The Panic of 1907, also known as the Bankers’ Panic of 1907, was a financial crisis that occurred in the United States during the early 20th century. It was marked by a series of bank runs, stock market collapses, and a credit crunch that led to widespread financial turmoil and economic distress. The Panic of 1907 is also commonly referred to as the Knickerbocker Crisis or the 1907 Bank Run.

Panic of 1907

The Panic of 1907 was a severe financial crisis that gripped the United States in the autumn of 1907. It was characterized by a series of bank runs, stock market declines, and business failures, leading to widespread economic distress. It is also commonly referred to as the Bankers’ Panic of 1907, Knickerbocker Crisis, or 1907 Bank Run.

The panic was triggered by the collapse in the stock price of the United Copper Company, a major mining corporation. A group of speculators attempted to corner the market on United Copper Company stock but failed, causing its share price to plummet.

Trust companies and banks associated with these speculators faced liquidity problems and bank runs. The failure of the Knickerbocker Trust Company (the Knickerbocker Crisis) in October 1907 triggered a wave of panic and withdrawals from other banks and trust companies.

As news of the collapse of United Copper Company and Knickerbocker Trust Company spread, depositors rushed to withdraw their money from other trust companies and banks out of fear of losing their savings. This led to widespread bank runs, where banks and trust companies were unable to meet the demands of depositors for cash withdrawals, exacerbating the panic.

Trust companies were particularly hard hit during the panic of 1907. Many trust companies had invested heavily in speculative ventures and were unable to meet the demands of depositors for withdrawals, leading to their collapse.

The Panic of 1907 had far-reaching consequences for the U.S. economy. It caused a sharp contraction in economic activity, leading to widespread business failures, layoffs, and bankruptcies. The stock market experienced significant declines, with the Dow Jones Industrial Average falling around 40% from its peak in early 1907 to its trough in late 1907.


The late 19th and early 20th centuries were characterized by rapid industrialization and economic expansion in the United States. However, this period was also marked by financial instability, with recurring episodes of bank runs, banking panics, and economic downturns.

The banking system in the United States during the late 19th and early 20th centuries was highly fragmented, consisting of numerous small banks operating independently. This fragmentation made the system vulnerable to regional shocks and contagion effects.

Unlike today, the United States did not have a central bank to provide liquidity support or act as a lender of last resort during times of financial distress. There was a lack of effective regulation and oversight of the banking industry during this period. Banks were often undercapitalized and engaged in risky lending practices, such as making loans based on speculative collateral or without proper due diligence.

Other than banks, trust companies also played a major role in the financial system during the 1900s, competing with banks for customer deposits. In addition to their primary roles, they were involved in financing infrastructure projects, industrial expansion, and urban development, contributing to the growth of industries such as railroads, utilities, and manufacturing.

Many trust companies offered banking services such as accepting deposits, making loans, and providing payment and clearing services. When trust companies experienced financial difficulties or failed, it had ripple effects throughout the financial system, leading to contagion and panic.

Bank Runs

A bank run occurs when a large number of depositors simultaneously withdraw their funds from a bank due to concerns about the bank’s solvency or the safety of their deposits. It is typically triggered by rumors or fears of financial instability, leading depositors to panic and rush to withdraw their money before the bank runs out of funds.

Bank runs are fueled by panic and herding behavior, as depositors follow the actions of others without necessarily assessing the underlying financial health of the bank.

Bank runs can have devastating consequences for the affected bank and the broader financial system. As depositors withdraw their funds, the bank’s reserves are depleted, making it difficult for the bank to meet the withdrawal demands of depositors. This can lead to a liquidity crisis for the bank, forcing it to sell assets or borrow funds at unfavorable terms to meet its obligations.

In extreme cases, a bank run can result in the bank’s insolvency and failure, causing depositors to lose their savings. Bank runs can also spread to other banks, as depositors lose confidence in the stability of the banking system as a whole.

