UV7329 Rev. Nov. 15, 2018 The Panic of 1907 and the High Tide of Progressivism (A) In early June 1913, President Woodrow Wilson contemplated legislative deadlock over a bill to establish a central bank in the United States. The law under consideration was titled “An Act to Provide for the Establishment of Federal Reserve Banks, to Furnish an Elastic Currency, to Afford Means of Rediscounting Commercial Paper, to Establish a more Effective Supervision of Banking, and for Other Purposes” (also known as the Federal Reserve Act). A disagreement between prospective sponsors of the bill, Representative Carter Glass and Senator Robert Owen, threatened to derail its progress through Congress (see Exhibit 1 for brief biographies of Wilson, Glass, and Owen). It had been in development since early January and represented a massive change in public opinion and legislative sentiment. Wilson had ordered Congress to remain in session during what was proving to be a long, hot Washington, DC, summer in order to push through this legislation. Now, the whole effort seemed threatened by intransigence. He called Glass and Owen to the White House to resolve their differences and restore momentum to the effort. Wilson reflected on the competing versions of the bill and how they compared to legislation presented 20 months earlier by a Republican, Senator Nelson Aldrich (see Exhibit 1). He wondered how well the Federal Reserve Act might forestall financial panics in the future. And how would this act reflect the popular will? What would a central bank accomplish that the US Treasury and clearinghouses couldn’t? How did the Federal Reserve Act complement the Progressive impulse? He reflected on the rapid change in public opinion regarding a central bank and on the possible influence of the recent Panic of 1907. Wilson wanted to exploit the momentum of the first year of his presidency. He was on the way to establishing a remarkable record of new laws and policies, consistent with Progressive ideals: Lowered tariffs and an income tax. Nearing completion was legislation that dramatically reduced import tariffs and that promised to make goods cheaper for working-class families. The loss of federal revenues from import duties would be offset by a progressive income tax, enabled by ratification of the 16th Amendment to the Constitution in February 1913. Direct election of US senators. In 1912, Congress had passed legislation promising to take away the election of senators from state legislatures and make these officials subject to popular election. Stronger antitrust legislation. The Federal Trade Commission Act and Clayton Antitrust Act were progressing through Congress as of the summer of 1913. How did the reform impulse reflected in these legislative changes capture the spirit of Progressivism of the day? This case was prepared by Robert F. Bruner, University Professor, Distinguished Professor of Business Administration and Dean Emeritus. The author thanks Sean D. Carr, Executive Director of the Batten Institute and Assistant Professor of Business Administration, and Peter Debaere, Professor of Business Administration for collaboration on earlier projects related to the Panic of 1907. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2017 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to firstname.lastname@example.org. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to email@example.com. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 2 UV7329 The Political Landscape In the election of November 1912, the Democratic Party won the White House and solid majorities in both the US Senate (47 Democrat versus 41 Republican) and the House of Representatives (249 Democrat versus 123 Republican). Yet Wilson knew that party labels masked other political fault lines that might cause legislators to vote in unexpected ways. It would be necessary to break the impasse from the standpoint of several groups: Conservatives favored “sound money” (i.e., a gold standard that would dampen inflation), protectionist tariffs, and laissez-faire approaches to financial regulation. And they recoiled from government intervention in markets. Generally, they advocated the interests of the financial and business communities. Politicians and newspapers identified sound money conservatives as advocates for the interests of “Wall Street.” Prominent spokesmen were Frank Vanderlip (president of National City Bank), Henry Davison (managing partner of J.P. Morgan & Co.), and Paul Warburg (partner in Kuhn, Loeb & Co.; see Exhibit 1). Warburg had been an outspoken advocate of the need to replace the financial system that had proven to be fragile and panic-prone—everyone respected Warburg’s acumen and advocacy. Drawing on support from bankers, Senator Nelson Aldrich, Republican of Rhode Island, had offered his own proposal for a “National Reserve Association.” Populists were suspicious of concentrated financial power, and eastern elites, especially Wall Street. They represented “Main Street,” the interests of small town and rural Americans, and sympathized with debtors. They favored government control of the money supply, low tariffs, and easy credit, even at the risk of inflation, and represented the strong agrarian sector of the United States, which accounted for about 30% of national employment. In their view, true value creation came from farms and small towns; speculation, instability, and inflation came from big cities and the financial community. Populists echoed Thomas Jefferson, who wrote: I sincerely believe…that banking establishments are more dangerous than standing armies; & that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.1 Among the Populists, Senator Robert Owen of Nebraska, the cosponsor of the Federal Reserve Act bill, was an ally of William Jennings Bryan, the three-time candidate for president and now secretary of state in Wilson’s cabinet (see Exhibit 1). Progressives sought to solve problems associated with rapid industrialization, urbanization, and immigration—chiefly, these were poverty, disenfranchisement, unemployment, and illness. They sought to apply tools of social science research to measure and expose problems—“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman,” said Louis Brandeis.2 Progressives opposed monopolies and high import tariffs that generated large economic rents. As a result, Progressives distrusted big business and Wall Street. Banking, they argued, was a public trust. Senator Robert La Follette of Wisconsin had railed against the existence of a “money trust” in the United States—he and others murmured that Wall Street bankers created panics in order to profit from them. Congressman Arsene Pujo of Louisiana had convened hearings from May to December 1912 to investigate whether there existed a money trust in the United States. Pujo’s investigation reported that a money trust did exist, even though it could find no formal agreement such as had characterized earlier trusts in oil, manufacturing, and other fields.a Publicity from the Pujo hearings prompted Wilson (and a Modern historians disagree on the accuracy and fairness of the Pujo investigation’s conclusions. The investigation found an oligopoly in investment banking (underwriting and distribution of securities) after the Panic of 1907, that the cartel dominated New York City’s call loan market, and that its dominance of credit markets threatened competition in the real economy. Critics of the investigation point to the partiality of evidence used by the investigators and their exaggeration of the bankers’ behavior and intent. For a detailed discussion of the criticisms and defenses of the Pujo investigation, see O’Sullivan, 273–310. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 3 UV7329 other Democratic candidates) to hammer hard on anti-monopoly themes and especially those oriented toward the financial community: the great money lenders in this country are in arrangement with the great manufacturers of this country, and they do not propose to see their control of the market interfered with by outsiders. And who are outsiders? Why, all the rest of the people of the United States are outsiders.3 Wilson had been elected president in November 1912 on a groundswell of popular support for Progressive policies. The election results confirmed a regime shift in American politics toward a vision of government that would be more democratic, representative, benevolent, and activist. And Wilson needed to weigh the advocacy of other interest groups such as organized labor (the American Federation of Labor, founded in 1886), farmers (the National Farmers Union, founded in 1902), commerce and industry (the Merchants’ Association of New York and the US Chamber of Commerce), and bankers (the American Bankers Association, founded in 1875). All these had views about whether and how the United States should embrace central banking. Most broadly, the differing views of politicians and interest groups reflected basic divisions within American society: East versus South and West; urban versus rural; money centers versus the “interior”; Main Street versus Wall Street; the poor and middle class versus the well-to-do. The political implications of this antipathy were stark: banks would be prevented from branching or doing business across state lines, and there would be no central bank. Warburg wrote: Individualism in banking was the gospel of the country. The view was generally held that centralization of banking would inevitably result in one of two alternatives: either complete governmental control, which meant politics in banking, or control by “Wall Street,” which meant banking in politics. Abhorrence of both extremes had led to an almost fanatic conviction that the only hope of keeping the country’s credit system independent was to be sought in complete decentralization of banking…If industrial conditions had not undergone revolutionary changes, this host of self-centered local banks might not have proved so inadequate. But when the country outgrew its provincialism; when our new industries started upon their phenomenal careers; when a lively and intimate daily exchange of goods and funds began to develop, not only between the several sections of the country, but between ourselves and all the rest of the world, the national banking system, with the state banking system superimposed upon it, was bound to show the fatal consequences of its inadequate structure. It became painfully manifest that extreme individualism in banking had rendered the country incapable of coping with its growing requirements and had made it hopelessly defenseless against dangers both from within and from without.4 1896–1906: The Boom The “growing requirements” to which Warburg referred proved to be inescapable. For 12 years after the Panic of 1893–95, the US economy grew rapidly, especially in coal, iron, and volume of railroad traffic. There was ample speculative activity in the stock market. Mass immigration brought more than 1 million immigrants in 1905. Although the 7.5% annual real growth rate of the GDP from 1896 to 1906 was high, so was the volatility of capital formation and the current account, which suggested instability in the economy. America was industrializing rapidly, creating businesses of unprecedented scale and power. The volume of corporate mergers surged between 1894 and 1904, bringing more than 1,800 companies into just 93 entities. The strong growth and economic development of the United States also came with an increasing demand for new capital. Figure 1 depicts macroeconomic trends during this period. