J . P.

M O R G A N , events occurred suddenly when de-

positors, acting on real or imagined

THE PANIC OF 1907,

fears, ran to their banks to demand
their cash deposits back.
People panicked easily because if
their bank failed, they would lose all
& THE FEDERAL RESERVE ACT the money they had deposited. Unlike
today, no government insurance pro-
IN 1907, J.P. MORGAN AND OTHER WALL STREET BANKERS RESCUED BANKS,
gram guaranteed bank deposits.
THE STOCK MARKET, AND NEW YORK CITY FROM FINANCIAL RUIN. IN 1913, “Bank runs” quickly wiped out
CONGRESS PASSED THE FEDERAL RESERVE ACT, WHICH PUT THE GOVERN- the reserves of banks and often
MENT IN CHARGE OF MANAGING FUTURE FINANCIAL CRISES. caused them to fail even though
they might still hold solid assets
In 1900, more than 20,000 banks such as profitable loans. A panic
operated in the United States (com- could start among small rural banks
pared to fewer than 8,000 today). and spread up the chain of banks. It
When people deposited money in a could also go down the chain after
bank, it did not just store the cash the failure of banks on Wall Street.
in a vault. The bank made its profits The financial markets could also
by lending most of these funds to cause bank panics. If banks reck-
businesses and individuals and lessly speculated their reserves on
charging interest on these loans. land, when the value of land fell, a
Banking regulations required bank panic might follow. If the
most banks to keep a certain per- stock market crashed, a bank panic
centage of their deposits, called re- could result. During the 1800s, at
serves, in ready cash or easily least five major bank panics erupted
available. Small town banks often followed by economic depressions
deposited some of the reserves in of varying lengths and severity.
larger city banks to earn interest Without a central bank to res-
there, but they could quickly call cue the banking system during a
Library of Congress

back their reserves as needed. panic, the bankers themselves had

The city banks in turn usually to try to stop the financial melt-
deposited part of their required re- down. No banker was better at
serves in the biggest city banks. A this than J.P. Morgan.
large percent of the reserves that J.P. MORGAN (1837–1913), left, walks with
flowed up this chain of banks ended his son, John Jr., in 1912. J.P. Morgan
up in New York City’s Wall Street fi- Born in 1837, John Pierpont
nancial institutions, the largest Morgan was the son of a successful
banks of all. To meet an increase in the demand bank financier. Pierpont, as he pre-
Wall Street banks made loans for loans, local banks sometimes ferred to be called, was educated in
to railroads, huge corporations, had to call back reserves they had private New England schools and
and even to the U.S. government. deposited in city banks. In turn, studied art history at a German uni-
They also invested in stocks and these banks then often had to call versity. After his first wife died,
bonds. In this way, Wall Street fi- back their reserves from up the Morgan married Frances Tracy in
nanced much of America’s boom- chain of banks. 1865. They had four children.
ing industries. The United States did not have a At age 24, Morgan entered New
When things went smoothly, central bank. In 1836, President An- York finance as the Wall Street
money from bank reserves flowed drew Jackson had refused to re- agent for his father’s banking com-
up the chain of banks to Wall Street charter the Bank of the United pany. In 1871, Morgan’s father
and then down the chain in the States. Thus, no national central arranged for his son to form a part-
form of profitable interest. But bank managed the supply of money nership with an older banker. Drex-
things did not always go smoothly. or acted as a “lender of last resort” ell, Morgan and Co. soon emerged
to keep banks in business when as the main source of loans to the
Bank Panics they temporarily ran short of cash. U.S. government.
One problem was the frequent Repeated bank panics broke out Over the next decades, Morgan
shortage of money in circulation. during the 19th century. Such became the dominant figure on Wall