Bank Panics

Bank runs often had contagion effects, spreading from one bank to another as depositors sought to withdraw their funds from any bank perceived to be at risk. This contagion effect could quickly escalate into a widespread panic, leading to runs on multiple banks simultaneously.

A bank panic is a widespread and uncontrolled fear among depositors that multiple banks or the entire banking system may become insolvent, leading to a rush to withdraw funds from banks. Unlike a bank run, which typically involves depositors withdrawing funds from a single bank, a bank panic involves a broader loss of confidence in the entire banking system.

Bank panics can have severe consequences for the broader economy, as they can disrupt the flow of credit and capital, impairing economic activity and potentially leading to a contraction in lending and investment.

Trust Companies

Trust companies were financial institutions that emerged in the late 19th and early 20th centuries in the United States. They provided a range of financial services, including fiduciary services, asset management, estate planning, and corporate trustee services. Trust companies primarily served as trustees for individuals, families, and businesses, managing assets such as investments, real estate, and trusts on behalf of their clients.

Trust companies in New York City became increasingly involved in speculative ventures during the late 19th and early 20th centuries. These ventures included investments in stocks, bonds, real estate, and participation in mergers and acquisitions.

Importance of Trust Companies in the Financial System

Trust companies were significant players in the capital markets, providing financing for businesses through underwriting securities and making loans. They facilitated investment in stocks and bonds and managed investment portfolios for individuals and institutions. Trust companies also engaged in margin lending, a practice whereby investors could borrow funds to purchase securities, using the securities themselves as collateral.

Trust companies played a major role in the development of the banking system, particularly in regions where traditional banks were scarce. They provided banking services such as savings accounts, checking accounts, and loans, contributing to the expansion of financial services to a broader segment of the population.

During the 1900s, trust companies also played a major role in providing liquidity to the stock market, including the New York Stock Exchange (NYSE). Their lending practices involved extending large sums directly to NYSE brokers without the need for collateral. These loans, typically required to be repaid by the end of the business day, served as funding for brokers to purchase securities for themselves or their clients.

Brokers then leveraged these securities as collateral for call loans, which were short-term overnight loans facilitating stock purchases, obtained from nationally chartered banks. The funds from these call loans were then utilized to repay the initial loans acquired from the trust companies.

This financial arrangement was essential due to legal restrictions barring nationally chartered commercial banks from issuing uncollateralized loans or guaranteeing payments for checks written by brokers on accounts with insufficient funds.

Trust companies were indispensable in this process, as they circumvented these legal limitations and provided the necessary liquidity to support the daily transactions on the NYSE floor. This also meant a failure of the trust company sector can lead to a broader calamity in the financial markets, including the stock market.

Major Causes for the Panic of 1907

Though the reasons for the Panic of 1907 are often pinpointed at the fall of the United Copper Company and the Knickerbocker Trust Company, it’s important to recognize that these events were catalysts rather than sole causes of the crisis. The underlying vulnerabilities in the financial system, such as speculative excesses, tightening credit conditions, and systemic weaknesses in the trust company sector, had been building for some time.

Speculative Excesses: In the years leading up to the Panic of 1907, speculative excesses were rampant in the financial markets. Both Leslie M. Shaw and George B. Cortelyou, who served as Treasury Secretaries in the years leading up to and during the Panic of 1907, pursued expansionary monetary policies, such as easy credit conditions and lax lending standards. Investors, buoyed by a booming economy and easy access to credit, engaged in speculative ventures, including stock market speculation, margin trading, and risky investments in unregulated securities. This created a bubble-like environment, with asset prices not reflecting their intrinsic values.

Banking System Vulnerabilities: The U.S. banking system of the early 1900s was decentralized and fragmented, consisting of numerous small banks and trust companies. There was a lack of regulatory oversight and supervision, as well as the absence of a central bank. Many banks were undercapitalized and poorly managed, with inadequate liquidity reserves to withstand financial shocks. This made the system vulnerable to bank runs and liquidity crises. Furthermore, trust companies held a low percentage of cash reserves relative to deposits, around 5 percent compared with 25 percent for national banks, increasing their vulnerabilities.