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 4 UV7329 Figure 1. Macroeconomic trends between 1895 and 1913. Sources: Robert Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (New York: John Wiley & Sons, 2008). Data are from the National Bureau of Economic Research (NBER) Macrohistory Database, http://www.nber.org/databases/macrohistory/contents/ (accessed Sept. 14, 2017). Capital to finance America’s growth came from foreign investors and domestic banks. The money supply grew in line with the real economy, at about 7.5% per year after the contraction of 1896. The rapid growth in money supply reflected booming exports, high interest rates, and attractive opportunities for foreign direct investment.5 And it also reflected rapid growth in bank lending. As the boom years went on, the expanding credit stretched the reserve basis of banks, rendering the financial system more fragile.b A relatively small circle of financial institutions, including J.P. Morgan & Co.; Kuhn, Loeb & Company; First National Bank; National City Bank; Kidder, Peabody & Company; and Lee, Higginson & Company, handled much of the debt and equity financing for these large companies. In 1907, the informal leader of this financial community was J. Pierpont Morgan. The first decade of the 20th century was turbulent. An anarchist assassinated President William McKinley in 1901. McKinley’s successor, Theodore Roosevelt, took up an agenda of Progressive activism. In 1901, Morgan led a syndicate to create US Steel through a combination of competing firms. Capitalized at $1 billion, it was the largest merger to date. In the same year, a contest for the control of the Northern Pacific Railroad was aborted when the contesting sides formed a cartel of railroads in the Northwest. Roosevelt was the first president who successfully wielded the Sherman Anti-Trust Act in 1903 to prevent the railroads’ combination. A scandal within management at Equitable Life Company in 1905 prompted investigations that commanded daily newspaper headlines. One observer wrote: “We have seen in what frame of mind the American public regarded these various episodes in high finance. It was a mixture of misgiving, exasperation, and helplessness…”6 The scandal prompted reform of regulation of life insurance companies in New York State. b From 1900 to 1906, national bank reserves as a percentage of deposits fell from 37% to 28%. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 5 UV7329 Profile of the US Financial System in 1907 With the advent of the National Banking Act of 1864, the federal government granted banking charters under the requirement that chartered banks retain substantial reserves with the government and subject themselves to regular examination for soundness. In 1907, the US financial system consisted of some 20,000 institutions, including national and state- chartered banks, stock savings banks, private banks, and trust companies. Half of these were small (capitalized at less than $25,000 in capital). Only 5,000 institutions held the national banking charter. National banks were permitted to issue their own banknotes (known as “greenbacks”), which, reflecting the relative safety of national banks, tended to trade at a comparatively small discount to gold. A major financial innovation in the national banking era was the advent of checking accounts. Bank checks gradually displaced banknotes as a form of money. The financial crises of the national banking era “all involved demand deposits, as currency was now backed by the federal government and was no longer subject to runs. The rise of checking accounts was not well understood for decades. Checks were a kind of ‘shadow banking system.’”7 Trust companies were relative newcomers to banking. Although similar to national and state banks in their functions, trust companies were less regulated. They could own stock equity directly, and they were also subject to less stringent reserve requirements: a 6% ratio of capital to deposits versus 25% for national banks. Consequently, trust companies could pay higher interest rates, which attracted deposits easily; that, in turn, fed their rapid growth. Although they had had an institutional presence in finance for decades, their form and activities had shifted. Originally organized in the mid-19th century to act as trustees for legal estates to handle the minutiae of investing, accounting, and reporting, trust companies performed functions similar to the private wealth management firms of the 21st century. As they were capable of managing the drafts and checking accounts of their trustees, it is not surprising that they gradually extended checking services to nontrust customers. Though trust companies did not have charters as banks under the National Banking Act of 1864, nor oversight by the comptroller of the currency, they could make it up to consumers by offering interest on checking accounts at rates higher than bank rates. The New York trust companies were subject to no regulation until early 1907. Writing in 1908, Alexander Noyes observed: Again, in the matter of reckless banking methods, it is to be remembered that the unsound banking prevalent in New York at the time of the 1907 collapse was nothing new. It had prevailed, in aggravated form, during at least six years. Its existence was no secret from the community at large. As long ago as 1903, the dangers of the position created by the inadequate trust company reserves, the imperfect restrictions of the law, and the venturesome practices of these companies in the investment of demand deposits, had been pointed out by the New York Clearing House Committee, and their conclusion had been emphasized by the point-blank refusal of the Associated Banks to clear checks any longer for such trust companies as would not submit to the prescribed reform in those directions. The trust companies had refused to yield.8 In addition to the recalcitrance of trust companies to adopt prudent business practices or cooperate with the New York Clearing House (NYCH), they were guilty of a failure to cooperate with one another. The “old money” downtown trust companies distrusted the “upstart” uptown trust companies—the most severe runs were concentrated among the latter. One historian wrote, “If there had been more cooperation between the uptown and downtown trust companies, they might have been able to convince depositors that the troubled trust companies were solvent and would be assisted.”9 This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 6 UV7329 Earthquake and Recession The San Francisco earthquake of April 13, 1906, devastated the city and sparked the dramatic movement of gold from money centers in Europe as claims on insurance policies mounted. The Bank of England, the leading central bank in the world, sought to preserve its reserves of gold and therefore raised the interest rate in the summer of 1906 and again in late fall. In addition, it restricted lending by British banks to American firms. The net result was a credit crunch in the United States. In March 1907, the stock market plunged 10% briefly. By June 1907, the US economy was in recession. In August, New York City was unable to roll over its short-term bonds and sought Morgan’s help with a refinancing operation in Europe. October 1907: “Weeks of Slaughter and Despair”10 The Panic of 1907 nominally began with a failed “bear squeeze” speculation in the shares of United Copper Company (United Copper) on October 15, 1907. Since the summer of 1907, with money-market rates rising and equity prices falling, the brothers Augustus and Otto Heinze had become increasingly concerned about their holdings in United Copper. They had used United Copper stock to secure their positions in numerous banking concerns—especially to buy a controlling interest in Mercantile National Bank. To support the price of stock, the Heinzes developed a scheme to buy a large number of shares of United Copper, call for their delivery, and thus “squeeze” speculatorsc who they believed had been short-selling the stock. Eventually, the strategy proved unsuccessful, and the United Copper stock crashed, taking with it the brokerage firm Otto Heinze & Co. Figure 2 shows share prices for United Copper, the Dow Jones Industrial Average, and Amalgamated Copper Company—the largest copper-mining concern in the United States at the time. Figure 2. Share prices, 1907. Source: Author’s figure based on price quotations in Commercial and Financial Chronicle, 1907. This figure was originally published in Bruner and Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. c To “squeeze” short-sellers was to drive up the price of shares by buying shares from the short-sellers, and then to demand delivery of those shares. Some short-sellers would have sold shares that they did not own and would thus need to cover their short position by purchasing shares in the market for delivery to the buyer. This imposed a loss on the short-sellers. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 7 UV7329 The next day, two brokerage firms that had been involved in the speculation failed. This led to depositor runs on institutions rumored to be involved in financing the failed speculation. These included: Mercantile National Bank (Mercantile), of which Augustus Heinze was president, and a confederate, C. F. Morse, was vice president. National Bank of North America and New Amsterdam Bank, both of which had Morse as president. Morse was a director of seven banks, over which he exercised complete control. He had acquired these banks by pledging the stock in one bank for loans with which to buy another bank, and so on—this was the classic “pyramid” acquisition pattern of aggressive speculators. A contemporary described Morse as “an extreme character, even when judged by American speculative standards…regarded with distrust…seems to have frightened depositors.”11 Mechanics and Traders Bank, owned by E. R. and O. F. Thomas, associates of Morse. Although this bank was a state-chartered institution, it was a member of the clearinghouse. Consolidated Bank, also a state institution and member of the clearinghouse. The NYCH agreed to backstop claims on the banks, after examining them for solvency and on the condition that the presidents (Augustus Heinze, Morse, and O. F. Thomas) and the entire boards of directors resign. On October 21, 1907, Mercantile opened under new management, but in January 1908, it was closed for liquidation. The NYCH, a consortium of banks like an exclusive club, was a private association set up explicitly to pool the risk that one of its members might not be able to honor checks. In the next few days, NYCH repeatedly agreed to make up the balance of any debts Mercantile was unable to pay. NYCH’s actions at first seemed to help avoid a full-blown banking panic. Subsequent analysis showed that the operation of five Heinze-Morse banks had carried less-than-required cash