 9 which resulted from a natural disaster. Panic from the natural disaster, combined with a crash in the market, set the stage for a 1907 financial crisis.

The Panic of 1907

The items discussed in the previous section are the foundation of the financial crisis. While economists do agree that the San Francisco earthquake contributed to the Panic of 1907, the main cause is widely attributed to a different set of events. Again, the common theme is the lack of a central banking system in the

United States. With no lender of last resort, there was no “reliable way to expand the money supply in the United States” (Moen). The economy was contracting, the stock market was falling, and the lack of available credit was driving up interest rates.

Prices of commodities fell twenty‐one percent, climbed by nearly fifty percent, production fell roughly 11 percent, and the unemployment rate jumped from 2.8 to 8 percent (Bruner 142). However, the US had no means of responding to these issues.

The main trigger to the entire panic, however, was when a man named F.

Augustus Heinze looked to corner the stock of a major United States copper company: United Copper Company. At the time, a firm by the name of Amalgated

Copper Company controlled roughly fifty percent of the U.S. copper market and was regarded as a (McCulley 145). During the first half of 1907, the copper market took a tumble, so the Amalgated Copper Company significantly reduced the amount it released to the market in an effort to sustain the price. The Amalgated

Copper Company instead stockpiled most of its copper with the United Metals Really Good Researcher & Writer 10

Selling Company, a subsidiary (McCulley 145). F. Augustus Heinze was a business

competitor to Amalgated. He gained control of eight New York banks and used funds

from each one in an attempt to make money off the copper market through stock.

Unfortunately for Heinze, after he purchased a huge number of shares of stock from

the United Copper Company, the United Metals Selling Company released millions of

pounds of copper into the market. This drove down the price of copper, bringing the

price of the copper stock down with it (McCulley 145). This drop in the market

caused those who had invested in the banks that Heinze controlled to lose faith, and

many quickly sought to withdraw their deposits, leaving these banks short on

capital.

As the panic began, the surface still appeared calm because many of the

institutions facing panic were trust companies and not the banks themselves. At the

time, the New York Clearing House required banks to hold at least twenty‐five

percent of their reserves in cash. The trust companies, on the other hand, were

under state regulations and therefore were not obligated to follow the guidelines set

by the New York Clearing House. They were not required to keep all of their

reserves in cash; they were allowed to have them secured in investments (Bruner

67). In fact, of the fifteen percent required reserve rate, these trust companies only

had to hold one‐third in cash (Bruner 67). This means that these trust companies were not equipped to respond at a time when cash would be in demand, and this is exactly the case in the Panic of 1907.

While the eight banks faced scrutiny for participating in the attempt to corner the stock market, runs on trust companies also contributed to the Really Good Researcher & Writer 11 development of the panic. It is believed that C.F. Morse, who was in charge of the

Knickerbocker Trust Company located in New York, was involved with Heinze in his attempt to corner the copper market (Moen). Again, the trust companies were not directly associated with the New York Clearing House. Due to this, the New York

Clearing House was not responsible for providing a “bailout” to the trust companies.

Despite the fact that they did not having the backing of , trust companies were more attractive to investors because they brought much higher returns. In a ten‐year period ending in 1907 trust companies saw their assets grow

244 percent to reach over 1.3 billion dollars, while national banks grew 97 percent and the assets in state banks in New York grew only 82 percent (Bruner 67). Many companies encountered problems during the period following the run on the copper market. Investors became suspect of what was going on so they began to rapidly withdraw their funds from banks, leaving financial institutions even more strapped for cash at a time when they were already strained. Ultimately, the New York

Clearing House decided to stop clearing checks for the Knickerbocker Trust

Company, which lead to its demise (McCulley 146). Although the Knickerbocker

Trust Company could not be saved, the nation looked for other responses to the

Panic of 1907.

Responses: J.P. Morgan

Thinking that the New York Clearing House was acting too slowly and outright disagreeing with its decision to stop clearing checks for the Knickerbocker

Trust Company, a man by the name of J.P. Morgan took the initiative in seeking a Really Good Researcher & Writer 12 solution to the panic. J.P. Morgan, one of the most famous private bankers and financiers in United States history, was seventy years old at the time of the panic and arguably in the stretch run of his banking career. Morgan realized that something needed to be done quickly and that the New York Clearing House was not moving fast enough with its decisions. He also believed that the Clearing House was

not operating on a scale large enough to save America’s financial system. Morgan

assembled a team of private investors to essentially spearhead the short‐term

response (one to two weeks following the first run) to the panic. They decided that

it was too late to save the Knickerbocker Trust Company, and they instead shifted

their focus toward aiding other financial institutions in an effort to prevent them

from suffering the same fate. Morgan’s top advisers on the committee were James

Stillman from National City Bank and George Baker from First

(Tallman 7). In addition to these three, a team of young financiers aided in the

process of analyzing the assets and liabilities of financial firms to determine what

needed to be done to prevent a run on their capital. Other firms including the Trust

Company of America and Lincoln Trust experienced runs on their capital. In fact, the

Trust Company of America paid out 47.5 million dollars (Tallman 8). J.P. Morgan

personally pledged 3 million dollars to the to allow it to

remain in operation.

