A History of Banking
The Panic of 1907
How a failed attempt to corner copper shares triggered bank runs in New York in 1907, how J.P. Morgan organised a rescue, and why it led to the creation of the Federal Reserve.
In October 1907, a financial panic hit New York.
The trigger
- A failed attempt to corner the stock of a copper company caused losses for linked banks.
- Depositors rushed to withdraw from trust companies, like the Knickerbocker Trust, which failed.
Contagion
Panic spread across banks, and the stock market fell sharply.
J.P. Morgan’s rescue
- With no central bank, banker J.P. Morgan gathered other bankers and organised loans to shore up the system.
- He famously locked bankers in his library until they agreed on a plan.
The Federal Reserve
- The panic showed the need for a lender of last resort.
- Congress created the Federal Reserve in 1913.
Lesson
Without a central bank, private bankers had to act, but a permanent institution was needed.
The locked library
During the panic, Morgan kept bank leaders in his library overnight until they pledged money to save weaker banks.
Thinking the US always had a central bank
The Federal Reserve was created only in 1913, after the 1907 panic.
Key takeaways
- The Panic of 1907 began with a failed copper corner.
- Trust companies faced runs; Knickerbocker failed.
- J.P. Morgan organised a private rescue.
- The Federal Reserve was created in 1913.
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