U. S. Financial Panics

1837  Cotton & Land, thanks Nick Biddle!

1857  Going, Going, Gone! 

1873  Rail Speculation and The Crime

1884  Gambler Bankers from hell

1907  Morgan & the Fed 

1929  Margin for Error

1933  Sucker Punch

1987  Global Meltdown

2000  Dot Gone

2008  Too Big to Bail!

20...?

Profit and Loss Magazines from 1907 and 1908

Destabilizing Speculation & The Panic of 1907

Prelude to Panic: 

 

  1. The "Rich Man's Panic":     March:    UP rail stock widely held as financial collateral drops 50 pts

  2. New York City Bond fails :   June:    $2 million is offered for $29 million in four percent NY bonds

  3. Copper Market Mania :      July:    Anaconda & Amalgamated copper scams go public, copper stocks collapse  

  4. Standard Oil :                    Aug:    Standard Oil Antitrust - Standard fined $29 million by US court

  5. Trust Company Failures :  Oct:    Knickerbocker Trust,  Sullivan Trust + many others fail 

  6. War of the Bankers :         Nov:    Morgan and Stillman defeat Morse, Heinze, Thomas and Barney

The points above provide a timeline to panic with the major relevant milestones listed. A seventh point relates to Livingston's work Origins of the Federal Reserve which introduced the idea that the US government failed the public by neglecting to maintain 'a lender of last resort'.  Livingston simply states that there was not enough coin in the system in 1907 to support the galloping inflation of the earlier financial excitement, something of an understatement when one considers the bank wars and banking manipulations of 1907 totally dependent upon the absence of any credible regulator. 

     

With regard to the panic timeline, by October of 1907 JP Morgan (the individual) organized a series of meetings with prominent bankers at his home in New York in an attempt to restore confidence in US financial markets. Morgan and other US financial leaders made statements that appeared in US newspapers, the idea being to calm world markets with a further agenda to represent the economic condition in the US as being basically sound.  The fact is that Morgan relied on his lieutenant Stillman to engineer the panic based on a run on the Trust Company of America - a run on this Trust assured Morgan of success in his bid for Tennessee Coal & Iron, a company that Morgan desperately needed to complete the Steel Trust. 

 

Morgan asserted his position as central to the stability of the financial world and Morgan is generally credited with providing relief to the immediate source of desperation within the US economy at this time.  But it is probably more accurate to say that Morgan sacrificed the stability of US markets in order to attain his own ends, whilst defeating the adventurer bankers that challenged his old guard.  The foregoing is not intended to be overly critical of Morgan because the adventurer-bankers represented by Thomas, Heinze, and Morse threatened the entire banking system itself, not just the currency supply of coin.  

In 1908 the National Bank of North America, the New Amsterdam National, the Mechanics and Traders and the Oriental banks were permitted to fall into bankruptcy.  Bank closures were accompanied by bankruptcy of Southern Steel, Arnold Print and Westinghouse Electric; the business centers of the country had effectively been frozen and all credit frozen.

   

As an aside, it is interesting to note that by 1907 both J P Morgan and Rockefeller believed that a Corporatocracy was the America of the future, with larger merged financial institutions operating far more efficiently and with far higher profits than smaller ones. The fact that a merged trust conglomeration can lead to a lack of economic stability was ignored, because such considerations oppose the bottom line of ultimate profitability. But due to public outrage at the bank closings, it is interesting to note that Teddy Roosevelt adopted an anti-monopoly position for political advantage. The government-enforced dispersal of the resultant large trusts of the time left us with the anti-trust laws in existence today, which are woefully inadequate to deal with the neo-liberal economic policy of today and the excesses enjoyed by a raging Corporatocracy, only driven by greed.   

 

Curb Brokers on Wall Street about 1910

 

Destabilizing Speculation

It is easy to imagine that whimsical speculators might irrationally place their bets in the market and thus destabilize the pattern of  buying and selling based upon market expectations, or the perceived gaps in valuation that typically drive the market. But economic theorists claim that there can be no such thing as destabilizing speculation where the goal is short-term gain, instead of long-term profit. Friedman goes so far as to say that destabilized markets cannot exist by debunking the idea of the destabilizing speculator. Friedman holds that speculators who buying high on market enthusiasm and then sell low when enthusiasm wanes will surely lose their positions. This buy-high, sell-low speculation will correspondingly lose its power to trade-in and influence the market, therefore such speculation will  fail to survive and cannot exist. Friedman then goes so far as to state that a multiplicity of incompetent "investors" cannot exist either. 

 

Unfortunately Friedman's theory fails on a number of counts. The best argument vs Friedman relates to the very same panic and mania we are concerned with throughout US history, the most recent example being the collapse of Lehman in 2008 and the subsequent threat of economic depression.  In 2008 United States and world share markets were shaken to their core, not by day-trading incompetents, but by the securitization and homogenization of debt obligations which should never have been monetized or securitized. In 2008, the Federal Reserve answered this crisis by re-inflating the bubble that burst, and so long as the Federal Reserve can add zeroes to its bankster balance sheet, the strategy seems to be working, as of late 2010.

 

With regard to the Panic of 1907 no one single factor led to it's onset, as Lehman was blamed for in 2008. The San Francisco earthquake was preceded by overly enthusiastic extensions of credit which created galloping inflation, as well as large-scale public speculation in largely overbought securities, and local bank runs for coin based on earlier coin shortages (with no support from a "lender of last resort") ...all of these factors worked together to create the Panic in that year to finally burst the flimsy bubble of the state bank and trust system. Destabilizing speculation?  In part yes, in toto, no.

 

Part 2: Coin shortages fuel the Panic!

Troops called out in 1907 to end labor disputes