Following this personal pledge from Morgan, other wealthy Americans joined

his effort to save trust companies. John D. Rockefeller was one such person. He gave

10 million dollars of his own money to bail out various trust companies (Tallman 8).

Morgan’s plans and actions even garnered the support of the United States Treasury. Really Good Researcher & Writer 13

The Treasury, under the direction of George Cortelyou, gave 37.6 million dollars in

aid to national banks, before it could no longer afford to give any more of its assets

(Tallman 8).

The next stop in the short‐term recovery was to find a way to get the stock

market moving up again. This time Morgan and his group gave ten million dollars to

the rescue cause and their efforts barely kept the stock market open for the rest of

the day (Tallman 9).

Clearly Morgan’s work was still far from done. Panic actually continued to

spread all the way to the New York government, which needed thirty million dollars

to fulfill its short‐term obligations. The Mayor of New York, George McClellan,

turned to Morgan for help. To solve the issue, Morgan, along with Stillman and

Baker, wrote a thirty million dollar, six percent to the city of New York, again

putting their own assets on the line avert further crisis (Tallman 10). Major trust

companies continued to have issues after this and it was Morgan yet again who

convinced private investors to pool together twenty‐five million dollars to save

these financial institutions. After about three weeks of these operations, panic began

to subside throughout New York, as trust company presidents finally came together

to form a support network for companies experiencing runs.

The work of J.P. Morgan was so incredibly crucial to the United States

recovering from the panic. In just three weeks, Morgan was able to form plans that

averted major disaster. The New York Clearing House was not only acting slowly,

but also foolishly in its decisions not to help trust companies. It was Morgan who

recognized the dangers of letting these large corporations fail and what it might Really Good Researcher & Writer 14 possibly mean for the future of the country. By pledging large sums of his own

money, he was able to gain the support of other powerful individuals in America to save its financial institutions. His work was extremely diversified, as he impacted multiple sectors of the economy, using the skill set that helped him achieve personal success. Morgan was already considered one of the greatest financiers of his time, but his work in the three weeks following the first runs on trust companies cemented his legacy as a banking hero in the United States. Today, it is acknowledged that he single handedly saved the nation during this panic.

His work solved many of the country’s short run problems. To solve the problems the US would face in the long run, including avoiding a similar future crisis required a different set of solutions. Many of these solutions came in the form of new policy.

Responses: Policies and the

J.P. Morgan’s efforts were crucial to the short‐term success of the United

States and kept financial institutions afloat. However, many people realized that long‐term changes were needed in order to avoid another crisis in the future. It was apparent to the citizens of United States that a central banking system was needed.

The lack of a lender of last resort was a recurring issue among the panics of the late

1800s and early 1900s, but a central bank would act as a lender of last resort. At the time many Americans were skeptical of a large, centralized bank, as they feared the possible effects of heavy government involvement in the monetary system. It was decided, however, that a system of small, undiversified banks was more prone to Really Good Researcher & Writer 15 panic and crisis than a centralized banking system (Bruner 161). The United States could use a centralized bank to act as shock absorber to the economy and to protect the financial system.

Nelson W. Aldrich was the first to begin the movement for a centralized banking system. In 1908, Congress passed the Aldrich‐Vreeland Act (Bruner 143).

The act set up a fund of emergency currency to provide to banks based on the reserves they held. The National Reserve Association was appointed to monitor and distribute these funds as needed, and it was the largest holder of the nation’s reserves (McCulley 238). Unfortunately, Aldrich’s plan was never fully realized, because people feared that the banking class would obtain full control over this organization. In his article “Banking Reform in the United States” that appeared in

The American Economic Review, E.W. Kemmerer notes that, “the great obstacle to the reform has been the fear that the National Reserve Association would be controlled and selfishly exploited by financial interests” (Kemmerer 53). The fear of a large, centralized power still influenced the thoughts and actions of many people. The fear of a single group in society gaining an advantage through the use of a government system severely slowed the progress toward establishing a centralized bank in the

United States. Every attempt to establish such an institution, including the first and second banks of the United States, failed to become permanent mainstays in the country.