reserves, and that these banks suffered sharply during the panic. During the week before the runs, their reserves stood at 19.3% of deposits and then after the runs shrank to 10.8%—this compares to an average of 26.5% and 25.5% for all other banks in the NYCH.12 During the panic, deposits declined by 48% at New York City’s trust companies.13 Knickerbocker Trust Company under Siege The runs on the Heinze-Morse banks triggered runs on several trust companies shortly thereafter. The trust companies became the conduit for the spread of the contagion. The first of these was the Knickerbocker Trust Company (Knickerbocker). Charles T. Barney, the president of Knickerbocker, was a close associate of Morse. Barney served as a director of two of Morse’s banks, the National Bank of North America and the New Amsterdam Bank. Though neither Barney nor Knickerbocker was directly involved in financing Heinze’s bear squeeze, the growing distress of institutions in the Heinze-Morse circle fanned fears about Knickerbocker. On October 21, 1907, Barney’s forced resignation from the boards of National Bank of North America and New Amsterdam Bank became public knowledge. Shortly thereafter, the National Bank of Commerce, which was often referred to as “Morgan’s bank,”d announced it would no longer cleare for Knickerbocker, and d J. P. Morgan had been a director of the National Bank of Commerce since 1875. He stepped down as its vice president in 1904. By the time of the banking crisis, Morgan remained both a director of the bank and a member of its executive board. e To “clear” for Knickerbocker meant that the bank would cash checks drawn on that trust company. Clearing was the process of transmitting cash between commitment (signing a check) and settlement (final payment with cash). In the process of clearing, an intermediary bank assumed some liability on behalf of the institution for which it was clearing. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 8 UV7329 other national banks followed suit. Consequently, they refused to cash checks drawn on Knickerbocker, and in some cases, they withdrew their funds, reflecting a growing unease about Knickerbocker’s solvency. On the morning of October 22, 1907, an hour before Knickerbocker opened its bronze doors at 5th Avenue and 34th Street in New York, a large crowd of depositors waited patiently on the sidewalk to reclaim their money. Knickerbocker was one of the largest and most successful trust companies in the country. Shortly after it opened that morning, a long line extended from inside its lobby onto the sidewalk, while company officers and policemen tried to control the growing crowd. Around noon, a Knickerbocker officer stood on a chair in the middle of the anxious crowd and read a statement emphasizing that the New York State banking department had examined Knickerbocker and found it solvent. A weakhearted cheer erupted, but nobody dropped out of line. The payments continued at first, but the demand was so great that the bank officer then announced that there would be no more payments made. Within barely two and a half hours, Knickerbocker had returned more than $8 million to its depositors. What had triggered this large-scale withdrawal of funds by private individuals as well as banks were the events of the previous day. The news of the run on Knickerbocker and its subsequent suspension threatened other trust companies. Almost all the banks and trust companies started calling in loans in an effort to build cash. As the trust companies struggled to meet the demands of depositor withdrawals, they withdrew their cash balances from national banks. In addition, they ceased lending to brokers, which caused the call loan market to freeze and brought trading on the New York Stock Exchange (NYSE) to a standstill. Then, over the ensuing days, as the NYCH banks suspended convertibility of deposits, small country banks and larger metropolitan banks across the country were unable to access their reserves in New York, causing them, too, to suspend.14 At the market’s opening on Tuesday, the call money rate was 10%. By noon, there were no offers for money at all on the floor of the exchange. During the afternoon, the call loan interest rate surged up to 70%. As the call money was increasingly difficult to get, stock prices dropped to their lowest level since December 1900. As the financial crisis grew, US Treasury Secretary George B. Cortelyou arrived in New York City and announced that he was ready to deposit government money in the banks that needed liquidity. In the absence of a US central bank, the Treasury had become an active player in the money market, often shifting gold and currency from its own vaults to different regions and depositing the funds in national banks that then re-lent them. An alternative way the Treasury could inject liquidity was to make advance payments of principal and interest on government bonds. During the Panic of 1907, Cortelyou actively sought to quell the panic through Treasury operations, but his efforts proved inadequate owing to the relatively small reserves that he was able to deploy. By mid-November, the Treasury had virtually exhausted its cash holdings in attempting to fight the crisis. Still, it found another way to boost the confidence of the public and the banks. It issued $40 million in gold bonds, which were intended to finance the Panama Canal, and redeposited the proceeds with banks. And national banks that acquired these bonds were allowed to use them as the basis for additional banknote circulation. A classic means of increasing the money stock was to attract gold flows from abroad. Arrivals of imported gold eventually helped to ease the crisis. The nation’s major bankers and financiers, led by Morgan, also played a significant role in addressing the financial crisis. After the run on Knickerbocker, Morgan became increasingly worried about other trust companies and in particular about the Trust Company of America. The cash the Trust Company of America had left was rapidly disappearing as depositors gathered in front of its main offices. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 9 UV7329 During the early stages of the panic, Morgan had been in Richmond, Virginia, attending a church convention. Upon his return to New York City, as the crisis at Knickerbocker was brewing, Morgan called the trust company presidents to his private library. He formed a committee to monitor the evolving situation with the trusts, and he asked that it function like the banks’ clearinghouse and to assist the trust companies with their liquidity needs. Morgan demanded financial commitments from committee members. He wanted to stop the run and restore the public’s wavering trust. He insisted that the members of the clearinghouse, and J.P. Morgan & Co., would do what they could to assist the trust companies. Over the next few weeks, similar scenes were repeated in New York, with Morgan sometimes going as far as locking the room where negotiations were held to ensure a favorable outcome. On October 24, an acute shortage of money occurred on the NYSE. The interest rate on call money reached 100%. This time, the presidents of the banks—not the trust companies—gathered around Morgan. Within half an hour, Morgan again raised a “money pool” of almost $25 million from 14 banks. Because this money did not stem the tide of runs, a second money pool with rates between 25% and 50% raised more. The second commitment proved sufficient to meet all demand. The city of New York was next in line, needing between $20 million and $30 million quickly to avoid insolvency. Morgan committed the funds and assured the city that even more funds could be had. Efforts were under way to calm the public by providing financial information to the press, and even by reaching out to the community’s clergy. Still other emergency measures were taken. On October 26, members of the NYCH “suspended,” which meant that they would no longer make payments in specie. This ensured that suspensions would spread from New York City to many other regions of the country, since banks in the interior had been withdrawing gold from New York banks in order to meet withdrawals by their own depositors. Around the country, clearinghouses issued emergency loans to their members in the form of clearinghouse certificates. The banks substituted these certificates for cash when settling accounts with one another at the clearinghouse each day. Because the banks used the certificates as cash, the certificates in effect freed up cash for the public. In this way, the certificates increased the US money supply. The certificates proved to be effective at restoring liquidity to the financial system during critical periods of stringency. But the issuances of these certificates were ad hoc. Bank suspensions reduced liquidity for individuals and companies. News of suspensions triggered a national wave of hoarding cash. Safe-deposit-box rentals skyrocketed. During the panic, about $350 million in deposits were withdrawn from the US financial system. Oregon, Nevada, and California declared legal holidays, which resulted in keeping banks closed. South Dakota, Indiana, Iowa, and Oklahoma allowed banks to pay out only small amounts—about $10.15 The crash and Panic of 1907 reverberated around the world. Commodity prices fell 21%, negating virtually the entire increase from 1904 to 1907.16 Industrial production dropped more than in any previous US panic.17 In November, US Steel’s output was down by 25% versus a year earlier; in December, it was down 65%. The dollar volume of bankruptcies declared in November spiked by 47% over a year earlier—the panic would be associated with the second-worst volume of bankruptcies up to 1907.18 Gross earnings by railroads fell by 6% in December.19 Production fell 11% from May 1907 to June 1908; wholesale prices fell 5%. Imports shrank 26%.20 Unemployment rose from 2.8% to 8%,21 a dramatic increase in a short space of time. Immigration, which had reached 1.2 million people in 1907, dropped to around 750,000 by 1909; it would not reach 1 million again until 1910. The US crisis was associated with financial crises in Egypt (January to May 1907), Hamburg (October), Chile (October), Holland, Genoa (September), and Copenhagen (winter).22 The contemporary economist and Wall Street observer Alexander Dana Noyes said that such outbreaks were bound to occur wherever the system was most fragile or credit most abused.23 A case in point was the impact of the crash and Panic of 1907 on Mexico, a country very sensitive to mineral and agricultural prices, and heavily dependent on flows of This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 10 UV7329 investment capital from the United States. Foreign direct investment in Mexico plummeted late in 1907, triggering a sharp recession, a wave of bankruptcies, and a stock market crash.24 The panic and subsequent depression were among the catalysts for the Mexican Revolution.25 The Commercial and Financial Chronicle wrote, “It is probably no exaggeration to say that the industrial paralysis and the prostration was the very worst ever experienced in the country’s history.”26 Milton Friedman and Anna Schwartz concluded that the recession was “among the five or six most severe.”27 In January 1908, banks finally lifted their suspension of payments; the bank panic was over.28 The subsequent recession ended in June 1908, followed by buoyant economic growth in the United States for the next 18 months. By late 1909, the stock market and industrial production recovered to prepanic levels (see Figures 3 and 4), and the economic cycle peaked in 1910, slumped the next year, and recovered again in 1912. Figure 3. Trend in industrial production, 1894 to 1912. US Industrial Production (Indexed, 1894=100) 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Source: Author’s figure based on Davis Industrial Production Index, NBER. