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Wall Street with Trinity Church in the distance. (Andy Kingsbury / Corbis)

The Financial Panic of 1907: Running from History

Robert F. Bruner discusses the panic of 1907 and the financial crisis of 2008

What did Morgan do to stop the panic?
You quell panics by organizing collective action to rescue institutions and generally convey confidence back into the market. Morgan was called back from Richmond, Va. by his partners when the panic hit. He took the equivalent of a red-eye flight, attaching his private Pullman car to a steam engine and hurtling back to New York City overnight. He arrived on Sunday, October 20th and immediately convened a meeting of the leading financiers at his mansion on 34th Street. He chartered working groups to get the facts and then over the next several weeks deployed the information to organize successive rescues of the major institutions. He did allow some institutions to fail, because he judged that they were insolvent already. But of the institutions that he declared he would save, every one survived.

Was Morgan practicing a kind of "profitable patriotism"?
Nowhere in the archives could I find an expression of principles or sentiment by J.P. Morgan to suggest that he was trying to save the system because the free market is good or because capitalism is better than the alternative economic systems. But we can say that Morgan had lived through perhaps half a dozen anguishing financial crises and that he understood the extraordinary disruptions panics could cause. Morgan devoted his career to developing the industrial base of the United States and felt that destabilizing forces should be fought in order to sustain this legacy. And he felt a great sense of duty to the backers who supported this extraordinary episode of growth.

Is Warren Buffet the new "Jupiter" of Wall Street, as Morgan was called?
It's an appropriate comparison and yet there are big differences. The points of similarity are obvious: two very bright individuals, widely respected, able to mobilize large sums of money on short notice. But Morgan was an anchor of the East Coast establishment and Warren Buffet rather recoils from that role. He likes living in Omaha, and he shuns some folkways of the East Coast elite.

In 1907, was the average American fonder of the Wall Street titans than "Joe Six-Pack" is today?
No. There was a growing distrust among average Americans toward the financial community in 1907—this reflected the extensive social changes in America. The Gilded Age spawned the age of Progressivism. Progressives gained traction because the incredible industrial expansion of the Gilded Age carried with it rising economic inequality, major societal changes (such as urbanization and industrialization), and shifts in political power. America saw the rise of movements involving worker safety and the new urban poor. Over a million people immigrated to the U.S. in 1907 alone, which was associated with urban crowding, problems of public health, and poverty. And of course the Gilded Age also produced extraordinary companies such as Standard Oil. John D. Rockefeller was the epitome of the monopolist who sought to corner industrial production in certain commodities. In 1907, Teddy Roosevelt gave two speeches that raised the level of hostility that the Progressives and the American public in general felt toward the financial community. In one speech Roosevelt referred to the "predatory man of wealth."

What reforms followed the 1907 panic?
Most importantly, it led to the founding of the U.S. Federal Reserve System. The act was passed in December of 1912, and is arguably the high water mark of the Progressive era. The panic was also associated with a change in the voting behavior of the American electorate, away from the Republicans who had dominated the post-Civil War era and toward the Democrats. Though Howard Taft was elected in 1908, Woodrow Wilson was elected in 1912, and fundamentally the Democratic Party dominated the first seven decades of the 20th century.

What reforms are we likely to see in the coming months?
I think we'll see some very pointed hearings in Congress, getting the facts, finding out what's broken down, what's happened. In the period from 1908 to 1913 there were a series of Congressional hearings that explored whether there was a money trust on Wall Street, and whether the leaders on Wall Street had triggered the panic out of their own self-interest. We may see the same starting in 2009.

If the next few years mirror past crises, we should not be surprised to see new legislationthat consolidates oversight of the financial industry within one agency or at least a much smaller set of regulators. We are likely to see legislation requiring greater transparency and heightened levels of reporting on the status and soundness of financial institutions. We're almost certain to see limits on CEO pay and benefits for corporate leaders. We may even go so far as to see a new Bretton Woods type of meeting that would the restructure multilateral institutions, such as the World Bank and the International Monetary Fund, which were founded in 1944 and have since waned somewhat in their capacity to manage global crises.

How long will it take for investors to get their confidence back this time?
The actual panic will end with a comprehensive restoration of liquidity and lender confidence. Confidence could return in a matter of weeks. The Panic of 1907 ended in the first week of January of 1908. That was a period of about 90 days. But the recession that the panic triggered continued to worsen until June of 1908 and it wasn't until early 1910 that the economy recovered to a level of the activity it enjoyed before the onset.

Panics can be short lived but devastating in their collateral damage on the economy. What we don't know this very day is which companies are laying off workers or delaying or canceling investments, or which consumers are not planning to build houses or buy cars or even have children because of these difficulties. It is the impact on the "real" economy that we should fear. I believe the government and the major institutions ultimately will prevail. But it's the collateral damage that could take a year or 18 months or 24 months to recover.

Did you anticipate the modern crisis when writing the book?
We had no premonition that there would be a panic this year but we could say with confidence that there would be a crisis someday, because crises are commonplace in market economies.

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About Abigail Tucker

A frequent contributor to Smithsonian, Abigail Tucker is writing a book about the house cat.

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