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A Failure of Regulation? Reinterpreting the Panic of 1907

  • Bradley A. Hansen

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.

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1 See, for example, Bruner, Robert F. and Carr, Sean, The Panic of 1907: Lessons Learned from the Market's Perfect Storm (Hoboken, 2007); Donaldson, R. Glen, “Financing Banking Crises: Lessons from the Panic of 1907,” Journal of Monetary Economics 31 (Feb. 1993): 6995; Frydman, Carola, Hilt, Eric, and Zhou, Lily Y., “Economic Effects of Runs on Early Shadow Banks: Trust Companies and the Impact of the Panic of 1907,” NBER Working Paper 18264 (July 2012); Ganley, William T., “Panics and Depressions: A Historical Analysis of 1907, 1929, and 2008,” in Heterodox Analysis of Financial Crisis and Reform: History, Politics, and Economics, ed. Leclaire, Joelle J., Jo, Tae-Hee, and Knodell, Jane (Northampton, Mass., 2011); Kroszner, Randall S., “Lessons from Financial Crises: The Role of Clearinghouses,” Journal of Financial Services Research 18 (2000): 157–71; Moen, Jon and Tallman, Ellis, “Lessons from the Panic of 1907,” Economic Review (May/June 1990): 113; and Tallman, Ellis and Moen, Jon, “Liquidity Creation without a Central Bank: Clearing House Loan Certificates in the Banking Panic of 1907,” Journal of Financial Stability 8 (2012): 277–91.

2 See, for instance, Bruner and Carr, The Panic of 1907, 182; Eichengreen, Barry, “Economic History and Economic Policy,” Journal of Economic History 72 (June 2012): 289307, at 294; and Krugman, Paul, The Return of Depression Economics and the Crisis of 2008 (New York, 2009), 155–56.

3 See Gorton, Gary and Metrick, Andrew, “Regulating the Shadow Banking System,” Brookings Papers on Economic Activity (Fall 2010): 261321.

4 Sprague, O. M. W., History of Crises under the National Banking System (Washington, D.C., 1910), 254–55.

5 Accounts of the Panic that emphasize risky behavior by trust companies include Bruner and Carr, The Panic of 1907; Chernow, Ron, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York, 1990), ch. 7; Krugman, Return of Depression Economics; Markham, Jerry W., A Financial History of the United States, vol. 2 (Armonk, N.Y., 2002), 3133; Moen, Jon R. and Tallman, Ellis W., “The Bank Panic of 1907: The Role of the Trust Companies,” Journal of Economic History 52 (Sept. 1992): 611–30, and Clearinghouse Membership and Deposit Contraction during the Panic of 1907,” Journal of Economic History 60 (Mar. 2000): 145–63; Strouse, Jean, Morgan: American Financier (New York, 1999), 574; Tallman, Ellis and Wicker, Elmus, “Banking and Financial Crises in United States History: What Guidance Can History Offer Policy Makers?Federal Reserve Bank of Cleveland Working Paper 10–09 (July 2010); and Wicker, Elmus, Banking Panics of the Gilded Age (New York, 2000), ch. 5.

6 See Sprague, History, 255; and Wicker, Banking Panics, 111.

7 On the role of business history in the study of financial crises, see the special issues of Business History Review 83 (Spring 2009) and Business History 53 (Apr. 2011).

8 On the early development of trust companies in the United States, see Haeger, John Denis, “Eastern Financiers and Institutional Change: The Origins of the New York Life Insurance and Trust Company and the Ohio Life Insurance and Trust Company,” Journal of Economic History 39 (Mar. 1979): 259–73 and The Investment Frontier: New York Businessmen and the Economic Development of the Old Northwest (Albany, 1981); Hansen, Bradley A., Institutions, Entrepreneurs, and American Economic History: How the Farmers’ Loan and Trust Company Shaped the Laws of Business (New York, 2009); and White, Gerald, A History of the Massachusetts Hospital Life Insurance Company (Cambridge, Mass., 1955). Neal, Larry, “Trust Companies and Financial Innovation, 1897–1914,” Business History Review 45 (Spring 1971): 3551, examines the rapid growth of trust companies in the early twentieth century.