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 11 UV7329 Figure 4. Stock market performance during the crisis. Dow Jones Industrial Index, 1906–09 110.00 100.00 90.00 80.00 70.00 60.00 50.00 1906‐01‐01 1906‐04‐01 1906‐07‐01 1906‐10‐01 1907‐01‐01 1907‐04‐01 1907‐07‐01 1907‐10‐01 1908‐01‐01 1908‐04‐01 1908‐07‐01 1908‐10‐01 1909‐01‐01 1909‐04‐01 1909‐07‐01 1909‐10‐01 1910‐01‐01 Source: Author’s figure based on data from Federal Reserve Bank of St. Louis and National Bureau of Economic Research. Problems that Surfaced in the Panic of 1907 The panic cast a bright light on defects of the US financial system. The first of these was the “inelasticity” of the money supply. The supply of currency needed to vary as the needs of commerce varied across seasons and economic cycles. But the banks’ holdings of gold and other reserves limited their ability to expand credit. Under the National Banking Act, national banks could issue national banknotes in proportion to bonds on deposit with the US government. Economic growth required more cash. And the needs of borrowers had a seasonal cycle, driven particularly by the demand for cash to move the annual harvests from field to market. Most of the bank crises of the 19th century began in the fall. Also, the asset basis for lending ensured that the provision of bank credit would be procyclical with the economy: in good times, bank earnings would swell the reserves, allowing for more credit in the system; in bad times, loan losses (actual or expected) would prompt banks to reduce loans, sharpening downturns. Thus in a crisis, the banking system would tend to issue no new currency. Second, the required reserves of banks were “pyramided” through the system: country banks placed their required reserves on deposit with money-center banks in order to earn a return on the idle funds. And the money-center banks (in Chicago and St. Louis, for instance) would place their idle funds on deposit with the big banks in New York City. This system of deposits connected the welfare of banks tightly, ensuring that trouble would travel: if banks somewhere in the system experienced a run, they would call in their reserves from other banks, placing them under strain as well. Third, rescue capital was relatively immobile. Banks could not turn to a large reservoir of funds if they experienced a run. Available reserves were scattered throughout the system and subject to the whim of the boards of individual banks. Fourth, the financial condition of the numerous institutions in the system was relatively opaque. The ability to quickly marshal funds, as Morgan had, depended on access to information. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 12 UV7329 Fifth, the pattern of financial rescues in 1907 seemed unfair to some critics and prompted the spread of conspiracy theories. It appeared that being acquainted with Morgan and his circle ensured a rescue. Congressman Charles Lindbergh Sr. of Minnesota was the first to charge that a “money trust” existed in the United States. In 1908, novelist Upton Sinclair published The Moneychangers,29 a fictional account of the Panic of 1907 in which a character loosely based on Morgan engineered the panic to dominate upstart competitors and punish political opponents.f Sixth, the financial market had grown too big to manage. The surplus gold reserve of the US Treasury was inadequate to meet the liquidity crisis. And the range of institutions had swelled beyond the reach of the NYCH and its peers in other cities. When the NYCH banks suspended convertibility of deposits into gold, they instantly spread the panic to banks in the interior. The unwillingness of trust companies to join the NYCH and to coordinate with each other had amplified the panic. Seventh, clearinghouse loan certificates and other substitutes for cash did little to quell the panic. The mere suspension of a bank and payment using these substitutes inflamed consumer fears and strained correspondent banks. And the substitutes curtailed buying power since loan certificates traded at a discount to gold. Eighth, hoarding made conditions worse. Depositors simply took cash out of banks and stuffed it under the mattress, worsening liquidity and confidence in the system. Agrarian Populists such as William Jennings Bryan had called for federal deposit insurance as an antidote. In December 1907, the Oklahoma state legislature enacted a plan for deposit insurance; seven other western states followed quickly. Such insurance was anathema to bankers, who deemed it inflationary and a cause of moral hazard. Finally, acknowledged leadership was vital to shape a rapid response to a panic. In 1907, Morgan had stepped in to mobilize collective action. But he was 70 years old at the time of the panic. The country could not expect his help indefinitely. In the first 124 years of the United States, various schemes for supervision of the financial system and for systemic stabilization had been tried and found to be inadequate or politically unpalatable (First Bank of the United States, 1791–1811; Second Bank of the United States, 1816–36; Suffolk Bank Association, 1820; New York Safety Fund, 1832; New York Clearing House, 1853; and Independent Treasury, 1840). The stability of the US financial system was tested in a series of financial crises in the late 19th century: specifically, 1873, 1884, 1890, 1893, and 1895. These crises deeply challenged conventional thinking after 1907. The Progressive Ascendancy Remarkably, the Panic of 1907 had little effect on the federal elections a year later, in November 1908: Republican seats in Congress declined by only 1%, and voters elected William Howard Taft (the successor preferred by Theodore Roosevelt) president. Perhaps voters believed that representatives of their mood were in power and would act upon the recent crisis. The transition from the presidency of Roosevelt to Taft commenced a split in the Republican Party between Progressives and Conservatives. Where Roosevelt believed the president could do whatever the Constitution did not expressly forbid, Taft believed the president could do only what the Constitution expressly allowed.30 This difference explained the growing divide between Conservative and Progressive Republicans. f Sinclair depicts the Morgan-like character saying, “This country needs a lesson…There’s been too much abuse of responsible men, and there’s been too much talk in high places. If the people get a little taste of hard times, they’ll have something else to think about besides abusing those who have made the prosperity of the country; and it seems to me gentlemen, that we have it in our power to put an end to this campaign of radicalism.” (Sinclair, 104–5.) This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 13 UV7329 Various issues in 1909 and 1910 served to create and widen the split. In 1909, Congress passed the Payne- Aldrich Tariff, which raised duties on a range of imported goods and inflamed Progressives and Democrats who saw the tariff as crony capitalism, a handout of import preferences to Nelson Aldrich’s business friends. One Progressive senator openly accused Aldrich of profiting from the tariff, which Aldrich vehemently denied. The congressional elections of 1910 returned the Democrats to a majority. Republican seats in the House fell by 15%. Taft pursued monopolies and endorsed the 16th Amendment to the Constitution, which would legitimize the taxation of incomes. In the fall of 1911, Taft’s Justice Department began antitrust suits against US Steel and International Harvester. The charge against US Steel was that it had violated the Sherman Anti-Trust Act when it acquired Tennessee Coal & Iron—in this move, Taft appeared to rebuke Roosevelt for his earlier approval of the deal. The attack on US Steel was the last straw31 for Roosevelt, who thereafter moved to compete for the Republican nomination for president. In other respects, inaction marked Taft’s administration compared to Roosevelt’s muscular activism. Disgusted with Taft’s inability to sustain his Progressive legacy, Roosevelt first attempted to wrest the Republican nomination from him in 1912; failing that, he formed the Progressive Party—colloquially called the “Bull Moose Party,” after Roosevelt’s indomitable stamina—and ran as an independent candidate. Reforming the Financial System Mindful of the public mood, on May 30, 1908, Congress passed the Aldrich-Vreeland Act. This legislation afforded a method of issuing currency during a financial panic based on a broader definition of bank reserves. And it created a National Monetary Commission to study the adequacy of the financial system in the United States. Political wrangling ensued.32 The co-chairs of the commission were Senator Aldrich and Representative Edward B. Vreeland, both old-line Republicans identified with the financial community. Reliance on a bipartisan government commission to recommend difficult policies was a time-honored tactic. Central banking was abhorrent to mainstream thought as recently as 1906. Yet, in fact, some individuals and organizationsg had begun to advocate monetary reform as early as 1894, in the wake of the Panic of 1893: In 1894, the American Bankers Association had offered the “Baltimore Plan” to allow national banks to expand their issuance of banknotes in a panic. That same year, the secretary of the Treasury and the comptroller of the currency each offered plans to broaden the volume of currency in a crisis. In December 1896, a conference of midwestern business leaders met in Indianapolis to call for reform of the financial system. The next month, a large convention of representatives of 12 midwestern cities urged President McKinley to create a monetary commission that would advance legislation to promote the elasticity of credit. Subsequently this convention named its own monetary commission, which reported to a convention of some 500 representatives from 31 states in January 1897—the aim was to mobilize a national movement for financial reform. The net effect was to generate proposals in 1900 for the establishment of regional central banks. Unfortunately, the proposals failed to gain congressional support. In 1900, Congress passed the Gold Standard Act, which mandated that government obligations be paid in gold and defined the dollar exclusively in terms of gold. This reflected the growing popularity of gold owing to growing supplies: major gold strikes in Alaska, South Africa, and Colorado had g Some critics judged these late 19th-century central banking movements to be efforts by the financial elites to protect their market