Tightening Credit Conditions: In the months leading up to the panic, credit conditions tightened as interest rates rose and liquidity in the financial markets contracted. This was partly due to concerns about inflation and the impact of the San Francisco earthquake of 1906, which disrupted economic activity on the West Coast.

Stock Market Speculation: Stock market speculation played a significant role in fueling the Panic of 1907. Investors, lured by the prospect of quick profits, engaged in speculative trading and margin buying, driving stock prices to very high levels. When the flow of money reduced and stock prices began to decline, investors panicked and sold their holdings en masse, almost leading to the closure of the NYSE.

Global Economic Factors: International factors, such as the Russian financial crisis of 1905 and financial troubles in Europe, contributed to global economic uncertainty and instability.

The Fall of the United Copper Company and the Knickerbocker Trust Company: The Panic of 1907 was triggered by a series of events that eroded investor confidence and sparked multiple bank runs and panic selling in the financial markets. The collapse of the Knickerbocker Trust Company, one of the largest and most prestigious trust companies in New York City, sent shockwaves through the banking system and prompted depositors to withdraw their funds from other financial institutions. The failure of the Knickerbocker, coupled with rumors of financial troubles at other banks and trust companies, led to a broader crisis of confidence and intensified the panic.

Excessive Panic among Investors: Once the bank runs started, news of a series of trust company failures combined with rumors fueled excessive panic among investors. Concerns about the stability of financial institutions and fears of further losses prompted investors to liquidate their holdings and withdraw funds from banks, contributing to the severity of the crisis.

Major Events

United Copper Co.

In 1907, the United Copper Company, led by its president F. Augustus Heinze, attempted to corner the copper market by acquiring a controlling interest in the shares of the company. Heinze believed that by controlling a large portion of the copper supply, he could manipulate prices and profit from the resulting price increases.

Charles W. Morse was a financier and fellow speculator who collaborated closely with Heinze in orchestrating the fraudulent scheme. Both F. Augustus Heinze and Charles W. Morse also served on the boards of various banks, trusts, and insurance companies.

Otto Heinze & Company, a brokerage firm owned by Heinze and his brothers, Otto Heinze and Arthur P. Heinze, was used for the scheme. To finance its acquisition of United Copper Company shares, Heinze and his associates engaged in highly leveraged transactions, with their banking connections further aiding this, and borrowed heavily against the value of their existing holdings.

In an effort to maintain the illusion of strength and stability in the United Copper Company’s stock price, Heinze and his associates also engaged in market manipulation tactics. They reportedly engaged in fraudulent activities, such as wash sales and matched orders, to artificially inflate the price of the stock.

During October 1907, Otto Heinze attempted a bear squeeze against short sellers, who had bet on United Copper’s stock price falling. However, the plan failed spectacularly. United Copper Company stock crashed from $50 in the morning of October 15 to $10 on October 16.

A bear squeeze is a situation in financial markets where investors who have taken short positions in a particular asset (such as stocks or commodities) are forced to buy back those positions at higher prices to cover their losses. This sudden surge in buying activity among short-sellers can lead to a rapid increase in the price of the asset, exacerbating their losses and causing further upward pressure on the price.

One of the famous examples of a bear squeeze in recent times is the GameStop saga. In early 2021, retail investors on online platforms such as Reddit’s WallStreetBets forum coordinated efforts to drive up the stock price of GameStop, a struggling video game retailer that had been heavily shorted by institutional investors. As the stock price soared, short-sellers incurred significant losses and were forced to buy back shares to cover their positions, leading to a massive bear squeeze.

As news of the United Copper Company’s financial troubles and market manipulation tactics spread, investor confidence in the company and its management eroded rapidly. Gross & Kleeberg, a brokerage firm that assisted in the corner attempt, was the first major casualty. On October 16, the firm suspended all trading activities due to huge losses incurred during the attempt. On October 17, the New York Stock Exchange officially suspended Heinze & Company for defaulting on its financial obligations.