U.S. HISTORY 5
(c) Constitutional Rights Foundation, 2012
Bill of Rights in Action, 27:3. www.crf-usa.org
 Street. He was more than six feet tall In effect, Morgan acted in place reformers, called progressives, who
with a deformed purplish nose of a central bank that the U.S. did not demanded vigorous enforcement of
caused by a skin condition. He hated have. Wall Street nicknamed him antitrust (anti-monopoly) laws.
pictures taken with his nose in pro- “Jupiter,” after the chief Roman god. During the summer of 1907, a
file, and he once assaulted photogra- When his bank partner died, pair of minor Wall Street bankers
phers with his walking cane. Morgan renamed the firm J.P. Mor- devised a scheme to capture the
Morgan believed American capi- gan & Co. Morgan’s bank financed stock of the United Copper Co. and
talism should be under the control of the merger of numerous railroads drive up its price. But the scheme
bankers like him. His Wall Street into six huge systems. He traded his fell apart, and the company’s stock
peers saw him as their natural leader, financing for the majority of stock in plunged in value.
who was known as honest and fair. the merged railroads and a place on One investor in the scheme
Morgan viewed the wild cut- their boards of directors. Wall Street was the president of the Knicker-
throat capitalism of the late 19th called this process “morganization.” bocker Trust Company. This was a
century as wasteful and destruc- Morgan also merged competing new type of bank that was only
tive. He hated “ruinous competi- industrial companies into gigantic lightly regulated.
tion,” such as the rate wars that Trust companies did regular
drove many railroads into bank- He assembled the banking but also made risky loans
ruptcy. Morgan believed the best and speculated in the stock market.
way to create business stability was city’s commercial By taking risks, they made greater
for competitors to regulate them- profits and could offer higher inter-
selves with private agreements and trust company est rates to depositors than the more
based on trust. In the 1880s, Mor- common commercial banks did.
gan started to organize mergers of
bankers, put them Also, trust companies did not have
competing railroads. in separate rooms, to hold as much in reserve as com-
mercial banks.
‘Jupiter’ locked the front door, Early in October, Knickerbocker
In 1893, a stock market crash trig- depositors learned that their bank’s
gered a bank panic and the worst de- and kept the key in president had invested in United
pression in U.S. history up to that Copper stock. This caused a run on
time. During this depression, the his pocket until he the trust company by depositors
money supply shrank as people and
businesses hoarded cash. Scarce
could negotiate who feared it had lost money and
would fail. Actually, Knickerbocker
money caused high interest rates on a deal. itself had not invested in the
borrowing, which led to a drop in scheme and was stable.
spending and mass unemployment. corporations. In 1901, he merged But Knickerbocker still ran out
The gold standard worsened the steel companies he owned with of cash to pay off its panicked de-
crisis. The U.S. Treasury could only Carnegie Steel plus nine others to positors, and it closed. A panic
print paper money that was backed form U.S. Steel. This became the began. Depositors in other New
by its reserves of gold. The money cri- world’s first billion-dollar corpora- York trust company banks started
sis worsened when European nations tion, which controlled about half withdrawing their money. Banks
demanded payment in gold to settle the American steel business. down the banking chain were call-
trade imbalances. This threatened to Morgan donated millions of dol- ing back their reserves from Wall
shrink the money supply further. lars to museums, the opera, hospi- Street to guard against a run on
In February 1895, Morgan and tals, schools, and his Episcopal their deposits.
other bankers met with President Church. His passion was collecting Wall Street bankers turned to 70-
Grover Cleveland. Morgan proposed fine art, manuscripts, and other rare year-old J.P. Morgan, the one man
a plan for his financial firm to coor- objects. To contain his vast collec- they trusted. When a new run on the
dinate the U.S. purchase of gold tion, he built the Morgan Library Trust Co. of America bank occurred,
from world sources in exchange for next to his home. Morgan and two of his banker friends
government gold bonds payable in raised $3 million to save it. But the
30 years. The Panic of 1907 bank runs continued, especially on
Cleveland approved Morgan’s In 1901, Vice President Theodore the trust companies.
plan. It worked, and the U.S. money Roosevelt became president follow- Then New York City’s mayor re-
supply stabilized. Morgan and the ing the assassination of President ported to Morgan that the financially
other bankers who carried out the William McKinley. Roosevelt quickly stressed city needed a loan to cover
plan made a nice profit as well. signaled that he sympathized with its payroll and pay contractors.