positions, restrict entry, and/or extract monopoly rents. The notion was that the proliferation of state-chartered banks and the entry of trust companies into the banking business threatened the franchise of the incumbent large national banks. (See, for instance, Rothbard, 234–59.) This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 14 UV7329 relieved the dearth of gold currency that plagued the United States in the 1890s. This act was the death knell of the silverite and bimetal movements. In 1901, the departing Secretary of the Treasury, Lyman Gage, argued in his annual report for the creation of a confederated central bank, “under which the banks as individual units, preserving their independence of action in local relationship, may yet be united in a great central institution…Formed by some certain percentage of capital contributed by the banks themselves, and its management created through the suffrage of all, it would represent the interests of the whole country. With limited powers of control over its membership in the interest of common safety, confined in its dealings to the banks and to the Government, it could become the worthy object of a perfect public confidence. By the concentration of unemployed reserves from sections where such reserves were not needed, it could redistribute them in part as loans where most needed, and thus bind together for a common strength and protection the loose unrelated units, in whose separation and isolation the greatest weakness of our banking system is now to be found.”33 Gage’s proposal found insufficient support in Congress. In 1903, Senator Orville Pratt offered a plan to strengthen bank clearinghouses to respond to bank crises. The centerpiece of his proposal was to allow clearinghouses to issue their own asset-backed banknotes. This had the advantage of pooling the reserves behind currency. In 1906, the New York Chamber of Commerce proposed the establishment of a central bank in the United States. In response, the American Bankers Association developed an elaborate plan for banks to issue the national currency. In 1906, the creation of a central bank for the United States was a subject of active discussion among leaders in business and government. Jacob Schiff, CEO of Kuhn, Loeb and Company, a major investment bank, openly spoke on behalf of such a proposal during a speech on January 4. He said the current system of banking in the United States was “nothing less than a disgrace to any civilized country,” and that “If the currency conditions of this country are not changed materially, I predict that you will have such a panic in this country as to make all previous panics look like child’s play.”34 Following Schiff’s speech, the New York Chamber of Commerce chartered a committee to study the financial system; it reported a recommendation to centralize the nation’s finances under the control of the federal government. This report was the first formal proposal to establish a central bank and was quickly labeled a way for Wall Street to dominate Main Street. In his annual report for 1906, Treasury Secretary Leslie Shaw argued that instead of creating a central bank, the Treasury Department should be empowered to control bank reserves and the money supply. He feared that an independent central bank would be captured by “outside interests…would be responsible to no administration, to no political party, and each could shift the responsibility…It is doubtful whether such an institution could be managed less selfishly and more in the interest of the people generally than the Treasury Department…If the Secretary of the Treasury were given $100,000,000 to be deposited with the banks or withdrawn as he might deem expedient, and if in addition he were clothed with authority over the reserves of the several banks, with power to contract the national-bank circulation at pleasure, in my judgment no panic as distinguished from industrial stagnation could threaten either the United States or Europe that he could not avert.”35 Congress did not move to adopt Shaw’s (or Schiff’s) proposal. Common to all these proposals was a focus on expanding the supply of currency, pooling risks, and providing a lender of last resort. Overshadowing the many proposals for central banking in the United States were the examples of the central banks of Europe, all of which had been founded to serve the financial needs of monarchs and their This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 15 UV7329 imperialist aspirations. The Bank of England (BoE) was the most prominent example, and the leading central bank in the world. The BoE had been privately owned since its founding in 1696, and it operated under a special charter by the British government to act as its fiscal agent. The banknotes of the BoE became recognized as the British units of currency. Since 1866, the BoE served as the lender of last resort to ailing banks. A single institution without branches or subsidiaries, the BoE made no pretense toward representative engagement with regions or people beyond London’s Threadneedle Street or the leadership of Britain’s financial community. Democrats and Progressive Republicans scoffed that the National Monetary Commission would design a central bank like the BoE to the advantage of Wall Street. Indeed, as emerged years later, Aldrich convened a secret meeting of financiers and politiciansh on Jekyll Island, Georgia, in November 1910, to design a “National Reserve Bank” that made its way into the final report of the National Monetary Commission. Senator Aldrich claimed the design was his, though it was strikingly similar to a plan advocated by Paul Warburg, partner in Kuhn, Loeb & Co. (and son-in-law to Jacob Schiff) earlier in the decade. The National Monetary Commission published its report on January 11, 1911. The essence of the 24- volume report was to repudiate the National Banking System as a cause of panics and “inelastic” currency, and to recommend the establishment of a “National Reserve Association” that would promote cooperation among banks. In effect, the report advocated reversing the political model of banking in the United States established by the founders of the Democratic Party, Presidents Thomas Jefferson and Andrew Jackson. Perhaps reading the political tea leaves in late 1910, Senator Aldrich announced that he would retire from the Senate at the end of his term, in 1912. Thus the legislation to establish a central bank assumed the nature of a legacy for the venerable senator—and it began to shift the optics of the plan from that of a bipartisan Monetary Commission toward that of a swan song for the senator and the Republican Party. Aldrich circulated drafts of a plan (based largely on the Monetary Commission report), which won the endorsement of the American Bankers Association and the National Citizens’ League for the Promotion of a Sound Banking System. Aldrich introduced the bill in the Senate on January 9, 1912 (shortly before his retirement). But it failed to gain political support. The Republican Party platform for 1912 gave scant attention to the proposal. And the Progressive Party platform openly opposed it, saying it ceded control to private hands rather than to the government. “Money Trust” Hearings In November 1912, voters elected Woodrow Wilson as president. At Wilson’s urging, the House Banking Committee took up two initiatives: monetary reform and hearings on the possible existence of a money trust. These hearings displayed the Progressives’ rising distrust of high finance. The objective of the hearings was to determine the existence of a money trust, a financial analogue to the large industrial trusts—like Standard Oil— that had been formed in the late 19th century. Progressives feared that through the workings of a money trust, underwriting business would be directed to a few favored firms, investment capital in the United States would be channeled to the advantage of a few oligarchs, and that by this means they would control the country. The Pujo hearings were a forerunner to the modern concern with “crony capitalism” and “club deals.”36 Ultimately the final money trust report found that “…there exist[ed] an established and well defined identity and community of interest between a few leaders of finance, created and held together through stock h Present at the Jekyll Island conference were Henry Davison (managing partner at J.P. Morgan & Co.), Frank Vanderlip (president of National City Bank), Paul Warburg (partner at Kuhn, Loeb & Co.), A. Piatt Andrew (assistant secretary of the Treasury and Harvard professor), and Arthur Shelton (personal secretary to Aldrich). The secrecy of this meeting was sustained until the 1930s, after which it became the focus of conspiracy theorists (see, for instance, G. Edward Griffin, The Creature from Jekyll Island: A Second Look at the Federal Reserve [Westlake Village, CA: American Media, 1994]). This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 16 UV7329 ownership, interlocking directorates, partnerships and joint account transactions, and other forms of domination over banks, trust companies...and industrial corporations, which resulted in a great and rapidly growing concentration of the control of money and credit in the hands of a few men.”37 The evidence in support of this was a matrix of corporate directorships. The committee found that officers of the First National Bank were board directors in 49 corporations, with capital of $11.5 billion. For National City Bank, the figures were 41 corporations and $10.5 billion. J.P. Morgan & Co.’s officers were directors in 112 corporations with capital of $22.5 billion. Writing in 1914, Louis Brandeis estimated that in comparison the total capitalization of the NYSE was only $26.5 billion. Brandeis concluded: The operations of so comprehensive a system of concentration necessarily developed in the bankers’ overweening power. And the bankers’ power grows by what it feeds on. Power begets wealth; and added wealth opens ever new opportunities for the acquisition of wealth and power. The operations of these bankers are so vast and numerous that even a very reasonable compensation for the service performed by the bankers, would, in the aggregate, produce for them incomes so large as to result in huge accumulations of capital…We must break the Money Trust or the Money Trust will break us.38 The “Money Trust” hearings proved to be enormously influential. They dominated newspaper headlines for months, as Wall Street leaders were called to testify before the committee. Of particular interest was the power of the New York Clearing House during the Panic of 1907 “to pronounce sentence of death upon every financial institution in [New York City].”39 The findings of this hearing inflamed the public and seeped into the presidential election campaign of 1912. The Democratic Party candidate, Woodrow Wilson, said, The great monopoly of this country is the monopoly of big credits…A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom. This is the greatest question of all, and to this statesmen must address themselves with an earnest determination to serve the long future and the true liberties of men.40 Representative Glass’s View As he prepared to meet with President Wilson and Senator Owen in June 1913, Carter Glass outlined his own positions: 1. The United States “needs six or eight or ten independent but affiliated banks under the supervision of the government. This need the banks are created to supply. In other words, the Glass bill is modelled upon our federal political system. It establishes a group of independent but affiliated and sympathetic sovereignties, working on their own responsibility in local affairs, but united in national affairs by a superior body which is conducted from the national point of view.” 2. Bankers should hold a representation of three seats on the Federal Reserve Board. “I urged the ‘essential injustice and political inexpediency’ of denying the banks minority representation.” It would be “an almost irretrievable mistake to leave the banks without representation on the central board.” 