Initial Bank Runs

F. Augustus Heinze and Charles W. Morse’s involvement in the United Copper Company’s collapse heightened concerns among investors about the stability of other institutions with which they were associated. The insolvency of Otto Heinze & Company and Gross & Kleeberg further fueled skepticism. This increased uncertainty led to depositors rushing to withdraw their funds from banks and trusts associated with Heinze and Morse.

The affected banks included the Mercantile National Bank, in which Heinze was the president, and the National Bank of North America and the New Amsterdam National Bank, both of which were controlled by Morse. The Knickerbocker Trust Company, one of the largest in New York and previously associated with Morse, also faced a flurry of withdrawals from customers.

The board of the Mercantile National Bank forced Augustus Heinze to resign from his position as President on October 17.

New York Clearing House

Recognizing the precarious situation, the New York Clearing House stepped in and tried to stabilize the situation.

The New York Clearing House is a private organization established in 1853 by several New York City banks to facilitate the clearing and settlement of financial transactions among its member banks. In addition to its primary role of facilitating the exchange of checks, drafts, and other financial instruments, it also served as a forum for member banks to exchange information and provided risk management services to its member banks.

The Clearing House made a public announcement reassuring depositors that member banks, including those associated with Heinze and Morse, had been thoroughly examined and deemed solvent. It also exerted pressure on Heinze and Morse to resign from their positions in other banks and trusts.

As a result, Augustus Heinze, who had already stepped down from the Mercantile National Bank, was forced out of other banks and trusts where he served in various roles. Charles W. Morse resigned from all his banking interests, including the National Bank of North America, the New Amsterdam National Bank, the Garfield National Bank, the Fourteenth Street Bank, and the New York Produce Exchange Bank.

The Knickerbocker Trust Company (Knickerbocker Crisis)

Rumors began circulating on October 18, 1907, that the Knickerbocker Trust Company had positions in the United Copper Company and was experiencing financial difficulties, being on the verge of insolvency. The company also had previous associations with Charles W. Morse. These rumors eroded confidence in the bank and led to a loss of depositor trust.

The Knickerbocker Trust Company was founded in 1884 by a group of investors led by Charles T. Barney, a prominent banker. It was established as a trust company, offering various banking services such as savings accounts, loans, and trust management.

During the 1900s, the company was heavily involved in speculative investments, particularly in the stock market and real estate sector. It engaged in risky lending practices and extended credit to speculators and investors who were highly leveraged.

As fears grew about the solvency of the Knickerbocker Trust Company, depositors rushed to withdraw their funds from the bank in a panic. Despite efforts to reassure depositors and stabilize its operations, the bank run continued.

On October 21, 1907, the board of directors of the Knickerbocker Trust Company dismissed Charles T. Barney from his position as president. This decision was made due to Barney’s personal connections to Charles W. Morse. Following Barney’s dismissal, the National Bank of Commerce announced that it would no longer serve as the clearing agent for the Knickerbocker Trust Company.

This further undermined the confidence of depositors in the trust company, and the bank run intensified. The Knickerbocker Trust Company ultimately succumbed to the pressure of the bank run and was forced to suspend operations on October 22, 1907.

Its failure sent shockwaves through the financial system and contributed to contagion effects, leading to runs on other banks and widespread panic.

Further Bank Runs & Insolvency

In the aftermath of the Knickerbocker Crisis, several trust companies in New York City faced financial difficulties and collapsed. The collapse of the Knickerbocker Trust Company, one of the largest and most prestigious trust companies at the time, sent shockwaves through the financial markets.

As rumors spread about the financial troubles of certain trust companies, depositors grew increasingly anxious about the safety of their funds. Fearing that their deposits might be at risk, depositors rushed to withdraw their money from other banks and trust companies, sparking runs on deposits.