9 On the legal difficulties associated with the use of life insurance, see Murphy, Sharon Ann, Investing in Life: Insurance in Antebellum America (Baltimore, 2010), 141–42.

10 Ibid.

11 See Hansen, Institutions, ch. 4; and Smith, James, The Development of the Trust Company in the United States (New York, 1928).

12 See Farmers’ Loan and Trust Co. v. United States, 25 F. Cas. 1040 (1866), 1041; and Lanier, Henry Wysham, A Century of Banking in New York, 1822–1922: The Farmers’ Loan and Trust Company Edition (New York, 1922), 300.

13 New York Observer and Chronicle, 28 Nov. 1867, 383.

14 New York Times, 9 Aug. 1876, 2. See also Brewer, H. Peers, The Emergence of the Trust Company in New York City (New York, 1986), 188–89.

15 Conant, Charles, “The Growth of Trust Companies,” American Monthly Review of Reviews 26 (Nov. 1902): 577. Conant was a financial journalist, but eventually became secretary of the Morton Trust Company, and an adviser to the U.S. and foreign governments. For a brief description of Conant's career, see the New York Times, 7 July 1915, 11.

16 Brewer, Emergence, 193.

17 Chandler, Lester V., Benjamin Strong: Central Banker (Washington, D.C., 1958), 24.

18 Ibid.

19 Moen and Tallman, “Bank Panic of 1907,” 613.

20 New York Daily Tribune, 18 Mar. 1906, 2.

21 Annual Report of the Comptroller of the Currency to the Second Session of the Forty-Fourth Congress of the United States (Washington, D.C., 1876). The numbers are from Oct. 2, 1876.

22 New York Times, 9 Aug. 1876, 2. Reports are from 1 July 1876.

23 New York Times, 21 Sept. 1873, 1.

24 Independent, 13 Nov. 1873.

25 Brewer, Emergence, 10.

26 Ibid., 21. See also Groesbeck, Edward and Dickinson, Charles C., The General Banking Laws of the State of New York (Albany, 1892), 93103.

27 Groesbeck and Dickinson, General Banking Laws, 100.

28 Clark Williams, quoted in Bankers’ Magazine, Apr. 1909, 634.

29 Brewer, Emergence, 1.

30 State of New York, Annual Report of the Superintendent of the Banks Relative to Savings Banks, Trust Companies, Safe Deposit Companies and Miscellaneous Corporations for the Year 1897 (Albany, 1898) and New York Times, 9 Aug. 1876, 2.

31 See, for instance, New York Times, 14 Aug. 1898, IMS2; and New York Times, 9 Feb. 1902, WF4.

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.

37 Life, 29 Jan. 1903, 84.

38 Life, 28 May 1903, 482.

39 New York Times, 15 Jan. 1907, 7.

40 Herrick, Clay, Trust Companies: Their Organization, Growth, and Management (New York, 1909), 31.

41 On the emergence of the uptown residential and shopping district around Fifth Avenue, see Beckert, Sven, The Monied Metropolis: New York City and the Consolidation of the American Bourgeoisie, 1850–1896 (New York, 2001), 5659; and Burrows, Edwin G. and Wallace, Mike, Gotham: A History of New York City to 1898 (New York, 1999), 958–60.

42 In the 1880s, the Title Guarantee and Trust Company spent $450,000 developing its own copies of the title records in New York County, enabling it to guarantee titles when property changed hands. Although officially organized as a trust company, its primary business was distinct from that of most trust companies; see New York Times, 20 Mar. 1890, 1, and New York Daily Tribune, 27 Sept. 1888, 9.

43 North, Douglass C., “Life Insurance and Investment Banking at the Time of the Armstrong Investigation,” Journal of Economic History 14 (Summer 1954): 209–28, at 223.

