J.P. Morgan
Tags: Stock Market, Biography, History, Jp Morgan, Finance

The Panic of 1907

It is often the case that history is stranger and more interesting than fiction. But that “more interesting” part is quite subjective, so for those who are not terribly interested in finance, I’d like to pose a question to you before we begin talking about one of my personal heroes, J.P. Morgan:

Which moustache below do you think is the most powerful? There is a correct answer.

Which moustache did you choose? Which facial hair collaborated to save the western financial system? The answer is…this one:

“I’ve got some bad news, Anon. These papers say your facial hair game is bankrupt.”

In mid-October of 1907, the New York Stock Exchange crashed almost 50% from its peak the previous year. This happened during an economic depression. Many companies and people, fearing their assets would soon all be worthless, committed runs on banks — that is, they rushed to withdraw all their money, fearing the banks might also cease to function.

Of course, banks never have enough cash on hand to cover complete withdrawals of all their clients. Many banks ran out of cash and went calling on creditors. With so many repayment requests all at once, creditors were unable to cover their debt to the banks. With the banks out of cash, the confidence of depositors evaporated, too. Banks began to go bankrupt, so smaller regional banks withdrew their holdings from larger New York-based banks.

This meant that big New York banks and their affiliates began to go under first. The panic had a trickle-down effect. Big bank failures generated runs on smaller banks (which would then fail, too).

This all amounted to one of the biggest declines in the stock market’s history.

Enter J.P. Morgan.

Not all heroes wear capes. Some of them even look like crazy-eyed villains.

Morgan devoted enormous sums of his own fortune and convinced other New York bankers to follow his lead in bailing out the banking system. He understood that if the stock market was allowed to collapse, all of his amassed wealth would become useless.

In his most famous book, Edwin LeFevre relayed the scene of Morgan’s intervention as follows:

An amazing semi-biographical piece!

“Finally it became plain that there was no use in waiting at the Post for money. There wasn’t going to be any. Then all hell broke loose.

The president of the Stock Exchange, Mr. R. H. Thomas…knowing that every house in the Street was headed for disaster, went out in search of succour. He called on James Stillman, president of the National City Bank [the predecessor of Citibank], the richest bank in the United states…

Stillman heard what [Thomas] had to say. Then he said, “Mr. Thomas, we’ll have to go and see Mr. Morgan about this.”

Stillman’s moustache was not qualified to make decision’s without consulting Morgan’s.

The two men, hoping to stave off the most disastrous panic in our financial history, went together…and saw Mr. Morgan. Mr. Thomas laid the case before him. The moment he got through speaking Mr. Morgan said, “Go back to the Exchange and tell them there will be money for them.”

“Where?”

“At the banks!”

So strong was the faith of all men in Mr. Morgan in those critical times that Thomas didn’t wait for further details, but rushed back to the floor of the Exchange to announce the reprieve to his death-sentenced fellow members.

Then, before half past two in the afternoon, J.P. Morgan sent John T. Atterbury…into the crowd. …The old broker walked quickly to the Money Post…The crowd, that at first had been calmed down somewhat by President Thomas’ announcement, was beginning to fear that the relief plans had miscarried and the worst was still to come. But when they looked at Mr. Atterbury’s face and saw him raise his hand they promptly petrified themselves.

In the dead silence that followed, Mr. Atterbury said, “I am authorized to lend ten million dollars. Take it easy! There will be enough for everybody!”

Then he began. Instead of giving to each borrower the name of the lender he simply jotted down the name of the borrower and the amount of the loan and told the borrower, “You will be told where your money is.” He meant the name of the bank from which the borrower would get the money later.

…Morgan simply sent word to the frightened bankers of New York that they must provide the money the Stock Exchange needed.

“But we haven’t got any. We’re loaned up to the hilt,” the banks protested.

“You’ve got your reserves,” snapped J.P.

“But we’re already below the legal limit,” they howled.

“Use them! That’s what reserves are for!” And the banks obeyed and invaded the reserves to the extent of about twenty million dollars. It saved the stock market.

Department of Getting Bailed Out Since 1789

While LeFevre’s account is a bit fictionalized, the real history is even more impressive.

Morgan was no stranger to financial panics, having already bailed out the US Treasury for tens of millions in gold in the Panic of 1893. It was only natural that other bank leaders would look to him for guidance. Not only was James Stillman from National City Bank present, but George F. Baker of First National Bank, and the US Secretary of the Treasury, George B. Cortelyou. Cortelyou said the US was ready to give money to the banks to help stabilize the market and prevent an economic disaster — but the problem was figuring out which banks could survive long enough to lend the money without going under.

