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Wall Street History
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12/24/1999
J.P. Morgan - Savior
This week we continue our discussion of the Panic of 1907 and
the man who, single-handedly, turned things around, J.P. Morgan.
As I wrote last week, speculation in the early 1900s was rampant.
The lack of a central bank became a worrisome topic for many
because the banks were intimately involved in the market, either
as underwriters or investors. This included the trust banks, a
group separate from commercial and investment banks. Trust
banks were administrators of trust funds, money invested on
behalf of estates, wills, and the like. They provided a tenuous link
to the markets and many of them made loans to market
speculators, taking securities as collateral. Thus, if stocks fell, the
trust banks as well as other banks would be severely hurt, as
would their investors. Without a central bank, no one would loan
them money if a depositor''s run developed or they needed cash to
prop up their positions under duress.
The U.S. economy had taken a downturn in 1906. At Princeton
University, the school''s president, Woodrow Wilson, attributed
the country''s economic troubles to the government''s "aggressive
attitude toward the railroads, that made it impossible for them to
borrow." President Teddy Roosevelt was under fire from the
business community who urged him to ease up on regulatory
measures and antitrust prosecutions. Instead, Roosevelt
threatened at the end of 1906 to subject all large trusts to federal
control. Americans were enjoying "a literally unprecedented
prosperity," he said, ignoring the storm clouds on the horizon.
In her book "Morgan: American Financier," author Jean Strouse
writes of this time and J.P.''s emerging role in the spring of 1907.
"Morgan planned to leave for Europe in mid-March 1907, but the
combination of monetary shrinkage [largely due to financing of
the Boer and Russo-Japanese Wars] and a rumor that Roosevelt
would make some dramatic new move against the railroads called
him out of his ''Up-Town Branch.'' He went to Washington on
March 12 and spent two hours discussing ''the present business
situation'' with the President. As he left the White House he told
the press that Roosevelt would soon meet with the heads of
leading railroads to se what might be done to ''allay public
anxiety.''"
On March 12, the Dow Jones Industrial Average stood at 86.53.
On March 13, the stock market began to fall and closed that day
at 83.12. Morgan sailed for Europe. On March 14, the market
crashed, losing 8.3% of its value (DJ 76.23). The next six months
saw the market steadily erode.
Then on October 21, a run developed on The Knickerbocker
Trust Co. of New York (this was before the signing of Latrell
Sprewell). According to author John Steele Gordon, "Depositors
lined up in front of the bank''s headquarters on the future site of
the Empire State Building to demand their funds. The bank
closed the next day after an auditor found that its funds were
depleted beyond hope. The bank''s president, Charles Barney,
shot himself several weeks later, prompting some of the bank''s
outstanding depositors to commit suicide as well."
After this fiasco, J.P. Morgan and his Wall Street cronies put
together a rescue package designed to prop up the other trust
institutions. The group got together with Teddy Roosevelt''s
Treasury Secretary, George Cortelyou, who provided them with
$25 million to keep the system from collapsing. The funds were
then deposited in the national banks in New York with the intent
of adding funds to a system sorely in need of more liquidity. The
banks were to apply the funds as they saw fit to prevent further
panics.
[On October 21, the Dow closed at 60.81.it would bottom at
53.00 on November 15, a decline of 39% since March 12]
Roosevelt had tremendous faith in Morgan. But it was
extraordinary that the Treasury of the largest emerging economy
in the world had to transfer funds to private bankers in order to
prevent a financial collapse. The rumor was rampant that the
bankers had orchestrated most of the panic themselves in order to
make speculative profits.
After the Knickerbocker failure came the Trust Co. of America.
Morgan organized a $3 million pool to save it. The bailout
worked and a measure of confidence was restored. The $25
million pool from Treasury was parceled out as needed and it
kept the stock market from totally collapsing, though imagine the
chagrin today if the Dow fell from 11400 to 7000 (39%).
But the stock exchange continued to be weighed under by all of
the margin selling. [Today, margin debt is soaring, up 46% over
last year''s high levels.] On October 24, the NYSE President,
"Pay Me" Ransom Thomas, pleaded with Morgan to provide $25
million in funds to back the exchange, fearing it would not be able
to remain open that day if help was not forthcoming. Morgan and
the bank presidents responded quickly, pledging the funds, and
the NYSE was able to remain open. Gordon writes that "when
the support package was announced, pandemonium broke out on
the exchange. Morgan heard a thunder of noise at his office
across the street. It was the members of the NYSE giving him an
ovation."
Morgan was hailed as the savior of the banking system, the stock
exchange, and even New York City at the time. [Morgan had
engineered a bailout package for NYC also in October. The city
was in the throes of a depression with the market slide and bank
failures which forced the city''s back to the financial wall. Morgan
agreed to underwrite a successful $30 million bond issue].
Of course Morgan did not go unrewarded. Recall from our story
of two weeks ago that Teddy Roosevelt, despite his antitrust
proclivities, allowed Morgan to purchase the Tennessee Coal and
Iron Company for about $45 million when the true value was
closer to $700 million, thus expanding Morgan''s steel empire.
From time to time over the coming months I will have more on
the fascinating Morgan.
Brian Trumbore
Sources: "The Great Game," by John Steele Gordon
"Wall Street: A History," by Charles Geisst
"Morgan: American Financier," by Jean Strouse
[Note: Wall Street History will resume on Friday, January 7]
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