The Panic of 1907: How J.P. Morgan Took Over Wall Street

By Richard A. Naclerio

One of the most influential shapers of New York City’s history is Wall Street. The economic, social, demographic, and political impact the banking industry has had on New York City is undeniable in its scope and power. However, Wall Street itself is influenced by men who have harnessed and bridled it throughout its textured history. The consolidation of financial power is almost always a harbinger for the rise or fall of New York’s future, and no event was more exemplary of this effect than the little-known Panic of 1907, and no man amassed so much power from it than J.P. Morgan.

J.P. Morgan

The commonly known story of the Panic of 1907 is that in October of 1907 an attempt by F. Augustus Heinze, an overzealous Wall Street banker, to corner the copper market led to a run on many major banks. The effects of the run caused a panic that reverberated throughout Wall Street, New York City banks and ultimately, many of the US banking and manufacturing industries. At the height of the Panic, J.P. Morgan stepped in to aid the banking community and quell the massive drop in bank reserves and market collapse. He was touted by many Americans as a true patriot and selfless beacon of financial hope for the country. But, to those who rigidly examined his actions, he was a monster who fed off the demise of economic destruction.

In 1906, harbingers of the encroaching crisis went unnoticed. The US economy was fantastic, and threat of a panic was the last thing on the minds of Americans, especially New Yorkers. It could even be said that the reason for the crash was the fact that the market was too good the previous year. US credit was so strong in 1906 that an estimated sum of $500,000,000 was borrowed by Wall Street banks from European markets in order for corporations to seize opportunities of leveraged buyouts and mass consolidation throughout the year.

For example, The Union Pacific Railway, having received its shares of Northern Pacific and Great Northern in the Northern Securities liquidation, sold off a large chunk of them in June of 1906. This meant that Union Pacific had $55,968,000 in cash and money on call against $7,345,000 a year earlier. This sudden liquidity led to a massive acquisition period, borrowing $75,000,000 on its notes and buying $131,970,000 in railway stocks. Union Pacific’s activity, along with many others like it, put the country’s corporate structure into a dangerous position of debt-held capital, along with huge market consolidation.[1]

Agriculture was also doing well in previous years. Crops were strong and the whole country was enjoying prosperity, especially in the South and the West. Unemployment was very low, as manufacturers were on an industrial torrent, enabling them to pay very high wages. Everyone was happy. It is in these times when greed usually overtakes better judgment and disrupts what would undoubtedly be a time of sustained financial security. The forming of syndicates to underwrite the huge amount of new bond issues and the attempt to control the stock market under what became adverse conditions, led to the mass sale of securities to pay off these Himalayan European and Wall Street loans, as well as the margin calls of the market.[2] The commissions earned by these syndicates ranged from 2.5% to 10%, and J.P. Morgan and his sea of investment banks, trust companies, and railway and steel company interests were at the core of the bond, underwriting, and loan scramble.[3]

With increasing shares in decreasing markets, industrial monopolization, over-leveraged capital, debt, and other dark conditions, the Panic of 1907 began long before F. Augustus Heinze’s October run on copper, and as the ice began to crack under Wall Street, J.P. Morgan was under it waiting to attack. According to J.P. Morgan & Co.’s records, the Panic of 1907, which drew out over the last three weeks in October of that year proceeded as follows:

On October 17, 1907 there was a violent break in the United Copper and Consolidated Steamship Co.’s stock. F. Augustus Heinze, president of the Mercantile National Bank attempted to corner the copper market with Gross & Kleeberg as his brokers. C.W. Morse, head of Consolidated Steamship, was also the head of the National Bank of North America, and a director of the Mercantile National Bank.

That night, the New York Clearing House Committee decided that if Mercantile needed a bailout, it would aid the bank under the condition that the entire board resigns.

On October 21st the Clearing House Association denied aid to the failing Knickerbocker Trust Co., and the resignation of its president, Charles T. Barney was then announced.

On October 22nd the Knickerbocker Trust Co. closed its doors.

On October 23rd a run began on the Lincoln Trust Company dropping their deposits from $21,000,000 to $6,000,000.

On October 24th, J.P. Morgan invited fourteen banks to loan $23,550,000 at interest rates varying from 10% to a gargantuan 60% and renewed the next morning at 20%.[4]

On October 25th $1,000,000 was jointly loaned to the Lincoln Trust Co. by the First National Bank of New York, National City Bank of New York, and J.P. Morgan & Co., and the same was done for the Trust Company of America, including another $9,700,000 at 25% to 50% interest.

On October 29th a syndicate composed of J.P. Morgan, First National Bank, and National City Bank took for cash at par of $30,000,000.

On November 14th Charles T. Barney of the Knickerbocker Trust Co. committed suicide.

On November 21st the following members of Borough Bank and International Trust Co. were arrested: Howard Maxwell, William Gow, and Arthur D. Campbell.

On November 22nd US Treasury Secretary George B. Cortelyou announced the issue of $100,000,000 in Treasury Loan Certificates.

On November 26th Arthur D. Campbell committed suicide.

