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A Failure of Regulation? Reinterpreting the Panic of 1907

Published online by Cambridge University Press:  31 October 2014

Abstract

Lax regulation enabled trust companies to take excessive risks, according to previous studies of the Panic of 1907, leading to a loss of confidence and massive runs. These studies have, however, given relatively little attention to the historical development of trust companies. This article argues that a more historical perspective can lead to a better understanding of the institutional framework and the actions of trust companies. Depositors did not lose confidence because of inadequate regulation; depositors lost confidence in specific trust companies because of false rumors, and diversity among trust companies hindered cooperation to halt the Panic.

Type
Research Article
Copyright
Copyright © The President and Fellows of Harvard College 2014 

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References

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32 It later moved to the corner of Fifth Avenue and 34th Street.

33 New York Daily Tribune, 12 July 1884, 9.

34 New York Observer and Chronicle, 14 Nov. 1895.

35 Although located uptown, the Commercial Trust Company, founded in 1906 by A. L. Erlanger, of the booking agency Klaw and Erlanger, was more closely identified with the theater district than the residential district.

36 Life, 29 Jan. 1903, 84; and 9 Apr. 1903, 318. The Knickerbocker Trust Company and the Trust Company of America also published advertisements emphasizing personal accounts; see, for example, New York Times, 2 Jan. 1907, 9; and Bankers Magazine, May 1906, 744.

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48 New York Times, 21 Jan. 1907, 13.

49 The Clearing House was originally established to decrease the cost of clearing notes and checks; banks no longer had to settle individually with each bank that they held checks from. Eventually, some clearinghouses began to take on some of the functions of a central bank: regulation, supervision, and acting as a lender of last resort. See Gorton, Gary and Mullineaux, Donald, “The Joint Production of Confidence: Endogenous Regulation and Nineteenth Century Commercial Bank Clearinghouses,” Journal of Money, Credit, and Banking 19 (Nov. 1987): 457568Google Scholar.

50 Bankers Magazine, Nov. 1899, 777; and New York Times, 2 Mar. 1906. In some other cities, such as Chicago, both banks and trust companies could be members of the Clearing House. See Moen and Tallman, “Clearinghouse Membership.”

51 New York Times, 22 Oct. 1907, 1.

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56 Ibid.

57 Letter from Benjamin Strong to Thomas Lamont, 1924, Benjamin Strong Papers, Federal Reserve Bank of New York.

58 New York Times, 23 Oct. 1907, 1.

59 New York Times, 24 Oct. 1907, 3, and 26 Oct. 1907, 3; Evening World, 23 Oct. 1907; and Commercial and Financial Chronicle, 26 Oct. 1907, 1059.

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63 Moen and Tallman, “Bank Panic of 1907,” 620. August 22 and December 19 were dates in 1907 when trust companies were required to provide reports to the Superintendent of Banking.

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65 The annual report did not state the total number of deposits; it stated the number of deposits upon which interest was paid, but trust companies paid interest on the vast majority of deposits.

66 The exception to the rule is the Title Guarantee and Trust, which experienced a relatively small decrease in deposits; its primary services, however, were title insurance and investments backed by mortgages.

67 New York Times, 12 May 1911, 13.

68 Sprague, History, 255.

69 Ibid.

70 New York Times, 4 Mar. 1906, 14.

71 Ibid.

72 The Reserve Ratio is the sum of cash, specie, and deposits at approved reserve depositories as a percentage of checkable deposits reported for August 22, 1907 in State of New York, Annual Report of the Superintendent of Banks Relative to Savings Banks, Trust Companies, Safe Deposit Companies and Miscellaneous Corporations for the Year 1907 (Albany, 1908)Google Scholar.

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81 New York Times, 28 May 1904, 13. The Association was established in 1904 to address mutual concerns of the trust companies.

82 Ibid.

83 New York Times, 23 Oct. 1907, 1.

84 New York Tribune, 23 Oct. 1907, 2; see also, Commercial and Financial Chronicle, 26 Oct. 1907, 1060.

85 New York Times, 11 June 1912, 11.

86 Letter from Benjamin Strong to Thomas Lamont, 1924, Benjamin Strong Papers, Federal Reserve Bank of New York.

87 Commercial and Financial Chronicle, 26 Oct. 1907, 1061.

88 New York Times, 24 Oct. 1907, 1.

89 Commercial and Financial Chronicle, 26 Oct. 1907, 1019.

90 New York Times, 6 Nov. 1907, 1.

91 Clark Williams, quoted in Bankers’ Magazine (Apr. 1909), 634.