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A Lion In The Street
How J. P. Morgan, like a “one-man Federal Reserve,” calmed the bankers and helped ease the Panic of 1907
June 1957 | Volume 8, Issue 4
On August 8, 1911, a committee of the House of Representatives was interrogating George W. Perkins, a former partner of the House of Morgan, about the control of the Morgan firm over the steel industry. Tempers matched the heat of the Washington weather as the questioning ranged over every aspect of the firm’s affairs. Time and again the witness and Chairman Augustus O. Stanley clashed—interrupting each other repeatedly, their voices rising. Stanley asked Perkins about his personal contributions to political campaigns, and when Perkins, upon advice of counsel, refused to answer, Stanley threatened to cite him for contempt. Thereupon the members of the committee wrangled endlessly in a partisan discussion of the propriety of the question. Finally, perhaps to clear the air, Congressman Charles Lafayette Bartlett of Georgia turned to the role of J. P. Morgan in the Panic of 1907. “Is it not a fact,” he asked the witness, “that Mr. Morgan and his associates, not only in that panic but in all panics and at all times, so control and dominate the financial situation in New York that they can control it as they please?” Perkins leaped from his chair, pounding the committee table with clenched fists. “Absolutely not,” he snapped. “There never was anything further from the facts…. Mr. Morgan was able to do what he did in that panic because of the man and his personality, and because people believed in him.” “You need not get excited about it,” said Bartlett soothingly. “I am not getting excited,” Perkins stated quietly. “But I am in earnest.”
Perkins’ vehemence was understandable. No one had been closer to Morgan during the spectacular days of October and November, 1907, when the whole structure of American finance tottered on the verge of the abyss. He remembered the white and shaken faces of the nation’s leading bankers as they crowded into Morgan’s offices literally begging for direction, while mobs ranged aimlessly through Wall Street and panicked depositors clamored for their savings before the doors of some of the largest trust companies in the city. Morgan had been indeed, in the words of Frederick Lewis Allen, a “one-man Federal Reserve Bank” in the crisis.
The troubles of the autumn of 1907 were unexpected only in their violence. As early as May, Wall Street was predicting “a pretty serious time next fall.” The stock market was sluggish, new bond issues almost impossible to move; everyone seemed afraid to lend money. Through the summer things got no better. The great Union Pacific Railroad tried to float a $75,000,000 bond issue but could dispose of only $4,000,000. Industrial activity faltered; steel production was down about 20 per cent from the summer of 1906. In October conditions grew worse, for crops were late that year and farmers were straining the already precarious credit structure by seeking extensions of their loans to tide them over.
Suddenly the financial community was rocked by news of the failure of a big copper speculator named F. Augustus Heinze. Heinze controlled a chain of banks; it was rumored that these banks were involved in his personal collapse, and frightened depositors flocked to withdraw their funds. Their fear was contagious. Heinze’s banks were basically sound, but other institutions could not withstand the infection. By October 21 the Knickerbocker Trust Company, with deposits of $60,000,000, was in serious difficulty. Its president had been associated with the unfortunate Heinze, and its affairs were in bad shape. Lacking liquid funds, it could not meet the sudden demands of its frightened depositors without outside help. That afternoon its officers descended upon J. P. Morgan in search of assistance.
Morgan had spent the summer in Europe and the weeks immediately preceding the crisis at an Episcopal convention in Richmond, Virginia. Seventy years old and semiretired, he had not followed events closely. He was faced suddenly with the terrified clamor of hundreds of uncertain, befuddled financiers. Yet in a matter of hours he had a firm grasp of what was happening. Then, calmly but with iron determination, he took over.
Quietly he assembled a group of young banking experts who could examine the assets of doubtful institutions and find out whether or not they were worth helping. The Knickerbocker Trust, they said, was not sound; Morgan (although he owned stock in the company himself) coldly decided to let it go to the wall. By the afternoon of Tuesday, October 22, after doling out $8,000,000 to an unending line of creditors, the Knickerbocker closed its doors.
It was now clear that the financial world was “in for it.” For a decade previous to 1907 there had been a remarkable growth of a new kind of bank—the trust company. Ordinary banks were required by law to maintain large cash reserves, but trust companies were not. With only 2 or 3 per cent of their assets lying idle in the form of cash, trust companies could afford to pay high interest rates to depositors. Between 1898 and 1906 their business more than quadrupled. But all at once, with the collapse of the Knickerbocker Trust, the public became frightened. And it was all too obvious to the financiers that the trust companies, with their low reserves, would be hard pressed by even a moderate panic among their depositors. Still worse, there was no organization among them comparable to the Clearing House, which operated as a bulwark for hard-pressed banks.