Learning from History: The Panic of 1907 & its "bailout" [View All]

[Hannah Bell]

History can be instructive in our present circumstances, but what you learn from it depends on what kind of history you read.

For example, the standard, textbook histories of the Panic of '07 goes like this:

"On Oct. 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market....Wall Street was paralyzed...runs on several large banks... New York City ...on the brink of bankruptcy... The man who saved the day was J.P. Morgan, who brought together leading financiers and banks to bail out the ailing market. That was all in the days before a centralized banking system — and the Federal Reserve — were created to prevent widespread financial catastrophes."

http://www.npr.org/templates/story/story.php?storyId=14004846


http://www.npr.org/templates/common/image_enlargement.php?imageResId=14006382


In the standard histories, JP Morgan plays the role of savior of the financial system. Interestingly, he'd played a similar role in the Panic of 1896.

This is the history we learn in school, the simplistic "good guys/bad guys" history that forms the middle-class world view.

But in more serious histories, Morgan emerges with his halo somewhat tarnished.


At the turn of the 20th century, the Heinze brothers had managed to get the better of bigger, richer players in the copper mining industry - the Rockefellers, owners of what became Anaconda Copper. The Heinzes played dirty - but no dirtier than the Rockefellers.

F. August Heinze used some of his profits to open a bank in NY, & developed it into a financial network which cut into the action of established interests - like JP Morgan.

There's good evidence that Morgan, Rockefeller & other interests joined forces to take out the presumptuous newcomers. The Panic of 1907 was the fallout.


The Morgan-Rockefeller combination undertook a rumor campaign to undermine confidence in Heinze's banking network, & collapsed the Heinzes' copper corner by manipulating the market, precipitating bank runs, a stock market crash & liquidity crisis.

Then Morgan-led damage control was selectively applied to restore the system, while utterly destroying Heinze's network & associates.


The standard history, where Morgan is painted a savior, emphasizes his mobilization of private capital to preserve liquidity & confidence.

However, between $25-$70 million of the capital used came from the federal government. Morgan determined how much money would be used & in which institutions - the same czar-like role Paulson asked for in his first bailout proposal in our present crisis.


In the standard history, Morgan's selfless role as savior is emphasized. But the Morgan-Rockefeller interests profited in a number of ways.

1. The failure of the Heinze's corner & finances ended the 30-year "Copper Wars," leaving the Rockefellers in control.

2. The destruction of Heinze's banking interests removed a number of Morgan's competitors.

3. The extension of loans to other troubled institutions brought money & influence.

4. Assets lost by other players were bought up on the cheap.


In addition to the millions in bailout money from the public purse, the following interests contributed at least:

1. NY banking trusts: $25 million
2. Morgan interests (Morgan-Stillman): $13 million
3. Rockefeller: $10 million
4. First National (George F. Baker): $2 million
5. Kuhn, Loeb: $500,000

Kuhn, Loeb eventually merged with Lehman Brothers, now absorbed by Barclays.

Today, Citigroup (merger of Stillman & Baker's banks), JPMorgan Chase (merger of Morgan & Rockefeller's Chase-Manhattan), & Bank of America (west-coast origins) reportedly hold 1/3 of US deposits.

With more mergers on the way...


The 1907 "Bankers" Panic led to the creation of the Federal Reserve in 1913, with Morgan associates in leading roles.

http://query.nytimes.com/gst/abstract.html?res=9D04EED6103EE033A25750C0A9649D946697D6CF

Though it was designed to forestall future panics, it failed to do so just 16 years later, in 1929. And today, public money is again requested to stop meltdown.

Understandably, some wonder how much of a "reform" the Fed really was, considering how many of its key people, most notably Greenspan, are directly responsible for our present crisis.


So if the masters of the universe in 1907 were willing to precipitate a panic to further their own interests in 1907 - are things so different today? If the role of the Fed is not so much to stop financial meltdowns as to give some players more opportunity to manipulate the money supply - should we blindly trust those folks when they say they've got a wonderful plan for us?



http://eh.net/encyclopedia/article/moen.panic.1907

http://fraser.stlouisfed.org/docs/meltzer/talles90.pdf

http://www.24hgold.com/printarticle.aspx?pagedest=163141&langue=en&viewarticle=True

"Copper King at War" Sarah McNelis