The National Bank of Commerce extended credit to Knickerbocker Trust to cover those withdrawals. 8 The news sparked a run on Knickerbocker. On Friday, October 18, news broke that the president of Knickerbocker Trust, Charles T. While the Clearing House had been able to quash the runs on the national banks associated with Heinze and Morse, they were spreading to the trust companies. (Sources: New York Times, Commercial and Financial Chronicle, various issues) Enlarge 7 The daily maximum call loan interest rate during the Panic of 1907. The New York Clearing House then offered these banks loans that were eventually exchanged for clearing house loan certificates, one of the benefits of membership in the Clearing House Association. The Clearing House also forced out the management of these banks, including Heinze and Morse. 5, 6 After the collapse of this corner, the banks associated with these men succumbed to runs by depositors, who moved their deposits from dubious Heinze banks toward more reliable banks.įour days later, the New York Clearing House made a public announcement that the Heinze-related member banks like Mercantile National Bank had been examined and deemed to be solvent, calming their depositors. Morse, suffered huge losses in a failed attempt to corner the stock of United Copper, a copper mining company traded on the curb. On October 16, 1907, two minor speculators, F. Examining the sequence of events in 1907 makes the parallels clear. 4 Both crises started among New York City financial institutions and markets, and both affected the economy of the United States and the rest of the world. The Panic of 1907 had many elements in common with the financial crisis of 2007-09. Runs on trust company deposits, however, short-circuited their role as the initial liquidity provider to the stock market. 3 The extra liquidity provided by trusts supported new daily transactions on the floor of the exchange. Trusts were a necessary part of this process, because the law prohibited nationally chartered commercial banks from making uncollateralized loans or guaranteeing the payment of checks written by brokers on accounts without sufficient funds. 2 The proceeds of the call loan were used to pay back the initial loan from the trust company. Brokers used these loans to purchase securities for themselves or their clients and then used these securities as collateral for a call loan - an overnight loan that facilitated stock purchases - from a nationally chartered bank. Trusts did not require collateral for these loans, which had to be repaid by the end of the business day. Trust companies loaned large sums directly in New York equity markets, including New York Stock Exchange brokers. Because trust-company deposit accounts were demandable in cash, trusts were just as susceptible to runs on deposits as were banks.ĭespite their minor role in the payments system, trusts were large and important to the financial system. As a result, they held a low percentage of cash reserves relative to deposits, around 5 percent, compared with 25 percent for national banks. Trusts were not, however, a central part of the payments system and had a low volume of check clearing compared with banks.
Trust companies were state-chartered intermediaries that competed with banks for deposits. The central role of New York City trust companies distinguishes the Panic of 1907 from earlier panics. Moen and Tallman (1999) argued that the experience of the Panic of 1907 changed how New York Clearing House bankers perceived the value of a central bank because the panic took hold mainly among trust companies, institutions outside their membership. 1 The panic’s impact is still felt today because it spurred the monetary reform movement that led to the establishment of the Federal Reserve System. It transformed a recession into a contraction surpassed in severity only by the Great Depression. The Panic of 1907 was the first worldwide financial crisis of the twentieth century.
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