3. Notes of the Federal Reserve should be obligations of the banks, not the US government. “I pointed out the unscientific nature of [US government obligations.]” Behind the Federal Reserve Note would be the liability of individual banks, the double liability of bank stockholders, the gold reserves, the This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 17 UV7329 reserves of discounted commercial notes, and the liability of member banks. “There is not, in truth, any government obligation!”41 Senator Owen’s View Recalling this debate, Senator Owen wrote: “A serious contention over this Act turned upon the question: 1. “Should there be a central bank? I voiced the opinion of those who desired the banks to be distributed throughout the United States in districts independent of one another, but joined together so as to be cooperative without the dominance of one by the other… 2. “Another vital issue was who should control this system—the banks or the people of the United States? I steadily insisted that the control of the banking system of the United States was a governing function and should be controlled by the representatives of the people of the United states and should not be controlled by private persons, whatever their respectability… 3. “It was contended, as by Mr. Warburg, that these notes should be the notes of corporations instead of notes of the United States. I firmly insisted that these notes should be the notes of the United States under the control of the Government and based on the taxing power, and that when these were loaned to the banks, they should be adequately secured by gold in fixed ratio and by United States bonds or commercial bills… 4. “Some wished one bank, or as few as possible; others, from eight to twelve.”42 Conclusion As President Wilson prepared to meet with Representative Glass and Senator Owen, he sought to compare the stances of the two legislators along with the former bill offered by Senator Aldrich in 1911 (see Exhibit 2). The two legislative leaders would look to the president for guidance as to what he would expect to see in a bill that he would be willing to sign. To side obviously with either person would risk alienating someone in Congress. But to do nothing was not an option. Wilson also examined critically the overall structure of the legislation: Would it help to prevent financial crises in the future? If not, would it at least help to minimize their damage? The investment banker, Paul Warburg, wrote: Parties, in turn, are bound by traditions, platforms, slogans, and, most of all, by the fear of opposing factions. A model law, of sufficient importance to be considered as coming within the ominous circle of party politics, is bound, therefore, to lose its neutral character and to be remodeled so as to harmonize with the tenets of the party that undertakes to enact it. Thus the labors of parliaments may result in deplorable perversions of the original non-partisan proposals by dint of concessions to the right side or the left, depending upon the particular party which happens to be in power. And the more difficult it be to muster the necessary majority, the heavier must be the toll of concessions to extreme wings whose votes must be secured. Compromises thus are the frequent fruits of parliamentary law making.43 This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 18 UV7329 Exhibit 1 The Panic of 1907 and the High Tide of Progressivism (A) Main Figures Nelson Aldrich. Characterized as an “archconservative,” Aldrich proved to be an important figure in the reform movement that produced the US Federal Reserve System. A six-term senator from Rhode Island, his career focused mainly on US tariff policies and protecting the manufacturing interests of his home state. As chairman of the Senate Finance Committee, he was regarded to be one of the most powerful legislators of his day. His public service did not constrain his private interests: he grew wealthy from investments in street railroads, banking, rubber, and sugar. His daughter married into the Rockefeller family. Source: “NelsonWAldrich.jpg,” posted to public domain by the As early as 1903, his views about reform of the financial system began to Library of Congress, August 15, 2009, change. Initially, he focused simply on preserving the system of the old https://commons.wikimedia.org/wi National Banking Act by means of enlarging the range of assets that banks ki/File:NelsonWAldrich.jpg (accessed Jun. 12, 2017). could pledge as reserves in a financial crisis—the Aldrich-Vreeland Act of 1908 formalized this. But a 1908 tour of the leading central banks in the European capitals apparently persuaded him of the need for a central bank in the United States. Under the guise of the National Monetary Commission, he convened a secret meeting at Jekyll Island, Georgia, to develop a plan for a central bank, which became the bill he presented in January 1911. Aldrich’s plan was not adopted because political sentiment went beyond the provisions of the bill and because of Aldrich’s rather autocratic style. Closely identified with the financial sector when the Panic of 1907 and Equitable Insurance scandal were still fresh in the public’s mind, he was a lightning rod of reaction at the moment of Progressive ascendance. Arrogant, aloof, and indifferent to the views of colleagues, Aldrich was a one-man show. He failed to build consensus around his plan. By 1911, he was a lame-duck politician and out of step with the times. Nonetheless, Aldrich’s conversion to central banking is one of the most important political developments in the advent of the Federal Reserve Act. First, his thinking was a weathervane of attitudes in the financial sector and Wall Street in particular. Second, as an opinion leader and influencer in the Republican Party, his conversion legitimized a new conversation about financial reform. Finally, his “Aldrich Plan” proved to be the template from which Carter Glass and Robert Owen developed the Federal Reserve Act. Source: Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (Columbus: Ohio State University, 2005). Quotations on pages 54 and 56; see throughout for a detailed discussion of the thesis offered in the final paragraph of this summary. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 19 UV7329 Exhibit 1 (continued) William Jennings Bryan. A leader of the Populist and agrarian political segments in the United States, Bryan served two terms in the House of Representatives and was the three-time nominee for president by the Democratic Party (1896, 1900, and 1908). The son of an evangelical Christian preacher, he turned into a mighty orator with missionary zeal. He advocated a vision of pastoral America, bimetallism (currency based on both gold and silver), isolationism, pacifism, the interests of the “toiling masses,” and the abolition of alcoholic beverages. According to Bryan, the enemies of America’s greatness were Wall Street and the gold standard. In his most famous speech in 1896, he seemed to address bankers: “You shall not press down upon the brow of labor this crown Source: “WilliamJBryan1902.jpg,” posted to of thorns. You shall not crucify mankind upon a cross of gold.” public domain by the Library of Congress, February 24, 2011, https://commons.wikimedia.org/wiki/File:W By 1913, Bryan was an elder statesman in the Democratic Party and illiamJBryan1902.png (accessed Jun. 12, 2017). secretary of state in President Woodrow Wilson’s cabinet. Originally hostile to the notion of a central bank in the United States, he gradually accepted the idea on the condition that the bank would wrest control of the financial system from the bankers. He also fought for establishing federal deposit insurance for consumers. Source of quotation: William Jennings Bryan, “Address to the National Democratic Convention, 9 July 1896,” http://projects.vassar.edu/1896/crossofgold.html (accessed Nov. 13, 2018). Carter Glass. A journalist and newspaper publisher from Lynchburg, Virginia, Glass struggled through the deflationary years, 1873–97. He advocated silver coinage, relief for farmers and laborers, regulation of railroads and corporations, and poll taxes that would exclude African Americans from voting. A representative of southern attitudes toward big business and banking, he inveighed against Wall Street. At the same time, he recoiled from big government and the centralization of power toward Washington, DC. Glass was first elected to the House of Representatives in 1902 and was assigned to the House Banking and Currency Committee, where he was forced to confront his own ignorance about monetary matters. Over the next eight years, he immersed himself in an intensive educational program, reading more than 100 books and conferring with bankers and Source: “CGlass.jpg,” posted to public business leaders. With the Democratic victory in 1910, the chairman of domain by “File Upload Bot (Magnus the House Banking and Currency Committee, Arsene Pujo, named Glass Manske),” May 21, 2008, https://commons.wikimedia.org/wiki/File:C to lead a subcommittee on banking and currency reform. Glass favored Glass.jpg (accessed Jun. 12, 2017). banker control over the issuance of currency. Sources: Unless otherwise noted, all biographies created by author using publicly available information. