Financial "Rescue" or "Bailout": Part 2 of 3 - Early 20th Century
The Panic of 1907
The Panic of 1907, also referred to as the 1907 Bankers’ Panic, occurred when the New York Stock Exchange fell nearly 50 percent from its peak in 1906, resulting in a run on banks and trust companies. One immediate cause of the panic involved a failed attempt to corner the market on stock in the United Copper Company.
Many state and local banks and businesses declared bankruptcy. The loss of confidence among depositors led to a retraction of market liquidity and the absence of a statutory lender of last resort as the panic spread across the nation.
Then, when widespread rumors suggesting that The Trust Company of America had lent heavily to the individuals who had attempted to corner the copper, and newspaper reports of exchanges of big leather boxes between Morgan Company and Trust Company offices surfaced, signaling the further exchange of money and securities, the damage had been done--further eroding the public’s trust.
If the treasury hadn’t injected millions of dollars into the banking system in addition to the large sums of money personally pledged by financier J.P. Morgan to shore up the banking system, the crisis would have deepened even further.
In May 1908, under the direction of Senator Nelson W. Aldrich, Congress passed the Aldrich–Vreeland Act, which established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking, which led to the creation of the Federal Reserve System.
Public trust was restored and the panic eased, even though the “Aldrich bill”, which gave privately owned banks the authority to print money and control interest rates of the money they loan, had been opposed by the public and politicians—43 yay and 27 did not vote (because they were spending time with their families on that day of December 23rd, 1913.
Shortly after the bill was signed, President Woodrow Wilson himself—who, because of his limited knowledge of the banking system, relied on advisers—had a very grim view of had transpired as detailed in his paper titled The New Freedom: A Call for the Emancipation of the Generous Energies of a people . . . "I am a most unhappy man. I have unwittingly ruined my country. 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. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world - no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men."
For further review, see the Lessons From the Panic by Ellis W. Tallman and Jon R. Moen.
The Stock Market Crash of 1929
As the number of first-time investors grew in the 1920s, daily papers reported front-page news of a bright future, even after the financial devastation of the market crash in October of 1929.
Newspaper excerpts from three New York papers, The World, The New York Herald Tribune, and The New York Time, boasted of statements like this from John D. Rockefeller, "there is no need to destroy values," as he and his son had been heavy buyers of stocks for investments, and would continue to buy at the present prices.
Other headlines of the 1929 Stock Market Crash included . . .
- BABSON PREDICTS 'CRASH' IN STOCKS, Says Wise Investors Will Pay Up Loans And Avoid Margin Trading.
- FISHER VIEW IS OPPOSITE, Declares No Big Recession In Market Is Due, Because Inventions Are Adding To Health.
- PRICES OF STOCKS CRASH IN HEAVY LIQUIDATION, TOTAL DROP OF BILLIONS and PAPER LOSS $4,000,000,000, 2,600,000 Shares Sold In The Final Hour In Record Decline.
- STOCK PRICES SLUMP $14,000,000,000 IN NATION-WIDE STAMPEDE TO UNLOAD; BANKERS TO SUPPORT MARKET TODAY.
And by, November 24, 1929, the press was quoting a litany of political and financial voices unanimously declaring the worst was over.
- “The fundament business of the country, that is the production and distribution of commodities, is on a sound and prosperous basis.” ---Herbert Hoover
- “There is nothing in the business situation to justify any nervousness.” ---Eugene M. Stevens, President of the Continental Illinois Bank
- “The trouble is purely technical and fundaments remained unimpaired.” ---Charles E. Mitchell, President of National City Bank (now Citibank)
Nearly $30 billion dollars were permanently lost during the period of October 24 to November 13,1929, prompting the Federal Reserve to increase the money supply and lower interest rates from 6 percent to 4 percent. Critics called the Federal Reserve’s actions insufficient—as well as the probable cause of the economic depression that followed.
For further reading, see America's Great Depression, by Murry N. Rothbard