On January 21st, 1908 the Hamilton Bank resumed business.[5]

A total of $6,000,000 representing nineteen banks was loaned directly to Lincoln Trust and the Trust Co. of America. After that, another $10,000,000 was raised for more bailouts.

When the panic started, J.P. Morgan was in Richmond, Virginia. He was attending the annual Episcopal Conference and getting over a cold when he got the call from New York that something terrible had happened. He and his entourage of Bishop William Lawrence and Bishop Greer and others drove to Washington, and then took a train to Jersey City, and then it was off to Morgan’s offices in New York. The entire time, Morgan was seen with “no suggestion of care or anxiety on his part, indeed rather the contrary. He was in the best of spirits.” Later, upon arrival in Jersey City, he was heard, “singing lustily, some tune which nobody could recognize…”[6]

As the panic got underway, Morgan formed a committee to determine which institutions could be saved after the panic, and which would be sacrificed. The committee answered to three men; J.P. Morgan, George F. Baker (head of First National Bank of New York), and James Stillman (head of National City Bank of New York). At the end of countless hours of examination and committee recommendations, three banks were left off the list to save; the Hamilton Bank (which J.P. Morgan ended up taking over), the 12th Ward bank, and the Empire City Savings Bank — all three banks were in Harlem.[7] As Harlem was hit hard by the lack of attempts to aid the area, Brooklyn was hit even harder by the failure to carry out the intended aid. First National Bank of Brooklyn, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, and the Jenkins Trust Company of Brooklyn all failed.[8] 

Then the takeovers immediately began. J.P. Morgan swooped in and absorbed the Mercantile Trust, and six more trust companies and banks, including the two largest banks that were hit the hardest: The Trust Company of America and Lincoln Trust. Morgan’s Guarantee Trust and Manhattan Trust companies would control them with the Rothschild family US emissary, August Belmont, at the helm of the merger.[9] He promised Charles Barney that he would help to save the Knickerbocker Trust (one of the largest trust companies in the country, and competitor of his Bankers’ Trust Co.), but decided to pull the plug at the last minute. Soon after that Barney committed suicide.[10]

Banks in other cities began to fail. Banks in Providence, Philadelphia, and Pittsburgh sought aid. Secretary Cortelyou released $25,000,000 of government money for the bailout and J.P. Morgan’s approximated private pool of about $30,000,000, included a $10,000,000 loan from John D. Rockefeller. Publicly, Morgan railed the working people of America for trying to rescue their own money from the teeth of Wall Street greed:

As I have already said, I cannot too strongly emphasize the importance of the people realizing that the greatest injury can be done to the present situation in thoughtless withdrawal of funds from banks and trust companies and to hoarding their cash in safe deposit vaults or elsewhere, thus withdrawing the supply of capital always needed in such emergencies as that which we have been confronted with during the past week.[11]

While J.P. Morgan was ordering the public to “keep cool heads” and he and his Wall Street cohort were charging massive interest rates on their bailout loans, it was payback time. Morgan called the collateral on the loans he gave to his old adversary, C.W. Morse. He used the collateralized bonds to acquire Morse’s Consolidated Steamship Company, which was his competitor in that sector as well, as Morgan owned the International Mercantile Marine Company — the parent company of the famous Titanic White Star Lines.

Along with the banking and marine industries, Morgan began to gobble up interest in hundreds of companies. One in particular set off more monopoly indicators in the public eye, and even in Washington, DC. The panic struck the Tennessee Coal & Iron Company as hard as it did many other major US companies. Like the trust companies, banks, and Consolidated Steamship, J.P. Morgan’s radar for easy prey located another victim.

Tennessee Coal and Iron’s stock was melting away. It was a direct competitor of Morgan’s US Steel Corporation. So, Morgan used a sinking fund of $30,000,000 of 5% bonds in US Steel to be given in exchange for TC&I stock on the basis points of eighty-four for the bonds in exchange for 100 in the stock. This way, whoever owned TC&I stock, now owned a smaller part of US Steel, and Morgan then owned both companies with US Steel stock even higher than it was before the buyout.

The only problem for Morgan was that this was not exactly legal. This transaction came dangerously close to violating the Sherman Anti-Trust Law. E.H. Gary, H.C. Frick, and J.P. Morgan visited President Theodore Roosevelt to talk him into overlooking the monopolistic implications of the takeover. Their argument was one of proximity. The iron and steel plants of the companies had their own separate district territories. Therefore, they were not technically competitors, as they did not cater to a common market, and a union of these two corporations would then not be a monopolistic combination of capital ownership. President Roosevelt blessed the deal, and Morgan owned another one of his competitors (with estimated mineral reserves of 700,000,000 tons of iron ore and 2,000,000,000 tons of coal), while expanding the reach of US Steel and usurping valuable southern real estate at the same time.[12]

The Panic of 1907 was an anomaly. This dubiously unpredictable assault on New York City banks ended up becoming the catalyst for one of the largest cases of corporate consolidation in American history. This consolidation was so egregious that it was deemed a “Money Trust” by regulatory politicians. The questionable circumstances and outcomes of the Panic, and J.P. Morgan’s massive takeovers led to Louisiana Congressman Arsene Pujo’s Money Trust investigations and subsequent Sub-Committee on Banking and Currency Report in January of 1913. Through the “Money Trust Hearings” the Pujo Committee findings were astounding. They unanimously determined that a small cartel of financiers, namely J.P. Morgan and a few other of New York’s most powerful bankers, had gained consolidated control of numerous industries and monopolized them through the abuse of the public trust, mostly during and after the Panic of 1907.