The Trust Company of America, another prominent trust company in New York City, experienced a run on deposits shortly after the Knickerbocker Trust Company’s collapse. This scenario extended to other trust companies, including the Lincoln Trust Company and the Union Trust Company.

The crisis reached its peak in late October 1907. These runs were more severe, especially on trust companies. Depositors lined up to withdraw their funds, fearing that other trust companies might suffer a fate similar to Knickerbocker.

These bank runs were not limited to New York City; banks and trust companies in other cities also faced withdrawals as depositors sought to protect their savings. In cities such as Chicago, Philadelphia, and Boston, trust companies and banks experienced runs on deposits, reflecting the widespread panic and loss of confidence in the banking system.

Stock Market Turmoil

During the Panic of 1907, the stock market experienced significant turmoil and volatility, with sharp declines in stock prices and widespread panic among investors. Historical accounts indicate that the Dow Jones Industrial Average (DJIA) fell by more than 40% from its peak in early 1907 to its low point in November.

Stock prices plummeted across various sectors as investors rushed to liquidate their holdings and raise cash. Blue-chip stocks, speculative issues, and railroad shares were among the hardest hit, with some stocks losing a significant portion of their value in a matter of days. The rapid decline in stock prices eroded investor confidence and further fueled panic in the markets.

The heightened uncertainty and risk aversion during the panic prompted lenders in the call money market to become more cautious. Trust companies were no longer willing to offer credit to brokers. Given the liquidity pressures facing many financial institutions during the panic, they prioritized the preservation of their own liquidity. With fewer lenders willing to provide funds, the call money interest rate spiked from around 6% to 70%.

The situation became so dire that there were serious concerns about the ability of the New York Stock Exchange (NYSE) to continue operating. With liquidity drying up and panic selling intensifying, there were discussions among market participants and regulators about the possibility of temporarily closing the exchange to prevent further chaos and stabilize the financial markets.

Role of J.P. Morgan

Recognizing the severity of the crisis, J.P. Morgan, one of the most influential financiers of his time, assembled a consortium of leading bankers and financiers to address the liquidity shortages and restore confidence in the banking system. This consortium, often dubiously referred to as the “Morgan syndicate,” included prominent figures such as George F. Baker and James Stillman.

J.P. Morgan and his associates provided liquidity to troubled financial institutions by extending loans and purchasing securities during the Panic of 1907. By injecting much-needed funds into banks and trusts facing liquidity shortages, they helped them meet their immediate obligations and avoid insolvency. Notable examples include the Trust Company of America and the Lincoln Trust Company.

In addition to providing financial support, Morgan played a pivotal role in negotiating solutions to resolve specific crises and prevent further contagion effects. For example, he orchestrated the merger of several trust companies to prevent their collapse and stabilize the financial markets. These mergers not only safeguarded the stability of the affected institutions but also restored confidence among depositors and investors.

Furthermore, J.P. Morgan and his associates closely collaborated with government authorities during the Panic of 1907. Morgan also engaged in negotiations with government officials, including President Theodore Roosevelt and Treasury Secretary George B. Cortelyou, to coordinate efforts to address the crisis.

Moore & Schley

During the Panic of 1907, Moore & Schley, a prominent brokerage firm, found itself deeply entangled in the financial turmoil that swept through the markets. The firm faced mounting losses on its investments and margin loans, leading to fears of bankruptcy and a run on its assets. Investors and creditors grew increasingly concerned about the firm’s ability to meet its obligations.

In an effort to prevent the collapse of Moore & Schley and stabilize the financial markets, J.P. Morgan orchestrated a bailout of the firm. U.S. Steel, a company in which Morgan had a major shareholding and served on the board of directors, acquired the Tennessee Coal, Iron and Railroad Company (TC&I), in which Moore & Schley held significant shares, as part of the bailout. Under Morgan’s leadership, a syndicate of banks and financial institutions provided the necessary capital to stabilize Moore & Schley’s operations and prevent its bankruptcy.