Additionally, Aldrich tried to be as politically neutral as possible in his approach to crafting his plan. He aimed to keep the role of government in his banking system very limited. He nearly wanted the government to be a non‐existent Really Good Researcher & Writer 16 factor in the National Reserve Association. Unfortunately, this was also a downfall in

his plan. For this to be a success he would need the support of the Republican party but it “ignored the plan, probably in part, because it was the desire of the leaders to keep the question of banking reform out of the political arena” (Kemmerer 53). The

last hope for the Aldrich Act to become permanent in the United States faded with

the 1910 Congressional election, in which the Democratic party took a majority of

the (Bruner 146). The Democratic party admitted there was

a need for reform in the banking system, but simply did not agree with the plan laid

out in the Aldrich Act. However, people still recognized the need for a lender of last

resort. In the years following the failure of the Aldrich Act, the United States passed

arguably one of the most important reforms in its history.

Knowing that major financial reforms were necessary, the nation looked to

set up a system to protect the US currency. On December 22, 1913, Congress passed

the , which served as “an act to provide for the establishment of

Federal Reserve Banks, to furnish an elastic currency, to afford means of

rediscounting commercial paper, to establish a more effective supervision of

banking, and for other purposes” (Bruner146). The act established three main goals

for the Federal Reserve. These were as follows: to maximize in the

United States, to keep prices stable, and to control long‐term interest rates. The

creators of the Federal Reserve Act divided the nation into twelve districts, each

with its own regional reserve bank. This division was meant to preserve the sense

that the centralized banking system had limited power. However, each of these

banks would have the same powers, which included the ability to print currency. Really Good Researcher & Writer 17

Writing this act was complicated. The writers had to balance the division of power and responsibilities between public and private parties. This balance was necessary in order to prevent the government from having too much influence over the Federal Reserve. However, the writers also needed to be sure the

Federal Reserve followed the guidelines for reserve requirements and so on. One provision established of the Federal Reserve Board. This team of people represented the public’s interests with regard to the Federal Reserve. It was the responsibility of this Board to “oversee the operation of the system” (Toma). The balance in the

Federal Reserve is well established. It does not need approval from the United

States government to take action on an issue, but at the same time, it is responsible for its own funding and should not look to Congress for capital.

One major breakthrough with the Federal Reserve Act was that it convinced banks to hold their reserves with the regional banks of the Federal Reserve

(McCulley 297). This prevented banks from locking up large amounts of their reserves in non‐cash assets. This also gave the Federal Reserve the opportunity to help all banks in a time of panic or crisis, rather than just the larger banks. Again, the main purpose of the Federal Reserve was to serve as a lender of last resort who could provide assistance to banks in times of panic. The late 1800s and early 1900s saw a handful of banking crises. With each one it became more and more apparent that the United States needed some form of lender of last resort to provide capital in times of crises, as well as handle tasks such as adjust the discount rate in attempt to prevent a financial crisis from happening in the first place. Over time, the United

States has experienced different economic shocks, as well as expansion and Really Good Researcher & Writer 18 diversification in its financial system. Additionally, the Federal Reserve has evolved,

with its structure and responsibilities changing as needed. Its founding principles

still exist, but new assemblies of people such as the Federal Open Market Committee have arisen with the need for the Federal Reserve to take on new responsibilities.

Passing the Federal Reserve Act was a crucial time in our history as it has helped to lessen the effects of financial crises and stabilize the currency of the United States.

Comparison: The Panic of 1907 relative to other Crises

If there is one thing that economists can agree on, it is that financial crises are nothing new. Financial crises have been in existence as long as money has. While each one is a separate event with unique causes and effects, economists often find similarities among them. For example, as discussed earlier, a financial crisis does not spring out of nowhere. They all start with some form of panic. In the financial crisis of 2008, the trouble started when a bubble in the housing market eventually burst. The panic among investors, however, started when investors discovered high potential for default among subprime mortgages given out to people to finance their homes (Tucker). In 1906, an earthquake that destroyed much of San Francisco left the country in financial trouble due to high demand for capital around the world.

These panics also shared some other similarities. We often find that panics come with waves of the . In both cases, 1907 and 2008, the panics and crises followed periods of economic growth. The United States saw strong economic growth in the early 1900s, preceding the Panic of 1907, and saw strong growth Really Good Researcher & Writer 19 again from the late 1990s into the early 2000s prior to that crisis. With more foresight, it is thought that perhaps both crises could have been avoided altogether.

