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CHAPTER 1
The Bankers' Panic of 1907
"A Sthrange Business"
On March 17, 1908, Robert M. La Follette Sr. (R-WI) took to the Senate floor with the weighty charge that "it is difficult to find any sufficient reason outside of manipulation for the extraordinary panic of October, 1907." La Follette believed the economy was a political arena. "There was no commercial reasons for a panic," he contended, but "there were speculative, legislative, and political reasons why a panic might serve special interests. There were business scores to settle. There was legislation to be blocked and a currency measure suited to the system to be secured." La Follette's engagement with financial affairs reflected the American public's preoccupation with this subject. "I feel the deepest interest in the currency question," affirmed one self-described "quiet citizen."
A diverse collection of Americans, especially farmers and workers, shared La Follette's critical outlook on finance and his conviction that economic events were intertwined with politics. The recently formed American Society of Equity was a growing midwestern farmer organization. "It was the banking trust that brought on the panic," these farmers insisted. "They wanted a panic to discredit Teddy [Roosevelt] and to loot the Treasury." "The Wall Street Panic," stated one railroad brotherhood, was "willfully started" by "kings of finance" opposed to "the power of organized labor" and the Roosevelt administration's efforts to combat "plutocratic domination of our economic and political system." The union saw this event as yet another episode in the ongoing struggle between "the people" and "the money barons."
The banking fraternity emphatically denied that the Panic of 1907 was not simply an outgrowth of business conditions. The prominent Chicago banker James B. Forgan asserted that "the financial disturbance grew from causes plain to see and utterly different from those put forward by the Senator." Forgan was in high dudgeon. "I have never heard so much utterly sensational and untrue verbiage quoted as coming from the lips of any one man." Even the president, however, had concluded that powerful business magnates were culpable. "That the Harriman and Rockefeller interests," Roosevelt stated privately, "and those allied with them have been willing to see a panic and desirous of precipitating it, with purpose of discrediting my administration, I am quite prepared to believe."
The Panic of 1907 marked the inception of an intense decades-long debate over the form and function of the American financial system. Banking interests were arrayed against farmers and workers who drew on a rich nineteenth-century legacy of heterodox financial thought. The ideas of Greenbackers, Populists, and silverites remained influential well into the twentieth century. Many workers, farmers, and their families believed that bankers possessed an undemocratic degree of political and economic influence, and they dissented from the orthodoxy that the pursuit of profit should determine how financial institutions functioned. Numerous Americans sought banking reforms that prioritized public accountability, macroeconomic stability, affordable credit, and secure savings. The ensuing impassioned political battle would establish the essentials of the banking institutions we have today.
The War of the Copper Kings
The Panic of 1907 laid bare the great power held by a mere handful of financial figures. Their mercenary business rivalries inflicted an economic depression on the American people. The panic's immediate origins lie in a failed attempt to corner the shares of the United Copper Company. This mining enterprise was controlled by F. Augustus Heinze, who had brashly engaged in years of bitter struggle with the Amalgamated Copper Mining Company. Amalgamated Copper cast such a long shadow over Montana's politics and economy that the state's residents referred to it as simply "The Company." The giant copper trust was a venture of the confederation of aggressive speculators known as the Standard Oil Gang. H. H. Rogers, a notably ruthless robber baron whose business methods earned him the epithet "Hell Hound," was a leading member. "We are not in business for our health," Rogers bluntly acknowledged, "but are out for the dollars."
Heinze's eventful years in Butte commenced in 1889, when the young mining engineer first arrived from New York. He set to work studying maps of the "Richest Hill on Earth" and familiarizing himself with the area's geology. In 1892 Heinze headed back east to discuss a proposed smelter project with his wealthy family. He also traveled to Europe to procure credit for his fledgling business venture. Heinze employed this initial funding, his knowledge of geology, and the legal system to become one of Montana's Copper Kings. His use of the "apex law" was a constant thorn in the side of Amalgamated Copper. This law allowed mine operators to claim possession of minerals located beneath the property of others, because it held that ore belonged to the owner of the land where a vein either outcropped or came closest to the surface. At one point, Heinze retained thirty-seven attorneys to conduct his mining litigation. Underground, the conflict between the two interests took the form of open combat, as miners employed by Amalgamated and Heinze did battle with dynamite, steam, water, smoke, electricity, and rocks. "I'll drive Heinze out of Montana," Rogers vowed, "if it takes ten millions to do it." In 1906 Amalgamated finally bought out Heinze's Butte operations for $10.5 million, thereby dismissing 110 lawsuits involving $70 million worth of property.