“This is the place to stop the trouble, then,” Morgan told Cortelyou.

Cortelme? No, Cortelyou, pal.

As bank runs continued, Morgan put in late nights working with Stillman and Baker to pledge $8.25M of their banks’ money to other banks, even to rival banking trusts, to keep them afloat through the panic. This bought enough time for the slower-moving US Treasury to deposit another $25M. Not to be outdone, the wealthiest man in the US at the time, John D. Rockefeller, deposited another $10M into Stillman’s National City Bank, publicly pledging up to half of his wealth so long as it would help the United States maintain its lines of credit.

John D. “Three times more wealthy than Bezos” Rockefeller.

The Morgan-led Wall Street bailout put on display the impotence of the national treasury system, which largely lacked the free cash on hand to assist.

Morgan staved off a second financial crisis only weeks later: A brokerage used a massive amount of money in stocks as collateral for loans. When the value of those stocks collapsed, Morgan stepped in and initiated an emergency takeover of those failed companies to stave off a panic that might’ve otherwise triggered more bank runs so soon after the markets had stabilized.

This action by Morgan led the federal government to investigate solutions for its own failure to intervene in the recent crises. These investigations were directly responsible for the development of the Federal Reserve System.

With the crises seemingly resolved, banks exchanged notes of debt to each other to have loans between them without tying up cash. Cortelyou returned to Washington D.C. to give the impression that the worst had passed and his presence was no longer necessary.

Despite Cortelyou’s attempt to put the public at ease, the reality of the situation was that even more crises were lurking: The City of New York needed to raise $20M by the end of the month or the city itself would go bankrupt. Knowing the disaster such a situation would trigger, Morgan purchased $30M in city bonds from his personal fortune.

Thus far, Morgan saved the banks, Wall Street, New York City, and the US government itself.

If you want to be as strong as J.P. Morgan, you must embrace the ‘stache.

In order to resolve a final point of potential crisis — bailing out more trust companies to the order of $25M — Morgan invited roughly 120 bank and trust officials to his personal library. As the officials rejected Morgan’s initial plan for stabilization, he locked the library and pocketed the key until they could reach their own agreement. In the end, the bankers finally came around to understanding the logic of the solution Morgan had proposed in the first place and signed agreements at 4:45AM.

Given the frequency of panics in then-recent history and the nation’s reliance on the titan that was J.P. Morgan, Congress began passing acts to better-regulate banking. Debates on reform emerged and the chairman of the National Monetary Commission, Nelson Aldrich, went to Europe for almost two years to study banking systems there.

In the end, President Woodrow Wilson would sign the Federal Reserve Act, granting the US its first central banking systems and enabling the federal government to act to save its own economy, rather than relying on the altruism and character of moguls like J.P. Morgan.

Woodrow Wilson was unanimously voted Worst Moustache of the Panic of ’07 Club.

J.P. Morgan had personally lost $21M throughout the panic (which is around $552M by current dollar values). Despite initially being considered a hero, he later became the subject of criticism as people accused him of using the situation to bolster his own banks and corporations while allowing others fail.

The House Committee on Banking and Currency began an investigation into the concentration of wealth behind Morgan and other powerful New York bankers. It found that officers of Morgan’s were on the board of directors for 112 corporations worth a sum of $22.5 billion. For scale, the total worth of the entire New York Stock Exchange was then only approximately $26.5 billion.

Still, Morgan allowed the committee a number of intense days of questioning, even while those close to him stated that the inquests were horribly impacting his already-declining health.

His main questioner, Samuel Untermyer, elicited Morgan’s most famous exchange on the psychological nature of banking, stating his opinion that it is ultimately an industry based solely on trust:

Untermyer: “Is not commercial credit based primarily upon money or property?

Morgan: “No, sir. The first thing is character.”

Untermyer: “Before money or property?”

Morgan: “Before money or anything else. Money cannot buy it. … a man I do not trust could not get money from me on all the bonds in Christendom…that is the fundamental basis of business.”

Morgan’s ongoing illness would claim his life in late March of 1913, just nine months ahead of the Federal Reserve replacing public trusts as last-resort lenders. Thanks to Morgan’s willingness to mobilize his own wealth, and in no small part to his charisma in motivating others to do the same, the US would be better-situated to stave off financial panics in the future that would otherwise have collapsed the nation’s economy under the leadership of weaker men.

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