44 On the Armstrong Investigation of New York life insurance companies, see North, “Life Insurance”; Ransom, Roger L. and Sutch, Richard, “Tontine Insurance and the Armstrong Investigation: A Case of Stifled Innovation, 1868–1905,” Journal of Economic History 47 (June 1987): 379–90; and Beard, Patricia, After the Ball: Gilded Age Secrets, Boardroom Betrayals and the Party that Ignited the Great Wall Street Scandal of 1905 (New York, 2003), 281302. The investigation received extensive coverage at the time; McClure's published Burton J. Hendricks’ six-part “The Story of Life Insurance,” in 1906, and Arena published Albert Brandt's “Criminal Wealth versus Common Honesty” in May 1906.

45 Romer, Christina D., “Remeasuring Business Cycles,” Journal of Economic History 54 (Sept. 1994): 573609.

46 With the exception of the Panic of 1873, bank panics during the National Banking Era were preceded by negative economic shocks; see Mishkin, Frederic S., “Asymmetric Information and Financial Crises: A Historical Perspective,” in Financial Markets and Financial Crises, ed. Hubbard, R. Glenn (Chicago, 1991); and Calomiris, Charles W. and Gorton, Gary, “The Origins of Banking Panics: Models, Facts, and Bank Regulation,” in U.S. Bank Deregulation in Historical Perspective, ed. Calomiris, Charles W. (New York, 2000).

47 F. Augustus Heinze founded United Copper. The Heinze brothers secretly bought shares to drive up the price and then squeeze brokers that they believed were selling short; the attempt failed and the price plummeted from over $59 to $10. See Bruner and Carr, Panic of 1907, ch. 6, for a description of the attempted corner.

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): 457568.

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.

52 La Follette, Robert M., Centralization and Community of Control in Industry, Franchise, Transportation and Finance: The Panic of October 1907 and Its Lessons (Washington, D.C., 1908), 20. See also Kelly, Edmond, Twentieth Century Socialism: What It Is Not; What It Is; How It May Come (New York, 1910); Keys, C. M., “The Money Kings IV: Safeguarding the Trust Companies,” The World's Work 15 (Feb. 1908): 9908; and Stilwell, Arthur Edward, Cannibals of Finance: Fifteen Years’ Contest with the Money Trust (Chicago, 1912), 15.

53 United States Congress, House Committee on Banking and Currency, Money Trust Investigation, part 1 (Washington, D.C., 1913), 4.

54 See The New Legislation Affecting Clearing for Non-Members in the New York Clearing House,” Banking Law Journal 24 (Aug. 1907): 595602.

55 See Tallman, Ellis W. and Moen, Jon R., “Liquidity Creation without a Lender of Last Resort: Clearing House Loan Certificates in the Banking Panic of 1907,” Federal Reserve Bank of Cleveland Working Paper 10-10, July 2010.

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.

60 Noyes, Alexander Dana, “The Panic at New York,” North American Review 186 (Dec. 1907): 548.

61 Noyes, Alexander Dana, Forty Years of American Finance: A Short Financial History of the Government and People of the United States since the Civil War, 1865–1907 (New York, 1909), 370.

62 Satterlee, Herbert L., J. Pierpont Morgan: An Intimate Portrait (New York, 1939), 436.

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.

64 See Herrick, Clay, “New York Trust Companies during and after the Panic,” Bankers’ Magazine 78 (Jan. 1909): 71.

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).

73 New York Times, 1 May 1910, 1.

74 Hanna, John, “The Knickerbocker Trust Company: A Study in Receivership,” Temple Law Quarterly 5 (Apr. 1931): 319348, at 339.

75 Ibid, 341.

76 Ibid., 339.

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

78 For excerpts of the agreements between the Trust Company of America and the Committee of Trust Companies, see United States Congress, House of Representatives, Hearing before the Committee on the United States Steel Corporation, vol. 3 (Washington, D.C., 1912), 1669.

79 Hearing before the Committee on the United States Steel Corporation, vol. 3, 1678.

80 Wicker, Banking Panics, 111.

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.

The author wishes to thank Mary Eschelbach Hansen, Ellis Tallman, Chris Hoag, Mark Carlson, Walter Friedman, and three anonymous referees for helpful comments and suggestions.

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