6 U.S. HISTORY
(c) Constitutional Rights Foundation, 2012
Bill of Rights in Action, 27:3. www.crf-usa.org
 Fearing the city’s financial collapse
would worsen the panic, Morgan
and his banker friends purchased
$30 million in city bonds.
Brokerage firms, which han-
dled stock market transactions,
were also in danger of failing.
They were paying skyrocketing in-
terest rates on loans to meet their
obligations. Morgan put together a
$25 million “money pool” for
making lower interest loans to
them, avoiding an almost certain

Library of Congress
stock market crash.
But the largest brokerage firm on
Wall Street, Moore & Schley, was
$25 million in debt. The bankruptcy
of this key firm could still set off a
stock market crash. A CROWD GATHERED in front of a failed bank in New York City. Before federal deposit
insurance (created in the 1930s), if a bank went under, its depositors lost all their money.
Morgan called a meeting at the
Morgan Library. He assembled the
city’s commercial and trust com- The Fallout semi-retired with his son, John Jr.,
pany bankers, put them in separate Morgan’s deal-making finally in the process of taking over the
rooms, locked the front door, and stopped the Wall Street panic. Much family bank.
kept the key in his pocket until he economic damage, however, had al- When the committee’s chief coun-
could negotiate a deal. ready spread across the country. sel questioned Morgan whether he
The meeting went well into the The resulting depression of 1907–08 commanded any power over the
night. Trust company bankers resis- was severe, but probably would economy, he replied, “Not the slight-
ted pooling their reserves to stop the have been greater if the bank panic est.” He denied that any money trust
panic, but negotiations wore on. At had continued. existed. He also disagreed that his
4:30 a.m., Morgan finally bullied Wall Street cheered Morgan as mergers of railroads and industries
them into signing an agreement. It a hero. But progressives attacked had created an unhealthy concentra-
called for the trust company bankers Morgan and Wall Street for all the tion of economic power.
to bail out their brother bankers profits they made from their The Pujo committee, however,
who were struggling with runs on deals. Some even accused them of concluded that a “community of in-
their deposits. For his part, Morgan causing the panic so they could terest” existed on Wall Street that
promised to save the Moore & Sch- make money from it, but this was concentrated “the control of money
ley brokerage. never proved. and credit in the hands of a compar-
Morgan then devised a plan to It also turned out that the steel atively few men.” The committee’s
erase the debt of Moore & Schley. It company purchased by U.S. Steel report identified six Wall Street
would sell a steel company it owned had been underpriced. This made banks, including Morgan’s, which
to U.S. Steel, a company that Morgan the purchase even more profitable made it nearly impossible for large
held stock in and was a member of its for U.S. Steel (and Morgan). companies to sell their corporate
board of directors. The only problem Progressives criticized the presi- bonds without the group’s coopera-
with this deal was that by buying a dent for being hoodwinked by Mor- tion. The six banks had agreed not
competitor, U.S. Steel would monopo- gan into undermining his own to compete against one another in
lize the steel industry even more. This trust-busting campaign. In addition, handling new issues of bonds. The
could trigger an antitrust prosecution progressives claimed that a “money Pujo report also revealed that Mor-
by the Roosevelt administration. trust” of Wall Street bankers, gan’s bank along with two others
Morgan immediately sent headed by Morgan, conspired to held voting seats on the boards of
trusted advisers to Washington to monopolize the nation’s financial directors of corporations worth an
persuade President Roosevelt to investments. astounding $25 billion (between 2
approve the deal. Roosevelt agreed In December 1912, Morgan testi- and 9 trillion in today’s dollars).
that the circumstances of the Wall fied before a congressional banking Morgan sailed to Europe early in
Street panic warranted U.S. Steel’s committee hearing chaired by Rep. 1913. He died in his sleep in Rome
purchase of a competitor. Arsene Pujo. At age 75, Morgan was on March 31. Morgan’s partners

