By Jean Strouse
Sunday, September 28, 2008
Watching the Sunday morning talk shows last week, I found myself sympathizing with Henry Paulson. It's not that the Treasury secretary needs me to feel his pain, though he did look completely exhausted and had scarcely any voice left. My concern derived from having "lived" through the Panic of 1907 with J. Pierpont Morgan.
Over the calamitous past couple of weeks, I've heard people ask in despairing jest, "Where's J.P. Morgan now that we really need him?" In today's immense and vastly complex financial markets, no one man could play the role that Morgan played at the beginning of the 20th century, when, by persuasion, fiat, threat, loan and sheer force of character, he managed to stop a full-fledged panic.
If Morgan were looking on today, from wherever he is, as value and dollars disappear in a miasma of securitized subprime loans and credit default swaps, he might be thinking how relatively easy he'd had it. For the most part, he could see what he was bailing out. He didn't have to answer to Congress or the press -- at least not right away -- or deal with presidential politics. He might be amused to see the descendant of his firm, now called J.P. Morgan Chase, as the buyer of last resort for such companies as Bear Stearns and Washington Mutual. And he'd probably be invisibly backing Paulson and Federal Reserve Chairman Ben S. Bernanke as they try to unlock seized-up credit markets.
A hundred and one years ago, in another early autumn, a worldwide credit shortage had been roiling global markets for months. The 9-year-old Dow Jones industrial average had lost 25 percent of its value in the first three months of the year, and the U.S. stock market had crashed in March, in spite of record corporate earnings. That spring, banks failed all over Japan, the Egyptian stock market collapsed, and the city of San Francisco could not float a loan. After the U.S. stock market tanked again in August, the New York Times estimated the losses at $1 billion (roughly $15 billion in today's dollars -- quaint sums in light of the proposed $700 billion bailout but enormous at the time).
What set a match to the tinder in October 1907 was a run on New York trust companies. Morgan, 70 years old and the most powerful private banker in the world, was attending an Episcopal Church convention in Richmond when the panic started: An attempt by speculators to corner the stock of a copper company failed, and as word got out that trust companies had made loans to the speculators, people with money on deposit at the trusts lined up to take it out. The trust companies, the weakest link in the financial system, operated like commercial banks -- accepting deposits, issuing loans and financing speculative schemes -- only with no regulatory supervision or mandated reserves.
Morgan's partners kept him apprised of the situation by messenger and by wire but insisted that he not return to New York early since a sudden change in his plans might cause further panic. When he did return, arriving early Sunday morning, Oct. 20, he went straight to his private library on East 36th Street. There his partners brought him up to date. Reporters stationed themselves across the street. Bankers stopped by all day and into the night as Morgan gathered information and resources.
He left no record of his thoughts during this crisis. Neither intellectual nor introspective, he was, as Henry Adams said of Theodore Roosevelt, "pure act." But he knew from long experience how quickly a few big failures could lead to cascading disaster. The Fed did not yet exist, and for two decades, Morgan had been acting as the country's unofficial lender of last resort, quietly working to amass reserves and supply capital to the markets in periods of crisis.
Late that Sunday night, Treasury Secretary George Cortelyou sent word: The government would deposit $6 million in New York's banks. President Theodore Roosevelt was off shooting game in the Louisiana canebrakes. He told a reporter on Oct. 20: "We got three bears, six deer, one wild turkey, twelve squirrels, one duck, one opossum and one wildcat. We ate them all, except the wildcat."
By the time the meetings at the library broke up early Monday morning, Morgan had appointed two groups of men to handle whatever came next: a high command consisting of himself, George Baker, head of the First National Bank, and James Stillman of National City Bank -- and three young lieutenants who would supply the senior trio with information. Their first job was to determine which trust companies were essentially healthy and could be saved with fresh infusions of cash, and which were hopelessly overextended and should be allowed to fail.
The Morgan team did not have enough time to study the most besieged of the trusts, the Knickerbocker, which shut its doors on Tuesday. Banks around the country began withdrawing money from New York. Stock prices plummeted. The Treasury secretary took an afternoon train to Manhattan. Morgan came down with a heavy cold.
The next domino to totter was the Trust Company of America. The young bankers working for Morgan had examined its books and determined that although the company's surplus was gone, its assets were essentially intact. The bankers traded cash for collateral. TCA stayed open.
On Thursday, the panic spread to the Stock Exchange. Financial institutions calling in loans were choking off the market's money supply. Stock prices plunged. At 1:30 p.m., the Exchange president told Morgan that he would have to suspend operations before the 3 p.m. close. Out of the question, said Morgan: He would find money to lend the brokers. He summoned the presidents of New York's major commercial banks to his office and quickly came up with $23.5 million. He sent word to the trading floor. "The rebound was instantaneous," reported the Times.
Saturday's newspapers reported that $5 million in gold would be sent from London, that confidence had returned to the French Bourse "owing to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic," and that "J.P. Morgan has a cold."
The old man, who hadn't slept more than five hours a night all week, spent most of the weekend at home. Roosevelt had been on the sidelines while Morgan handled the crisis. On Sunday, the newspapers published a letter from the president saying that the fundamentals of the economy were sound.
Still, the bankers had to bail out a near-bankrupt New York City, and the trust companies, source of the original trouble, weren't in the clear. Sunday night, Nov. 3, Morgan gathered 50 trust company presidents at his library, told them they had to come up with $25 million on their own and left them in a large room filled with Renaissance bronzes, Gutenberg Bibles and tiers of books. He withdrew to his librarian's office. At 3 a.m., he called in one of his sleep-deprived lieutenants, Ben Strong, for a review of a trust company's books. Strong gave his report, then headed to the library's front doors and found them locked. Morgan had the key in his pocket. No one would leave until the trusts ponied up. The presidents continued to talk. At 4:15, Morgan walked in with a statement requiring each trust company to share in a new $25 million loan. One of his lawyers read it aloud, then set it on a table. "There you are, gentlemen," said Morgan.
No one moved.
Morgan took the arm of Edward King, the head of the Union Trust, and drew him to the table. "There's the place, King," he said, "and here's the pen." King signed. The other presidents signed. They set up a committee to handle the loan and supervise the final-stage bailouts of endangered trusts. At 4:45, the library's heavy brass doors swung open and let the bankers out.
As the stock market rallied and gold began to arrive from Europe, the two long weeks of crisis came to an end. For a moment, Morgan was a national hero. Crowds cheered as he walked down Wall Street, and world leaders saluted his achievement. The next moment, however, the exercise of that much power by one private citizen terrified a nation of democrats and revived America's longstanding distrust of plutocrats and concentrated wealth.
The 1907 panic convinced the country that its financial welfare could no longer be left in private hands. It led to the establishment of a National Monetary Commission and ultimately, in 1913, nine months after Morgan died, to the founding of the Federal Reserve.
Morgan had a strong sense of financial public duty, but he wasn't acting as proto-Fed out of pure altruism: The people he represented had billions of dollars invested in the emerging U.S. economy. Critics who thought he had engineered the panic for his own profit would have been surprised to learn that his U.S. firms lost $21 million in 1907. The crisis itself was relatively brief, but it brought on a severe nationwide contraction that destroyed not only speculative ventures but healthy banks and businesses as well, and threw people all over the country out of work -- a scenario that everyone working around the clock to resolve the crisis of 2008 has to hope will not sound familiar down the line.
Jean Strouse is the author of "Morgan, American Financier" and director of the Dorothy and Lewis B. Cullman Center for Scholars and Writers at the New York Public Library.