In the small hours of Sunday 3 November 1907, some of the richest men in America discovered that the doors of J. Pierpont Morgan's library on Madison Avenue were locked, and that their host had the key in his pocket. Morgan, seventy years old and nominally retired, had herded the presidents of New York's trust companies into the marble palazzo that housed his manuscripts, told them the sum required to stop the financial system collapsing, and withdrawn to play solitaire while they argued. At around a quarter to five in the morning the trust presidents signed a pledge of $25 million, and the doors were opened. It was the climactic scene of the Panic of 1907 — the crisis that finally persuaded the United States it could not keep outsourcing central banking to one old man.
The panic had begun three weeks earlier with a piece of failed skulduggery. In mid-October the speculator Otto Heinze tried to corner the stock of United Copper and was crushed when the price collapsed instead. Runs immediately started on banks connected to his brother, the copper magnate F. Augustus Heinze, and to their associate Charles W. Morse. The contagion then leapt to New York's trust companies — lightly regulated institutions that paid higher interest and kept far thinner reserves than banks. The Knickerbocker Trust Company, one of the largest in the city, was fatally tainted by its president Charles T. Barney's links to Morse: on 22 October 1907 it paid out millions to a queue of depositors in a few hours and suspended payments. Barney, refused a rescue, shot himself weeks later.
The one-man central bank
Morgan hurried back from a church convention in Richmond, Virginia, and turned his library into a command post. Teams of young bankers audited the books of tottering institutions overnight; Knickerbocker was judged past saving, but Morgan concluded that the next domino, the Trust Company of America, was where the trouble had to be stopped, and money was marshalled to hold the line there. Help converged on him rather than on Washington, which had no central bank to offer: Treasury Secretary George B. Cortelyou deposited tens of millions of federal dollars in the New York banks and left their deployment largely to Morgan and his circle, while John D. Rockefeller pledged millions of his own fortune and let it be known that more was available.
The crisis kept mutating, and Morgan improvised a rescue for each new form it took. When the president of the New York Stock Exchange, Ransom Thomas, warned him on 24 October that the exchange would have to close early because the call money that brokers borrow against shares had simply vanished, Morgan summoned the bank presidents and raised $25 million in a matter of minutes to keep the market open. He organised support for the City of New York itself, which was weeks from defaulting, by arranging to take tens of millions of its bonds. He even asked the city's clergy to preach calm from their Sunday pulpits. The final knot was the brokerage Moore & Schley, dangerously loaded with shares of the Tennessee Coal, Iron and Railroad Company as collateral. The solution — having U.S. Steel buy the company outright — needed the blessing of the trust-busting president Theodore Roosevelt, so two steel men, Elbert Gary and Henry Clay Frick, took an overnight train to Washington and secured his acquiescence over breakfast on Monday 4 November, minutes before the markets opened. The panic broke soon afterwards.
From library to Federal Reserve
Relief curdled quickly into alarm. Share prices had roughly halved from their 1906 peak, a sharp recession followed, and the searching question was unavoidable: what would America do next time, when there was no Morgan? Congress passed the Aldrich–Vreeland Act in 1908, creating an emergency currency and a National Monetary Commission under Senator Nelson Aldrich. In November 1910 Aldrich, the banker Paul Warburg, Frank Vanderlip and a handful of others slipped out of New York — travelling under first names only, with the cover story of a duck-hunting trip — to a private club on Jekyll Island, Georgia, where they drafted the blueprint for an American central bank. After years of political wrangling, Woodrow Wilson signed the Federal Reserve Act on 23 December 1913. Morgan never saw it: he had died in Rome that March, and on the day of his funeral the New York Stock Exchange closed in his honour.
The Federal Reserve is many things, but at bottom it is Morgan's library made permanent — a lender of last resort that cannot retire, cannot die, and never has to lock the door twice.
Quiz nuggets
- The panic began in October 1907 when Otto Heinze's attempt to corner United Copper stock failed.
- The Knickerbocker Trust Company suspended payments on 22 October 1907 after a devastating run.
- On the night of 2–3 November 1907, J.P. Morgan locked the trust-company presidents in his library until they pledged $25 million.
- Theodore Roosevelt approved U.S. Steel's takeover of Tennessee Coal, Iron and Railroad just before markets opened on 4 November 1907.
- The crisis led to the Aldrich–Vreeland Act (1908), the secret Jekyll Island meeting (1910) and the Federal Reserve Act, signed on 23 December 1913.