America Financial Crisis in 1907

By Warren Ford, KaChun Mok, Weijie Wu, Spencer Good

Government Background

• United States has a federal republic government i.e. “Representative Democracy”

• Three Branches of government make policylegislative, executive and judicial, whose powers are vested by the U.S. Constitution in the Congress, the President, and the federal courts, including the Supreme Court, respectively.

United State Government Structure

Federal Reserve System

• Is the central banking system of the United States

• Was created on Dec 23, 1913 with the enactment of the Federal Reserve Act

• Response to a series of financial panics

Timeline

• The first bank of the United States (1791 in Philadelphia)• The second bank of the United States(1816) (1812 military conflict against United Kingdom of Great Britain and Ireland)• Free Financial Period(after second bank close 70 years)• Nelson Aldrich design a plan for an American Central Bank in

1911• Woodrow Wilson signed the Federal Reserve Act patterned

after Aldrich’s vision into law

Banking System

• Free Banking Era (1837-1862)• Nation Banking Act (1863)• Financial Panics Prevail (1873 -1907)• A Very Bad Year (1907)• After the Panic

Free Banking Era (1837-1862)

• Types of banks– State Banks– 712 chartered banks in US

• Issue their own notes

Nation Banking Act (1863)

• Create a system of national banks• Create a uniform national currency– National banks issued circulating notes that

backed by the U.S government securities– Taxation was required on state bank notes

• To finance the war (civil war)

Financial Panics Prevail (1873 -1907)

• The national Bank Act was try to stabilize the currency

• Bank runs occurred• Depression occurred in 1893• The economy stabilized after the intervention

of J.P. Morgan

A Very Bad Year (1907)

• Market crash brought about by modest speculative bubble and the liquidity problem

• Started on New York City, and crisis spread across the country– Nearly suspended all withdrawals– Thousands of banks collapsed and millions deposits

lost.• The situation changed when J.P. Morgan made

temporary loans to main New York Banks and other financial institutions

Fritz Augustus Heinze

1869-1914Brother Otto Heinze

United Copper1902-1913

John Pierpont Morgan1837-1913

George B. CortelyouJames StillmanLord Rothschild

John D. Rockefeller

TimelineOct. 9, 1907 – Heinze Failed Market corner

Oct. 21, 1907 – The Nation Bank of Commerce stops accepting checks from the Knickerbocker Trust

Oct. 22, 1907 – J.P Morgan organizes financial assistance starting with the Trust Company of America

Nov. 4, 1907 – The last move to stop the panic happens with the approved accusation of the Tennessee Coal, Iron, and Railroad Company By U.S. Steel

Assets Pre/Post Panic

GNP

Dividend/Interest Rate

Board Member Seats

Impact on the economy

• In 1906 aggregate business failures totaled $119 million. • In the next two years liabilities grew to $197 million in

1907 and $220 million in 1908, mostly in manufacturing. • The Miron and Romer Index of industrial production

reveals that production levels dropped from 93 in October 1907 to 71 in December, remained below 80 until July 1908, and did not exceed 90 until the November 1908.

• The decline in production also affected foreign trade as 1908 imports and exports fell by 22% and 9%.

• Unemployment levels increased from 3% in 1907 to 8% in 1908

References• Richard Sylla. “The US Banking System: Origin, Development, and Regulation.” The Gilder Lehrman. Accessed April

5, 2015. Retrieved from http://www.gilderlehrman.org/history-by-era/economics/essays/us-banking-system-origin-development-and-regulation

• Edward Flaherty “A Brief History of Central Banking in the United States” American History From Revlution to Reconstruction and beyond. Accessed April 3. Retrieved from http://www.let.rug.nl/usa/essays/general/a-brief-history-of-central-banking/

• “History of the Federal Reserve” Federal Reserve Education. Retrieved from https://www.federalreserveeducation.org/about-the-fed/history

• King, Gilbert. "The Copper King's Precipitous Fall." Smithsonian. September 20, 2012. Accessed April 19, 2015. http://www.smithsonianmag.com/history/the-copper-kings-precipitous-fall-44306513/?no-ist.

• Frydman, Carola, Eric Hilt, and Lily Zhou. "The Panic of 1907: JP Morgan, Trust Companies, and the Impact of the Financial Crisis." Harverd University. Accessed April 1, 2015. http://isites.harvard.edu/fs/docs/icb.topic1029951.files/Carola Paper.pdf

• Chen, Lucy, Bonnie Kavoussi, Kelly Peeler, Katherine Savarese, Philipp Lehmann, and Josh Specht. "The 1907 Crisis in Historical Perspective." Center for History and Economics. Accessed April 29, 2015. http://www.fas.harvard.edu/~histecon/crisis-next/1907/timeline.html#1907.

• All pictures from Wikimedia Commons. https://commons.wikimedia.org/wiki/Main_Page• Statistics retrieved from “The Panic of 1907” http://isites.harvard.edu/fs/docs/icb.topic1029951.files/Carola

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