The Pujo Committee Report found that Morgan, and a handful of similar goliaths of American and international banking and industry, had gained control of major manufacturing, transportation, mining, telecommunications, and financial markets throughout the United States. The report revealed that no less than eighteen different major financial corporations were under the complete control of a consortium led by J.P Morgan, George F. Baker, and James J. Stillman. Just these three men, personally, represented the control of over $2.1 billion through the resources of seven banks and trust companies: Banker’s Trust Co., Guaranty Trust Co., Astor Trust Co., the National Bank of Commerce, Liberty National Bank, Chase National Bank, and Farmer’s Loan & Trust Co. The report revealed that this handful of men held the New York Stock Exchange hostage, and attempted to evade interstate trade laws.[13]

The committee’s scathing report on the banking trade concluded that 341 officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion). In other words, Morgan had influence or outright control over so many corporations’ boards of directors that they represented over four-fifths of the value of every corporation on the entire New York Stock Exchange.[14] Despite the sweeping investigation and the damning evidence the Pujo Committee compiled, there is no evidence that any of the men named in the Pujo Report were ever arrested, prosecuted, or fined for any crime, and yet no group or investigative committee had ever proven the Pujo Committee inaccurate.

There were many who even believed that the Panic of 1907 may have been premeditated and manufactured by the Wall Street elites to gain ultimate control over banking and industry in America. When testifying before the Committee on Rules, Congressman Charles Lindbergh Sr. made this striking protest in his speech:

The real purpose was to get a monetary commission, which would frame a proposition for amendments to our currency and banking laws, which would suit the Money Trust. The interests are now busy everywhere, educating the people in favor of the Aldrich plan. It is reported that a large sum of money has been raised for this purpose. Wall Street speculation brought on the Panic of 1907. The depositors’ funds were loaned to gamblers and anybody the Money Trust wanted to favor. Then when the depositors wanted their money, the banks did not have it. That made the panic.[15]

What is clear in the exploration of this history is that the first decade of the 20th century saw economic upheavals in New York City drastically impact not only industries and economies across the country and the rest of the world, but also the reality that a small handful of financiers wielded an incredible amount of power in orchestrating these upheavals.  

Richard A. Naclerio is the author of The Federal Reserve and Its Founders: Money Politics and Power. He is a PhD candidate in American History at the CUNY Graduate Center and his area of interest is US Economic and Financial History. Rich is an adjunct instructor in the History Department at Iona College and his dissertation is entitled, Credit Rating Agencies and the Crash of 2008: This is Why We Can’t Have Nice Things.

[1] Alexander B. Noyes, Forty Years of American Finance (1865-1907), New York: 1909, 355-356

[2] These observations on the causes of the Panic of 1907 were written by William M. Kingsley in a July 1909 financial periodical of the time called, The Ticker and Investment Digest. Ironically, he was the Vice-President of the United States Trust Co. of New York City at the time of the panic.

[3] Charles W. Gertenberg, “The Underwriting of Securities by Syndicates,” Trust Companies Vol. 10 (June, 1913), 328-332

[4] Note that interest rates this high were completely illegal at the time. They were only accepted because of the much-needed influx of currency into the market during the Panic. Morgan and his Wall Street friends took full advantage of the vulnerability of the industry.

[5] Vincent Carosso Papers, The Morgan Library, [ARC 1214] Box 37: Morgan & Co. – Panic of 1907, File 2. Syndicate Book #5.

[6] Vincent Carosso Papers [ARC 1214] Box 37: Morgan & Co. – Panic of 1907, File 1: Lawrence, Bishop William. Memoir of John Pierpont Morgan (1837-1913), 32-33.

[7] J.P. Morgan Papers [ARC 1196] Box 18 Folders 1-4 (Clippings): Daily Herald, Rutland, Vermont. October 25, 1907.

[8] Robert F. Bruner and Sean D. Carr. The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (Hoboken, N.J: John Wiley & Sons, 2007).

[9] J.P. Morgan Papers [ARC 1196] Box 18 Folders 1-4 (Clippings): New York Press, November 6, 1907, 1-2.

[10] Groner, 215.

[11] J.P. Morgan Papers [ARC 1196] Box 18 Folders 1-4 (Clippings): The Sunday States, New Orleans, Louisiana. October 27, 1907, 1.

[12] The Commercial and Financial Chronicle November 9, 1907, 1177-1180.

[13] Pujo Committee Report, February 28, 1913, “Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 To Investigate the Concentration of Control of Money and Credit;” Scribd.com. (Accessed October 15th, 2016).

[14] Bruner, 31-32.

[15] Congressman Charles Lindbergh testifying before the Committee on Rules, December 15, 1911. Modernhistoryproject.org. (Accessed: November 1, 2016).