Heinze promptly turned to finance, establishing control over the Mercantile National Bank of New York, while retaining remnants of the United Copper Company. In October 1907, his brothers Arthur P. Heinze and Otto C. Heinze Jr. conducted an audit of United Copper's stock and discovered there were more shares being traded in the market than actually existed. They sought to turn this situation to their financial advantage by cornering the company's stock, believing that brokers had loaned shares to speculators who thought United Copper's price would fall. The speculators planned to sell these shares with the expectation of later repurchasing them at lower prices, returning them to the brokers, and pocketing the spread. But if the brokers lacked sufficient shares to meet a call to deliver their holdings, there would be a bidding war for the stock. For the plan to work, however, the Heinze brothers needed to purchase additional shares. F. Augustus Heinze initially refused to aid this scheme. He was apprehensive about a recent unexplained drop in deposits at the Mercantile National, where $4 million had been withdrawn over the previous four months. But after repeated entreaties, he relented and arranged for provision of a loan from his bank. United Copper stock hit $60 per share on October 14, before tumbling to $10 two days later, destroying the attempt to corner the market; evidently there was no shortage of shares. "Some who remember financial history," reported the New York World, "saw the fine hands of H. H. Rogers and his Standard Oil associates raised in revenge."
A story soon circulated that a friend of Heinze had indiscreetly told two of her friends about the corner. The Chicago Daily Tribune reported that this piece of gossip became known to a private detective agency whose managers recognized "such information would be of great value to the Amalgamated Copper interests ... led by H. H. Rogers." These "foes of Heinze" made the most of this financial intelligence. "When the time was ripe for intervention by the Amalgamated people," related the Washington Post, "men known by them to be allied with Heinze in his pooling interest were sounded, and finally one was found who would dump his holdings." Whether the Standard Oil Gang had foiled the corner in such a manner or not, it was a bust.
Following this financial misadventure, nervous depositors began withdrawing their funds from the Mercantile National, which forced Heinze to appeal for help from the city's other bankers — specifically the New York Clearing House Association, where his old adversaries exercised influence. A former president of the organization, James Stillman, president of National City Bank, was a key member of the Standard Oil Gang. Stillman's bank had played a pivotal role in establishing Amalgamated Copper. A longtime associate of Stillman's, Hanover National Bank president James T. Woodward, was currently chairman of the clearinghouse. Stillman served on the boards of both the giant copper trust and Woodward's bank. And Stillman worked closely with Woodward during the ensuing financial crisis. Otto C. Heinze Jr. recalled that "the clearinghouse refused to give assistance unless the control of the bank were turned over to them and F. A. immediately resigned its presidency." Heinze's career as a banker was over. He accepted banishment from financial circles in return for the clearinghouse's aid.
Panic!
The financial drama of October 1907 remained far from over. Depositors at the Knickerbocker Trust Company had grown wary because its president, Charles T. Barney, was associated with Heinze and his confederate Charles W. Morse. The National Bank of Commerce initially extended loans to support the trust company. But on October 21, the bank announced it no longer would act as the Knickerbocker's clearinghouse agent, and Barney resigned his position. A sizable line formed outside the trust company's building on Fifth Avenue before its doors opened the following morning. Over the next few hours, the line continued to grow and the city's banks dispatched numerous messengers to the Knickerbocker's branches with stacks of checks drawn on the trust company. The Knickerbocker paid out over $8 million that morning before suspending all payments at 12:30 p.m. "My God! Give me my money!" cried out one woman left standing at a teller window with passbook in hand.
Bank runs soon spread. A city magistrate instructed one depositor charged with disorderly conduct that his money was safe in the bank. "Maybe you think that, Judge, but I don't," he retorted. Another institution associated with Barney — the Trust Company of America — was awash with frightened depositors. Governor of New York Charles Evans Hughes Sr. (R) received numerous telegrams urging him to take the radical step of declaring a bank holiday in the state. The panic placed money at such a premium that Hetty Green — the "Witch of Wall Street"— claimed she "easily" could have demanded interest payments of 40 percent on the loans she extended to wealthy men and major corporations caught short during the crisis.
On October 23, Secretary of the Treasury George B. Cortelyou left Washington, DC, aboard a train bound for New York to meet with the most powerful financial figure in the nation: J. Pierpont Morgan. Early the following morning, Cortelyou announced that the federal government would deposit $25 million in New York banks. Management of this no-interest loan was left in the hands of Morgan. Later that afternoon, John D. Rockefeller Sr. made $10 million of his vast wealth available to the cause. The following days found Morgan ensconced in the opulence of his private library coordinating efforts to stem the panic. The New York World commented that Morgan was "in practical control of all the banks and all the trust companies. ... [H]is word was law and his rule was absolute." A managed infusion of currency allowed beleaguered institutions to keep their doors open. Financial conditions improved toward the end of October, as demonstrated by the Trust Company of America becoming a net recipient of deposits. "No one," Stillman commended Cortelyou, "can appreciate more ... than I do what this country owes to the present Secretary of the Treasury."