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 20 UV7329 Exhibit 1 (continued) Robert L. Owen. A native of Virginia, Owen graduated as the valedictorian of his class at Washington and Lee University. He served as an Indian agent in Oklahoma and was a newspaper editor and businessman. He cofounded the First National Bank of Muskogee in 1890, and it nearly failed during a bank run in 1893. Based on that experience, he pursued banking reform through self-study and traveled to Europe to examine central banking there. Elected by the Oklahoma legislature to the US Senate upon that state’s admission to the Union in 1907, he attacked Aldrich, and advocated government control of the Source: “Robert Latham Owen.jpg,” currency, an income tax, women’s suffrage, and direct election to the posted to public domain by the Library of Senate. Owen served as the inaugural chairman of the Senate Committee Congress, September 23, 2007, on Banking and Currency (created in 1913). https://commons.wikimedia.org/wiki/Fi le:Robert_Latham_Owen.jpg (accessed Jun. 12, 2017). Source: Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve (New York: Penguin Press, 2015). Paul Warburg described his own background and position on central banking in the United States: I was trained in the practices of a banking system which under varying forms had worked satisfactorily in almost every industrially advanced country, except the United States. From the time of my arrival in America I felt impelled to urge the adoption of the fundamental principles upon which that established and proven system was based, and by submitting several plans I tried to demonstrate the possibility of a practical adaptation of this system to American conditions. It was owing to the interest I had shown in banking reform that, when the Aldrich Banking and Currency Committee was appointed, I was invited to assist it in formulating a plan providing for the creation of Source: “Paul Warburg 01.jpg,” posted to a central Reserve Association with regional branches. I had opposed public domain by the Library of Congress, plans envisaging systems of large numbers of divisional reserve banks February 24, 2009, https://commons.wikimedia.org/wiki/Fil entirely disconnected from one another, but I favored plans providing e:Paul_Warburg_01.jpg (accessed Jun. 12, for a moderate number of regional banks intimately connected with 2017). one another so as to constitute a properly coordinated central banking system. Hence, when subsequently a bill was introduced in Congress for the creation of a system of regional reserve banks tied together by a central board, instead of one reserved bank with regional branches, I endeavored, just as I had done in the case of the Aldrich Bill, by positive and negative recommendations to keep the Act, a highly desirable project, from being jeopardized by dangerous concessions to extreme political demands. Source: Paul M. Warburg, The Federal Reserve System: Its Origin and Growth, Reflections and Recollections (New York: The Macmillan Company, 1930), 8–9. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 21 UV7329 Exhibit 1 (continued) Woodrow Wilson. Born in Virginia and raised in Georgia and South Carolina, Wilson was educated at the University of Virginia and Johns Hopkins University, where he received his PhD. He served as an instructor at several colleges and rose to a professorship at Princeton University, where, in 1902, he was appointed president. In 1910, he was elected governor of New Jersey and pushed legislation to regulate utilities, change voting laws, and restrict corrupt practices. And in 1912, he was elected president of the United States. Source: “President Woodrow Wilson portrait December 2, 1912.jpg,” posted to public domain by the Library of Congress, October 29, 2009, https://commons.wikimedia.org/ wiki/File:President_Woodrow_Wilson_port rait_December_2_1912.jpg (accessed Jun. 12, 2017). This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 22 UV7329 Exhibit 2 The Panic of 1907 and the High Tide of Progressivism (A) Comparison of the Aldrich Bill (1911) and Proposals Advocated by Carter Glass and Robert Owen in June 1913 Aldrich Bill (1911) Glass Proposal (1913) Owen Proposal (1913) House Senate What shall be the National Reserve Association (NRA) consists of 12 Reserve Banks, with a Federal Reserve Board (FRB) of Governors in Washington. organization’s 15 districts with a branch of NRA in each district. structure? Membership is voluntary for national banks, state Membership is compulsory for national banks. banks, and trust companies. NRA is the designated fiscal agent of US Treasury. Reserve Banks act as the fiscal agents of the US Treasury when requested by the Secretary of the Treasury, though the Secretary can also deposit funds outside of the Reserve System. Broad supervisory powers over the banking Supervisory powers of the Reserve Board are constrained. system. Who shall Banks join local banking associations. Boards of Reserve Banks are chosen by Boards of Reserve Banks are appointed govern the NRA board of directors is elected by the affiliated members of the Reserve System (i.e., by the president and confirmed by the institution? local banking associations. bankers). Senate. NRA has a board of 46 directors: 15 elected by the FRB has a seven-person board consisting Entire FRB is appointed by the branches, 15 representing agricultural, commercial, of three presidential appointees and four president. and industrial sectors, 9 others, and US secretaries selected by the Reserve Banks. of treasury, agriculture, commerce, labor, and the Bankers may occupy up to three seats on comptroller of currency. the FRB’s board. Chief executive (governor) appointed by the president of the United States from a list of candidates provided by the NRA board. An executive committee consists of the governor, two deputies, comptroller of the currency, and five representatives of the board of directors. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 23 UV7329 Exhibit 2 (continued) How shall the Provide accommodations on Provide accommodations on loans up to 90 days. institution create agricultural/industrial/commercial loans of 28 a national days or less. discount Regional banks are granted autonomy in the Similar. market and operation of discount windows. provide Application for accommodation must be Similar. liquidity? approved by the local association of banks of which it is a member. Discount rate is set by NRA. Discount rate is set by each Reserve Bank with approval by the FRB. NRA is engaged in open-market operations. FRBs engage in open market operations with no coordination among the Reserve Banks. What kind of Interbank balances are counted as part of the Reserves are to be concentrated in the Reserve Banks (i.e., interbank balances may not be bank reserves reserve requirement, which decentralizes counted as reserves). But cash held in bank vaults may be recognized as reserves. shall the concentration of bank reserves in the NRA. All gold reserves are to be concentrated in a central location. institution recognize? And where shall those reserves be held? Who shall issue Participating banks are authorized to issue Similar. Notes are to be issued by the FRBs. banknotes? currency notes on the basis of commercial paper in Notes should be obligations of the US Who recognizes financial emergencies. government. those notes as an The privilege to issue notes resides with the The privilege to issue notes resides in the obligation? NRA. FRB through each Reserve Bank. Note issuance is based on reserves of commercial Similar. paper, bills of exchange, and gold reserves. If reserve falls below 50%, NRA is subject to a tax. Similar. If reserve falls below 33.5%, NRA must stop issuance of notes. Note issuance is capped at $900 million. No cap on note issuance. Notes are obligations of the NRA. Notes are obligations of the Reserve Banks. Source: Author’s analysis. Page 24 UV7329 Bibliography Items listed below give a comprehensive reference to important writings about the Panic of 1907 and establishment of the Federal Reserve System. In particular, the discussion of the Panic of 1907 incorporates elements from Robert Bruner and Sean Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (New York: John Wiley & Sons, 2008), and from the Darden case study, Robert F. Bruner, Peter Debaere, and Sean Carr, “The Panic of 1907,” UVA-G-0619 (Charlottesville, VA: Darden Business Publishing, 2008). Discussion of the Federal Reserve benefited especially from Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (Columbus: Ohio State University, 2005), and Roger Lowenstein, America’s Bank: The Epic Struggle to Create the Federal Reserve (New York: Penguin Press, 2015). Andrew, A. Piatt. Statistics for the United States, 1867–1909. National Monetary Commission. 61st Cong. 2d Sess. Senate Doc. 570. Washington, DC: US Government Printing Office, 1910. Andrew, A. Piatt. “Hoarding in the Panic of 1907.” Quarterly Journal of Economics 22 (1908a): 290–99. Andrew, A. Piatt. “Substitutes for Cash in the Panic of 1907.” Quarterly Journal of Economics, 22 (1908b): 488–98. Beard, Patricia. After the Ball: Gilded Age Secrets, Boardroom Betrayals, and the Party that Ignited the Great Wall Street Scandal of 1905. New York: HarperCollins, 2003. Bernanke, Benjamin. “Hedge Funds and Systemic Risk.” Speech at the Federal Reserve Bank of Atlanta’s 2006 Financial Markets Conference, Sea Island, Georgia, May 16, 2006. https://www.federalreserve.gov/newsevents/speech/bernanke20060516a.htm. Blum, John Morton. The Republican Roosevelt. Cambridge, MA: Harvard University Press, 1977. Bordo, Michael D. “The Impact and International Transmission of Financial Crises: Some Historical Evidence, 1870–1933.” Revista di storia economica, 2nd ser., vol. 2 (1985): 41–78. Boyer, Brian H., Tomomi Kumagai, and Kathy Yuan. “How Do Crises Spread? Evidence from Accessible and Inaccessible Stock Indices.” Journal of Finance 61 (2005): 957–1,003. Brandeis, Louis D. “Other People’s Money and How the Bankers Use It.” New York: Frederick A. Stokes Company, 1914. Bruner, Robert F., and Sean D. Carr. The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. New York: John Wiley & Sons, 2008. Bruner, Robert F., Sean D. Carr, and Asif Mehedi. “Financial Innovation and the Consequencies of Complexity: Insights from Major U.S. Banking Crises.” In Complexity and Crisis in the Financial System: Critical Perspectives on American and British Banking, eds. Matthew Hollow, Folarin Akinbami, and Ranald Michie. London: Edward Elgar Publishing, 2016. Bryan, William Jennings. “Address to the National Democratic Convention, 9 July 1896.” http://projects.vassar.edu/1896/crossofgold.html (accessed Nov. 13, 2018). Burr, Anna Robeson. The Portrait of a Banker: James Stillman 1850–1918. New York: Duffield & Company, 1927. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 25 UV7329 Cahill, Kevin J. “The U. S. Bank Panic of 1907 and the Mexican Depression of 1908–1909.” Historian 60, no. 4 (1998): 795–811. Calomiris, Charles W., and Gary Gorton. “The Origins of Banking Panics: Models, Facts, and Bank Regulation.” In Financial Markets and Financial Crises, ed. R. Glenn Hubbard. Chicago: University of Chicago Press, 1991. This was also published as a chapter by the same title in U.S. Bank Regulation in Historical Perspective, ed. Charles W. Calomiris, Cambridge: Cambridge University Press, 2000. Calomiris, C. W., and S. H. Haber. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit. Princeton, NJ: Princeton University Press, 2014. Calomiris, Charles W. U.S. Bank Deregulation in Historical Perspective. Cambridge, UK: Cambridge University Press, 2000. Cannon, James G. Clearing House Loan Certificates and Substitutes for Money Used During the Panic of 1907. A speech delivered before the Finance Forum, New York City, March 30, 1910. Baker Library, Harvard Business School. Carosso, Vincent P. The Morgans: Private International Bankers, 1854–1913. Cambridge, MA: Harvard University Press, 1987. Carosso, Vincent P. Investment Banking in America. Cambridge, MA: Harvard University Press, 1970. Chandler, Lester V. Benjamin Strong: Central Banker, Washington, DC: The Brookings Institution, 1958. Chernow, Ron. The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance. New York: Atlantic Monthly Press, 1990. Clews, Henry. Fifty Years in Wall Street. 