An example of a Foreign insurance company underwriting Nevada risk in 1889  (see last section)

Scrip and JP Morgan


To provide more detail let us consider Livingston's theory about a coin shortage creating the panic. When coin currency became a scarce commodity local banks issued scrip to replace the coin with worthless notes.  In 1907 this was an eminently practical but ill-advised response to a much larger problem, and served to exacerbate an already sensitive financial situation thus prompting an escalation of the bank emergency, as citizens rushed to  demand coin. Meanwhile the banks could hardly refuse to dole out coin, and in so doing they maintained confidence in the banking system itself.  


Embarrassingly, banks were forced to place coin for public circulation and issue their own scrip as representative of cash funds between themselves, something like Bills of Exchange.  The clearing house relied heavily on bank-to-bank scrip and scrip was circulated publicly in times of financial crisis due to coin shortages; the practice has disappeared today because our monetary system is based on fiat money and is no longer represented by any commodity of value. (Some argue US labor is the commodity today, a subject upon which this author will not digress!)  


Clearing house associations represented a central office where member banks could remit checks to each other and settle their accounts. Clearing house banks issued scrip notes on behalf of their member banks, and such scrip represented the credit of the clearing house itself - this was an early and common practice in United States banking. 

Clearing House certificates issued in late 1907 were the result of a coin shortage due to an earlier abundance of credit and stock offerings, with US Steel the central speculative security involved. The circulating scrip certificates were not turned in after issue, but circulated like money since they represented the assets of the association; thus, the association acted much the same as a Federal Reserve Bank would, except that its activities are on a local level and the certificates generally change hands between banks. But sometimes members of the public were willing to accept scrip as payment in lieu of coin.

In 1907 speculation in steel was complemented by speculation in copper stocks, and certain trust companies shamelessly manipulated the copper shares market. Victims of the 1907 copper scam included Charles Schwab and the Guggenheims. When copper stocks began to deflate, a run ensued and many trusts failed as share prices plummeted.


J.P. Morgan provided the US Treasury with cash to stem the tide, as the stock market of 1907 ultimately became engulfed in panic. Morgan put his seal of approval on clearing house certificates as a means of conserving coin, which was being hoarded by the public, with frequent runs on coin being seen at the banks. As previously stated, the banks could circulate scrip certificates instead of doling out coin; yet scrip notes from the Panic of 1907 are not seen as often as scrip notes issued during the great depression. (Note: no reference book documenting scrip notes from any period exists and such a reference is sorely needed.)


Very few economists understand the significance of these topics, and the monetary disaster so recently set upon us reflects that lack of understanding - nothing much has really changed after two hundred years of financial kabuki dance. 


Unforeseen Events Relating to the Panic


In addition to the above factors, unforeseen events played a central role in the Panic of 1907 as they do in all financial panics. The San Francisco earthquake of 1906 resulted in disastrous and unexpected financial mayhem.  Any student of Western banking history will learn of the significance of foreign insurance interests in the US at this time for a reliance upon European stability to guarantee risk was a tried and true principle among all Western banking institutions.  San Francisco risk was primarily guaranteed by European insurance interests from the beginning of prominence of the city in the mid-nineteenth century until 1906, and beyond.  


British, German, and Scandinavian insurance companies were heavily involved in guaranteeing San Francisco's risk, a risk that proved to be inadvisable as only fate itself can so cruelly determine.  Claims began to pour in to foreign insurance companies from the Fall of 1906 subsequent to the earthquake and the outflow of capital, especially from Britain, threatened to destabilize the British pound.  In response the Bank of England revised the exchange rate upward - hence the very high exchange rates of memory to old-timers, with particular disaster to trade as the Bank of England refused to re-discount American trade notes; this simply meant that US indebtedness to Britain virtually doubled within a period of a few months, thus setting the stage for a credit squeeze and resultant currency shortage.


In the Western US a major resurgence in Western mining interests was stunted based on the wild exploits of mining wildcatters and speculators that promoted worthless holes in the ground on many occasions.  The largest copper scams involved the Butte properties of the Amalgamated and the Anaconda, while in the far West one of the most notable scams was the Greenwater copper scam. Unrealistic hopes for the Anaconda and Amalgamated copper caused the financial market for copper to plummet with disastrous results when the Greenwater district shortly thereafter failed to produce.  Many banks did not survive the ensuing panic while the Nye & Ormsby and State Bank & Trust were forced to close their doors.  Many personal fortunes were lost as a result of these bank closures, mainly in Philadelphia and New York with ripple effects in California, Nevada and Montana.   


Another element that ties in closely with mining wildcat investments is the effect of labor agitation across Western mining states. Cripple Creek in Colorado and the Couer D'alene mines in Idaho suffered significant labor agitation ultimately coming to a head in Nevada in 1907 when Teddy Roosevelt dispatched troops to restore order in Goldfield --  but this action was not necessary as locally employed thugs in the pay of the Goldfield Mine Operators Association (and most notably George Wingfield) had already restored a sort of uneasy order just prior to the troop's arrival. 


Even though the object of the labor strikes was to highlight the atrocious working conditions suffered by miners, the financial consequence of the strikes was a further destabilization and uncertainty for US financial markets. 

Troops called out in 1907 to end labor disputes


Panic of 1907!