The panics of 1907 and 1873 share other similarities as well. In fact, both

developed into international crises (Kindleberger 137). As with the Panic of 1907,

the Panic of 1873 occurred at a time when countries around the world demanded capital. Much of this capital demand came as countries began investing in more foreign goods, such as the Germans investing in American Railroads and United

States exporting goods to European markets (Kindleberger 138). Another common link between the two crises is that the United States had no centralized banking system during either panic. Experts believe that having a centralized bank could have lessened the panics or prevented them altogether, much as England was able to steer themselves away from the crisis in the early 1900s. Once the Federal

Reserve was put in place, the United States had a much better chance of preventing financial panic because it now had a system to control interest rates and protect capital. If people had not been reluctant to act and form a central bank, perhaps the

Panic of 1907 would not even be a part of US .

Conclusion

The Panic of 1907 was a revolutionary time in United States financial history.

The panic was a financial crisis that came on the heels of a natural disaster. It followed a period of business growth and in the US, and it marked a time of significant change in the United States monetary system that is still in effect today. Poor decision‐making by individuals combined with poor policy in Really Good Researcher & Writer 20 the country lead to one of the worst financial panics in US history. Trust companies

failed, the United States Treasury nearly went broke, and various other industries

felt the effects as unemployment rose and industrial production declined.

Though the crisis had a negative impact on many people, numerous positive

things came about as a result of it. J.P. Morgan, arguably the most famous banker in

United States history, cemented his place as one of the most important and

influential as well. His efforts to preserve companies and banks in America were

critical to the success and sustainability of the nation, at a time when the threat of the country defaulting on its currency was a real possibility.

In response to these problems, the nation developed one of the most important policies in US history: the creation of the Federal Reserve. Since the US

experienced several financial crises in the 1800s and early 1900s, it became

apparent that the United States would need a centralized bank to back its currency

and provide a lender of last resort. The Federal Reserve policy worked out well for

the United States, and it has an even more extensive role in the monetary system today.

The significance of the Panic of 1907 was how the United States responded. It was a turning point in the county’s history in terms of moving past the nation’s fear of too much government control in the wrong places. Previously, problems were ignored and no changes were made in response to other financial crises. At this time, however, the nation looked for changes to prevent future issues. Some of its most influential citizens acted as leaders during this crisis. Really Good Researcher & Writer 21

While many things went wrong for the United States and many regard the

Panic of 1907 as one of the worst financial crises in the nation’s history, a lot of

positive change grew from it. People progressed and policies emerged that shaped

the United States into the powerful financial institution it is today.

Really Good Researcher & Writer 22

Works Cited

Bruner, Robert F., and Sean D. Carr. The Panic of 1907: Lessons Learned from the Market's Perfect Storm. Hoboken, NJ: John Wiley & Sons, 2007.

Kemmerer, E.W. "Banking Reform in the United States." The American Economic Review 3.1 (1913): 52‐63. JSTOR. Web. 8 Nov. 2012. http://www.jstor.org/stable/1803457.

Kindleberger, Charles P. Manias, Panics and Crashes: A History of Financial Crises. Hoboken: John Wiley & Sons, 2005.

McCulley, Richard T. Banks and Politics during the Progressive Era: The Origins of the Federal Reserve System, 1897‐1913. New York: Garland Pub., 1992.

Moen, Jon. "Panic of 1907". EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL http://eh.net/encyclopedia/article/moen.panic.1907

Odell, Kerry A., and Marc D. Weidenmier. "Real Shock, Monetary Aftershock: The 1906 San Francisco Earthquake and the Panic of 1907." The Journal of Economic History 64.4 (2004): 1002‐027. Cambridge Journals. Cambridge University Press, 31 Jan. 2005. Web. 28 Nov. 2012. http://journals.cambridge.org/action/displayAbstract?fromPage=online.

Tallman, Ellis W. and Jon R. Moen. “Lessons from the Panic of 1907”. Econseminars.com. Economic Review, May 1990. 3 Sept. 2012. http://www.econseminars.com/Financial%20Panics/_Pre‐ Subprime%20Crises/Panic%20of%201907_Atlanta%20Fed.pdf

Toma, Mark. "Federal Reserve System". EH.Net Encyclopedia, edited by Robert Whaples. June 2, 2004. URL http://eh.net/encyclopedia/article/toma.reserve

Tucker, Abigail. "The Financial Panic of 1907: Running from History." Smithsonian Magazine. Smithsonian.com, 10 Oct. 2008. Web. 27 Nov. 2012. http://www.smithsonianmag.com/history‐archaeology/1907_Panic.html.

Wicker, Elmus. Banking Panics of the . Cambridge, UK: Cambridge UP, 2000.