1908. Reprint. New York: Arno Press, 1973. De Long, J. Bradford. “Did Morgan’s Men Add Value? An Economist’s Perspective on Financial Capitalism.” Inside the Business Enterprise: Historical Perspectives on the Use of Information. Chicago: University of Chicago Press, 1991. Dodd, Donald B. Historical Statistics of the States of the United States: Two Centuries of the Census, 1790–1990. Greenwood Press, 1993. Donaldson, R. Glenn. “Sources of Panics: Evidence from the Weekly Data.” Journal of Monetary Economics 31 (1992): 277–305. Donaldson, R. Glenn. “Financing Banking Crises: Lessons from the Panic of 1907.” Journal of Monetary Economics 31 (1993): 69–95. Diamond, Douglas W., and Philip H. Dybvig. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy 91 (June 1983): 401–19. Fink, Leon, ed. Major Problems in the Gilded Age and the Progressive Era, 2nd ed. New York: Houghton Mifflin, 2001. Friedman, Milton, and Anna Schwartz. A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press, 1963. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 26 UV7329 Gage, Beverley. The Day Wall Street Exploded. Oxford, UK: Oxford University Press, 2006. Garraty, John A. Right-Hand Man: The Life of George W. Perkins. New York: Harper & Brothers, 1957. Glass, Carter. An Adventure in Constructive Finance. New York: Doubleday, Page & Co, 1927. Gorton, Gary, and Lixim Huang. “Banking Panics and the Origin of Central Banking.” Working paper 9137. Cambridge, MA: National Bureau of Economic Research, 2002. Gorton, G. B. Slapped by the Invisible Hand: The Panic of 2007. Oxford, UK: Oxford University Press, 2010. Gorton, G. B. Misunderstanding Financial Crises: Why We Don’t See Them Coming. Oxford, UK: Oxford University Press, 2012. Gould, Lewis L. America in the Progressive Era 1890-1914. London: Pearson Education Limited, 2001. Griffin, G. E. The Creature from Jekyll Island. 4th ed. American Media, 2002. Grodecka, Anna, Sean Kenny, and Anders Ogren. “Predictors of Bank Distress: The 1907 Crisis in Sweden.” Sveriges Riksbank Working Paper Series, No. 358, Stockholm, October 2018. Guatteri, Mariagiovanna, Martin Bertogg, and Andrew Castaldi. A Shake in Insurance History: The 1906 San Francisco Earthquake. Zurich: Swiss Re Publications, 2005. Hansen, Bradley A. “A Failure of Regulation? Reinterpreting the Panic of 1907.” Business History Review (2014): 545–69. Harbaugh, William Henry. Power and Responsibility: The Life and Times of Theodore Roosevelt. Newtown, CT: American Political Biography Press, 1991. Horwitz, Steven. “Competitive Currencies, Legal Restrictions, and the Origins of the Fed: Some Evidence from the Panic of 1907.” Southern Economic Journal 56 (1990): 639–49. Kemmerer, E. W. Seasonal Variations in the Relative Demand for Money and Capital in the United States. National Monetary Commission. Washington, DC: US Government Printing Office, 1910. Kindleberger, Charles. Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books, 1978. Lowenstein, Roger. America’s Bank: The Epic Struggle to Create the Federal Reserve. New York: Penguin Press, 2015. McCulley, Richard T. Banks and Politics During the Progressive Era: The Origins of the Federal Reserve System, 1897– 1913, New York: Routledge, 1992. McGerr, Michael. A Fierce Discontent, The Rise and Fall of the Progressive Movement in America. Oxford, UK: Oxford University Press, 2003. Meltzer, Allan H. A History of the Federal Reserve: 1913–1951, vol. 1. Chicago: University of Chicago Press, 2003. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 27 UV7329 Mills, A. L. “The Northwest in the Recent Financial Crisis.” Annals of the American Academy of Political and Social Science, 1908. Moen, Jon, and Ellis W. Tallman. “The Bank Panic of 1907: The Role of Trust Companies.” Journal of Economic History 52 (1992): 611–30. Moen, Jon R., and Ellis W. Tallman. “The Transmission of the Financial Crisis in 1907: An Empirical Investigation,” Federal Reserve Bank of Cleveland working paper no. 14-09, Cleveland, OH, 2014. Morison, Elting E., ed. The Letters of Theodore Roosevelt, vols. 1–8. Cambridge, MA: Harvard University Press, 1952. Morris, Edmund. Theodore Rex. New York: Random House, 2001. Nelson, S. R. A Nation of Deadbeats: An Uncommon History of America’s Financial Disasters. Random House LLC, 2012. Noyes, Alexander D. 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: G. P. Putnam’s Sons, 1909. Noyes, Alexander D. “A Year after the Panic of 1907.” The Quarterly Journal of Economics, 23 (1908): 185– 212. Odell, Kerry A. and Marc D. Weidenmier. “Real Stock, Monetary Aftershock: the San Francisco Earthquake and the Panic of 1907.” Working paper 9176. Cambridge, MA: National Bureau of Economic Research, 2002. O’Sullivan, Mary A. “Too Much Ado about Morgan’s Men: The US Securities Markets, 1908–1914.” Chap. 7 in Dividends of Development: Securities Markets in the History of U.S. Capitalism, 1866–1922. 2016, Oxford: Oxford University Press, 2016. Owen, Robert Latham. The Federal Reserve Act. New York: The Century Company, 1919. Parthemos, James. “The Federal Reserve Act of 1913 in the Stream of U.S. Monetary History.” FRB Richmond Economic Review 74, no. 4 (July/August 1988): 19–28. Pujo, Arsene. “Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit.” Washington, DC: Government Printing Office, 1913. Ramirez, Carlos. “Did J. P. Morgan’s Men Add Value? Corporate Investment, Cash Flow, and Financial Structure at the Turn of the Century.” Journal of Finance 50 (1995): 661–78. Reinhart, C. M., and K. S. Rogoff. This Time is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press, 2011. Ripley, William Z. Trusts, Pools, and Corporations. Boston: Ginn and Company, 1916. Rockoff, Hugh, “Banking and Finance, 1789–1914.” In The Cambridge Economic History of the United States, Vol. II. Eds. Stanley L. Engerman, Robert E. Gallman. Cambridge, UK: Cambridge University, 2000. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 28 UV7329 Roosevelt, Theodore. An Autobiography. New York: Charles Scribner and Sons, 1913. Rothbard, Murray N., A History of Money and Banking in the United States: The Colonial Era to World War II, Auburn, AL: Ludvig von Mises Institute, 2005. Satterlee, Herbert. J. Pierpont Morgan. New York: Macmillan, 1939. Silber, William. When Washington Shut Down Wall Street. Princeton, NJ: Princeton University Press, 2006. Sinclair, Upton B., Jr., The Money Changers. 1908. Reprinted by CreateSpace Independent Publishing Platform, 2013. Smith, Dennis. San Francisco is Burning: The Untold Story of the 1906 Earthquake and Fires. New York: Viking Press, 2005. Sprague, O. M. W. “The American Crisis of 1907.” The Economic Journal (September 1908): 353–72. Sprague, O. M. W. 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Page 29 UV7329 Wiebe, Robert H. “The House of Morgan and the Executive, 1905–1913.” American Historical Review 65 (1959): 49–60. Wiebe, Robert H. The Search for Order 1877–1920. New York: Hill & Wang, 1967. Wiebe, Robert H. Self Rule: A Cultural History of American Democracy. Chicago: University of Chicago Press, 1995. Wilson, Woodrow. The New Freedom: A Call for the Emancipation of the Generous Energies of a People. New York and Garden City, NJ: Doubleday Page and Company, 1918. https://books.google.com/books/about/The_New_Freedom.html?id=MW8SAAAAIAAJ (accessed Nov. 13, 2018). This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019. Page 30 UV7329 Endnotes 1 “Thomas Jefferson to John Taylor, 28 May 1816,” Founders Online, National Archives, http://founders.archives.gov/documents/Jefferson/03-10- 02-0053 (accessed Oct. 11, 2018). 2 Brandeis. 3 Wilson, 174. 4 Warburg, 12 and 14. 5 See Friedman and Schwartz, 137–88, for a detailed description of money supply growth from 1896 to 1914. 6 Noyes (1909), 341. 7 Gorton (2012), 22. 8 Noyes (1908), 192. 9 Hansen, 569. 10 Warburg, 21. 11 Sprague (1910), 248. 12 Data from Sprague (1910), 262. 13 Figure cited in Lowenstein, 66. 14 Moen and Tallman (2014), 1. 15 For details on hoarding in the Panic of 1907, see Andrew (1908a). 16 Noyes (1909), 207. 17 Calomiris and Gorton (1991), 156. 18 Calomiris and Gorton (1991), 156. 19 These developments are discussed in detail in Sprague (1908), 368–71. 20 Noyes (1909), 208. 21 Cahill, 296. 22 Both Noyes (1909), 202–6, and Kindleberger mention that the Panic of 1907 occurred in a context of financial instability in foreign cities. The notion of contagion, or spread, of financial crises has been documented in the financial crises of the late 20th century. But the global contagion in 1907 is not as fully documented. Flows of gold into and out of the United States in 1907 are well discussed in contemporary and recent writings on the panic. It remains to be shown how these flows (or other mechanisms) actually transmitted the financial crisis globally in 1907. 23 Noyes (1909), 206. 24 Cahill, 795. 25 Cahill, 795. 26 Quoted in Cahill, 296. 27 Friedman and Schwartz, 156. 28 Calomiris and Gorton (1991), 161, date the end of suspension at January 4, 1908. Friedman and Schwartz, 163, discuss that the US Treasury resumed demanding payments in cash in December, but that some banks continued to restrict payments through January. 29 Project Gutenberg offers a free ebook of The Moneychangers at http://www.gutenberg.org/ebooks/5829. 30 The sense of this difference was offered by Gould, 54. 31 Gould, 61, highlights the antitrust case against US Steel as the trigger for Roosevelt’s run in 1912. 32 Chapter 2 of James Neal Primm, A Foregone Conclusion: The Founding of the Federal Reserve Bank of St. Louis (St. Louis: Federal Reserve Bank of St. Louis, 1989), gives a detailed and entertaining history of the legislative process that produced the Federal Reserve Act of 1913. See also Friedman and Schwartz, 168–73, for a critical discussion of the banking reform efforts. 33 US Department of the Treasury, “Annual Report of the Secretary of the Treasury on the State of the Finances for the year 1901,” 77, Federal Reserve Bank of St. Louis, https://fraser.stlouisfed.org/files/docs/publications/treasar/AR_TREASURY_1901.pdf (accessed Sept. 29, 2018). 34 Quotation of Schiff in McCulley, 126. 35 US Department of the Treasury, “Annual Report of the Secretary of the Treasury on the State of the Finances for the year 1906,” 46, 47, and 49, Federal Reserve Bank of St. Louis, https://fraser.stlouisfed.org/files/docs/publications/treasar/AR_TREASURY_1906.pdf (accessed Sept. 27, 2018). 36 See Dennis K. Berman and Henny Sender, “Probe Brings ‘Club Deals’ to Fore,” Wall Street Journal, October 11, 2006, C1. 37 Pujo, 129. 38 Brandeis. 39 Quotation of chief investigator Louis Untermeyer in McCulley, 266. 40 This quotation of Woodrow Wilson corresponds to statements made in his campaign speeches and is reproduced in his book, The New Freedom: A Call for the Emancipation of the Generous Energies of a People (New York and Garden City, NJ: Doubleday Page and Company, 1918), 185, https://books.google.com/books/about/The_New_Freedom.html?id=MW8SAAAAIAAJ (accessed Nov. 13, 2018). 41 Details are from Glass, 124–26 and 173. 42 Owen, 88–90. 43 Warburg, 4. This document is authorized for use only in EDUARDO URGILES's TEORIA DE MERCADO DE CAPITALES-MBF at Universidad San Francisco de Quito - USFQ from Feb 2019 to Aug 2019.