By this point, however, the whole nation was suffering from a shortage of currency due to correspondent banks' inability to draw upon their New York reserves. Under correspondent banking, smaller banks maintained balances with larger banks and received services analogous to a clearinghouse and access to money markets. But correspondent banking also channeled funds toward New York City. "New York is a delinquent debtor," the Oakland Tribune alleged. Banks in two-thirds of all cities with populations over 25,000 suspended cash payments to some extent. "The lack of currency is felt everywhere," upstate New York's Cortland Democrat attested. In cities across the nation, clearinghouses circulated scrip as a substitute for currency. A Seattleite protested this ersatz currency by writing "don't let this happen again" directly on a $10 clearinghouse certificate. One Chicago depositor found the chaotic financial situation so alarming that he imagined imminent upheaval: "Unless the banks shall resume currency payments ... so as to restore some feeling of confidence ... there are apt to be ... scenes of riot and bloodshed in this city."
Desperate measures were taken in several western states. On October 24, a bank holiday was declared in Nevada. Oklahoma instituted a six-day holiday a few days later. The governor of Washington State proclaimed a five-day holiday. Before October was over, the governors of California and Oregon had introduced holidays that would last for close to two months. Conditions in California remained so perturbed that as November drew to a close, Frank B. Anderson, manager of the Bank of California, expressed concern that if the state's holiday was lifted, "some people might start a run on the banks." By December 17, the financial situation was sufficiently settled that the San Francisco Clearing House Association telegraphed the governor its opinion that continuing the bank holiday was "no longer required." The holiday was lifted a few days before Christmas.
Many contemporaries concluded that the irresponsible actions of New York financiers had victimized the nation as a whole. Michigan Farmer maintained, "There would have been no financial stringency so far as Michigan is concerned had not the eastern banks first refused cash payment." "We of the Pacific Coast must be independent of New York and Wall Street operators," stated the California Cultivator. "Were this the case we would scarcely realize the present money stringency." New Orleans's Daily Picayune concluded that if locals' money were not "in the insatiable maws of New York speculators, we would have had no panic here, and as soon as we can get it back our panic will disappear." Many people thought the recent financial crisis had been created deliberately. "It seems to us," stated Kentucky's Weekly Market Growers Journal, "that it is all manipulated by a few of our 'Captains of Industry' and 'Frenzied Financiers' to loan on exorbitant rates of interest and purchase stocks at far below their value." The hope of Henry George Jr. that "some of these panic makers will disappear from their haunts in Wall street, and go to breaking stone," expressed broader sentiment.
The Banking System
The Bankers' Panic had unsettled a complex network of around 20,000 banking institutions. The Northeast was better served than other regions, while the South's dearth of banks was conspicuous. Southern farmers habitually depended on expensive financing from crossroads retailers for essential supplies and equipment. Banking institutions also were scattered thinly across the sparsely populated West. At the apex of this multifarious financial system stood the private investment banks. These unincorporated partnerships assisted only the largest clients, arranging financing for domestic and foreign corporations and governments. Investment banks clustered in New York City, but notable firms operated in Boston and Philadelphia as well.
The commercial banking system revolved around the over 6,500 national banks that were federally chartered under the auspices of the National Banking Acts enacted during the Civil War. National banks were the only private financial institutions that could issue banknotes. They focused on larger customers, including businesses and other banks. The linchpins of the national bank system were its largest banks, which were the centers of the correspondent banking networks. In 1905 National City Bank was the largest of these, with deposits of $201 million. More than half of the thirty-three national banks with deposits of more than $20 million were in New York.
The most numerous banking institutions were almost 10,000 banks that individual states chartered. The diverse rules that regulated these institutions were less stringent than those governing national banks. State-chartered banks occupied a particularly important position in rural areas because they were not limited by the strict real estate lending restrictions that encumbered national banks. These banks were the single largest source of farm mortgage loans. Local bankers loaned their institution's funds and also negotiated mortgage loans on behalf of other investors, including life insurance companies, mortgage bankers, and private investors. In addition to national and state banks, there also were a few thousand very small, unchartered private banks. In the Northeast, commercial banks faced increasing competition from trust companies. These institutions originally managed money for affluent clients, but were now pursuing additional profits by performing general banking functions. Trust companies operated under a variety of state regulations that often permitted them competitive advantages, such as the ability to attract depositors with higher returns obtained through speculative investments.
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Excerpted from "Money, Power, and The People"
by .
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