The Panic of 1907, also known as the 1907 Bankers' Panic or the Knickerbocker Crisis, was a significant financial upheaval that gripped the United States. This crisis unfolded over a concentrated three-week period, beginning in mid-October, and saw the New York Stock Exchange plummet by nearly 50% from its peak the previous year. Occurring amidst an economic recession, the panic was characterized by numerous runs on banks and trust companies, eventually
spreading nationwide as many state and local financial institutions and businesses faced bankruptcy. The events of 1907 highlighted critical vulnerabilities in the U.S. financial system, particularly the absence of a statutory lender of last resort, and ultimately paved the way for significant reforms.
The Genesis of the Crisis: A Failed Copper Corner
The immediate trigger for the Panic of 1907 was a speculative attempt to corner the market on the stock of the United Copper Company. This scheme was orchestrated by F. Augustus Heinze, a copper magnate from Butte, Montana, who had moved to New York City and formed a close alliance with the notorious Wall Street banker Charles W. Morse. Together, Heinze and Morse had gained control over numerous financial institutions, serving on the boards of at least six national banks, ten state banks, five trust companies, and four insurance firms. The plan involved Heinze's brother, Otto, aggressively purchasing United Copper shares to create a short squeeze, forcing short sellers to buy back shares at inflated prices from the Heinzes.
To finance this ambitious endeavor, Otto Heinze sought assistance from Charles T. Barney, president of the Knickerbocker Trust Company, New York City's third-largest trust. Although Barney had previously financed Morse's schemes, Morse himself cautioned Otto that the required capital far exceeded what Barney could provide. Despite this warning, Otto proceeded with the corner attempt. On Monday, October 14, he began aggressively buying United Copper shares, driving the price from $39 to $52 in a single day. The following day, October 15, he issued a call for short sellers to return their borrowed stock. The price briefly surged to nearly $60, but Otto had misjudged the market; short sellers were able to find ample United Copper shares from sources other than the Heinzes. The stock price rapidly collapsed, closing at $30 on Tuesday and plummeting to $10 by Wednesday, October 16, leaving Otto Heinze ruined.
Contagion Spreads: From Speculation to Systemic Fear
The failure of the United Copper corner had immediate and far-reaching consequences. Otto Heinze's brokerage house, Gross & Kleeberg, went bankrupt, and his trading privileges on the New York Stock Exchange were suspended on October 17. The State Savings Bank of Butte, Montana, owned by F. Augustus Heinze, declared insolvency due to its holdings of United Copper stock as collateral and its role as a correspondent bank for the Mercantile National Bank in New York City, where F. Augustus Heinze served as president. News of the collapse prompted a run on the Mercantile National Bank, and depositors also began withdrawing funds from banks associated with Charles W. Morse.
The New York Clearing House, a consortium of the city's banks, intervened, forcing Morse and Heinze to resign from all their banking interests to mitigate the damage to the financial system's reputation. However, the crisis escalated dramatically with the downfall of the Knickerbocker Trust Company. On October 21, the Knickerbocker's board requested Barney's resignation due to his involvement in the Heinze and Morse speculations. The next day, the National Bank of Commerce, where J.P. Morgan was a dominant figure, announced it would no longer clear checks for the Knickerbocker. This triggered a classic bank run on October 22, with depositors forming crowds to withdraw their money. Despite efforts to reassure them, $8 million was withdrawn in less than three hours, forcing the Knickerbocker to suspend operations. This collapse, of New York City's third-largest trust, sent shockwaves through the city's financial sector.
Nationwide Impact and the Role of J.P. Morgan
The failure of the Knickerbocker Trust Company intensified fear across New York City's trusts, leading regional banks to withdraw their reserves from New York City institutions. The panic quickly spread nationwide as vast numbers of people withdrew deposits from their regional banks, contributing to the eighth-largest decline in U.S. stock market history. Interest rates on loans to brokers on the stock exchange soared to 70%, causing stock prices to fall to levels not seen since December 1900. Other large trusts, such as the Trust Company of America and Lincoln Trust Company, also faced runs, and by October 24, a string of failures included the Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, and several Brooklyn-based institutions.
The crisis might have deepened further had it not been for the decisive intervention of financier J.P. Morgan. Morgan and his associates initially examined the Knickerbocker's books and deemed it insolvent, choosing not to intervene directly to stop its run. However, its failure triggered runs on even healthy trusts, compelling Morgan to lead a rescue operation. On October 22, he conferred with other prominent bankers and the U.S. Secretary of the Treasury, George B. Cortelyou, who offered to deposit government money into banks. After an audit confirmed the Trust Company of America's solvency, Morgan declared, "This is the place to stop the trouble, then." He pledged substantial sums of his own money and persuaded other New York bankers to do the same, effectively shoring up the banking system and preventing a complete collapse. This intervention underscored the severe limitations of the U.S. Independent Treasury system, which lacked the ability to inject sufficient liquidity into the market during a crisis.