U.S. HISTORY 7
(c) Constitutional Rights Foundation, 2012
Bill of Rights in Action, 27:3. www.crf-usa.org
 publicly blamed his death on the banks had too much control over protect people’s money when banks
stress of the Pujo hearings. Mor- the cost of borrowing. It was time, failed. Congress finally enacted this
gan’s estate was valued at more the progressives argued, to stop re- reform in 1933, creating the Federal
than $100 million. That figure was lying on Wall Street bankers, like Deposit Insurance Corporation.
much smaller than the fortunes of J.P. Morgan, to end bank panics Today, the FDIC insures every de-
industrial barons like Carnegie and themselves and make big profits in positor up to at least $250,000 in an
Rockefeller. Carnegie commented, the process. insured bank.
“And to think, he was not a rich With the Democrats in control of
*****
man.” Morgan’s only son, John Jr., Congress, the Federal Reserve Act
In 2000, J.P. Morgan & Co.
inherited control of his father’s fi- was passed by strong majorities in
merged with Chase Manhattan
nancial empire. the House and Senate. President
Corp. to form the JPMorgan Chase
Wilson signed it into law on Decem-
Bank. This bank participated in the
The Federal Reserve Act ber 23, 1913. These were the act’s
2008 U.S. bailout of banks. It bor-
After the Panic of 1907, there key features:
rowed $25 billion, which it has
was widespread agreement that a • A seven-member Federal Reserve
since repaid to the U.S. Treasury. JP-
central bank was needed to man- Board, appointed by the presi-
Morgan Chase is currently the
age the money supply and to be dent with the consent of the
largest U.S. bank by assets held.
the “lender of last resort” to stop Senate, was to coordinate money
bank panics. Sharp disagreement supply policy with 12 banks des-
For Discussion and Writing
arose, however, over who should ignated as Federal Reserve
1. Why did bank panics often lead
run this bank. Banks. Each of the banks would
to the failure of banks and eco-
Most of the nation’s bankers, in- be located in a different region
nomic depressions?
cluding Morgan, wanted a private of the country.
2. President Theodore Roosevelt
central bank controlled entirely by • The Federal Reserve Banks were
condemned the “predatory man
bankers. The progressives wanted a to be “lenders of last resort” for
of wealth.” Was J.P. Morgan
central bank under the control of U.S. banks.
such a man? Why or why not?
the federal government. • The Federal Reserve Banks
3. How did the Federal Reserve Act
After Democrat Woodrow Wil- could issue Federal Reserve
attempt to stop the destructive
son won election as president in Notes, paper currency re-
bank panics?
1912, he sided with the progres- deemable in gold, to make the
sives. Wilson insisted that the cen- money supply more “elastic” or
For Further Reading
tral bank be a public agency expandable, if needed.
Bruner, Robert F. and Carr, Sean D.
directed by government officials ap- The Federal Reserve Act of 1913
The Panic of 1907: Lessons Learned
pointed by the president. has been changed a number of
from the Market’s Perfect Storm.
Bankers and Republicans ob- times, most notably to centralize
Hoboken, N. J.: John Wiley & Sons,
jected to Wilson’s demand for fed- power from the 12 regional banks to
2007.
eral control of the central bank. the Federal Reserve System’s policy-
They argued that the bank would be makers in Washington. One major Chernow, Ron. The House of Morgan:
controlled by politicians who would flaw in the 1913 banking reform ef- An American Banking Dynasty and
follow the policies of whichever fort was the lack of a government the Rise of Modern Finance. New
party was in power. They also com- bank deposit insurance system to York: Atlantic Monthly Press, 1990.
plained such a board would mean
major government interference in ACTIVITY
private banking and the free enter-
prise system. They much preferred
that any “capstone” board, as Wil-
Control of the Federal Reserve System
In 1913, J.P. Morgan and other bankers disagreed with President
son called it, should be in the hands
Woodrow Wilson and the progressives over who should control the
of expert bankers alone.
Federal Reserve System. Should it be directed by private bankers like
The progressives used the find-
Morgan or by government officials appointed by the president?
ings of the Pujo hearings to justify
the need for a government-con- 1. Form small groups that will first list arguments for each side of the
trolled central bank to counter Wall question above based on information in the article.
Street’s dangerous concentration of
2. The groups will then discuss the arguments on each side and
economic power. For many years,
decide who should control the Federal Reserve System.
farmers and populist politicians had
complained that the New York 3. The groups will then report their conclusions and reasons to the class.

8 U.S. HISTORY
(c) Constitutional Rights Foundation, 2012
Bill of Rights in Action, 27:3. www.crf-usa.org