Allegations against J.P. Morgan

While Morgan played a significant role in stabilizing the financial markets during the crisis, his actions also attracted criticism and scrutiny.

Critics accused J.P. Morgan of wielding excessive influence and control over the nation’s financial system. They argued that Morgan used his position to advance the interests of his own banking firm, J.P. Morgan & Co., at the expense of competitors and smaller financial institutions. His involvement in restructuring failed banks and consolidating financial assets was viewed as benefiting his firm’s bottom line.

Additionally, allegations surfaced suggesting that Morgan exerted undue influence on government officials and policymakers during the Panic of 1907.

Aldrich-Vreeland Act

The Aldrich-Vreeland Act was a piece of legislation enacted by the United States Congress in response to the Panic of 1907. It was signed into law by President Theodore Roosevelt on May 30, 1908. The act was named after its primary sponsors, Senator Nelson Aldrich and Representative Edward Vreeland.

One of the main provisions of the Aldrich-Vreeland Act was the authorization for the Secretary of the Treasury to issue emergency currency in times of financial stress. This emergency currency could be issued based on collateral provided by national banks and trust companies.

The act also established the National Monetary Commission, which was tasked with studying banking and currency reform in the United States. The commission was composed of members of Congress and leading experts in finance and economics.

The findings and recommendations of the National Monetary Commission laid the groundwork for the subsequent development of the Federal Reserve System.

Pujo Committee

The Pujo Committee was established by the U.S. House of Representatives in 1912, following the Panic of 1907 and subsequent financial instability. It was chaired by Congressman Arsène Pujo of Louisiana and tasked with investigating the concentration of economic power in the financial industry.

The committee conducted a thorough investigation into various aspects of the financial system, including the operations of banks, trusts, and other financial institutions. It sought to uncover potential abuses of power, conflicts of interest, and monopolistic practices that may have contributed to the Panic of 1907 and other financial crises.

The findings of the Pujo Committee raised significant concerns regarding the concentration of economic power among a select group of influential individuals and financial institutions. It particularly highlighted the dominance of a small group of powerful bankers, led by J.P. Morgan, who wielded disproportionate control over the nation’s financial markets and exerted considerable influence over government policies.

Based on its findings, the Pujo Committee proposed a series of legislative and regulatory reforms aimed at curbing the power and influence of dominant financial interests. These recommendations included measures to strengthen antitrust laws, regulate interlocking directorates, and increase transparency and accountability in the financial industry.

The Pujo Committee’s investigation and subsequent recommendations had a significant impact on public opinion and paved the way for broader efforts to reform the financial system. Its findings helped galvanize support for the establishment of the Federal Reserve System in 1913, which aimed to provide greater stability and oversight in the banking sector.

The Federal Reserve Act

In the aftermath of the Panic of 1907, there were calls for the establishment of a central banking authority to provide stability to the financial system. Advocates argued that a central bank could act as a lender of last resort, regulate the money supply, and oversee the banking industry to prevent future crises.

Against mounting pressure for banking reform, Congress began drafting legislation to create a central banking system. The Federal Reserve Act, introduced by Representative Carter Glass and Senator Robert Latham Owen, was designed to address the shortcomings of the existing banking system and provide for the establishment of a decentralized central banking system.

The Federal Reserve Act was passed by Congress and signed into law by President Woodrow Wilson on December 23, 1913. The act established the Federal Reserve System, a decentralized central banking system comprising a network of regional Federal Reserve Banks and a central governing board, the Federal Reserve Board (now the Federal Reserve Board of Governors).

  1. The Panic of 1907 by Federal Reserve History:
  2. The Panic of 1907 by Jon Moen, University of Mississippi (Economic History Association):
  3. The Panic of 1907 (Lessons Learned from the Market’s Perfect Storm): A book by Robert F. Bruner & Sean D. Carr

Leave a Reply

Your email address will not be published. Required fields are marked *