Panic of 1907
The Panic of 1907 was series of events that hurt the economy. The cascade of negative effects caused people to lose confidence in banks. Citizens all over America triggered bank runs.
"If the value of banking assets falls, spooked depositors may all demand their money when they sense the bank is in trouble - a bank run. Bank runs can lead to even healthy banks going under...The run dynamic is dangerous. It forces banks to sell assets at prices below market value. It can also damage the payment system of a country, which relies on bank deposits" (Sufi 124).
Major events leading to the downfall were:
Hepburn Act of 1906:
A fire and 7.8 magnitude earthquake destroyed 80% of San Francisco and left 3,000 dead, totaling $400 million in damage ($6 billion in 2013 dollars). Hefty loans to aid the rebuilding process triggered more bank runs.
|
"At that time, San Francisco was essentially the financial capitol of the United States. That put a lot of strain on the amount of capital..." (Carr). |
Expiry of the Second Bank of the United States:
"The Second Bank of the United States expired on schedule in 1836; it continued operations as a state bank, but without the powers that the federal charter had provided. Five years later, it went bankrupt" ("Second Bank", para. 18). Without the supervision of a central bank, there was no system that would serve as a safety-net and maintain a stable currency.
|
(Photo Courtesy of Schlager Group, Inc.)
"The bank, Mr. Van Buren, is trying to kill me, but I will kill it" (Jackson). "Andrew Jackson hated the idea of the Second Bank of the United States. He thought it wasn’t fair to the poor people. He wanted to destroy it." |
Augustus Heinze's Acquisitions:
"Augustus Heinze made his fortune in copper mining; Charles Morse made his selling ice. Together they acquired a chain of banks, using the equity of one bank as collateral to buy the next. In 1907 they lost huge sums trying to corner the stock of United Copper, triggering a run on their banks that caused a wider panic" (Financial Crisis, para. 5). Heinze and his partner started the Great Panic when they failed to invest in a company. With a huge loss in New York regional banks, this was the ultimatum that led people to pull out funds.
|
Augustus Heinze (Photo Courtesy of Harry Freeman)
|
(Video Courtesy of Sean Carr and Robert Bruner from University of Virginia)
"In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems" ("Lessons"). |
"This is a political cartoon shows that even responsible people who saved their money instead of buying things on credit or margin were out of luck when The Great Depression hit" (Bank Runs, para. 1). (Photo Courtesy of Mountain Heights Academy).
|
|
"In response to the panic conditions, depositors added to the woes of the financial system by withdrawing even more cash from circulation. According to the authors, about $350 million in deposits were withdrawn from the U.S. financial system. Most of this amount was hoarded in cash to the tune of $200 to $296 million" (Droke). (Photo Courtesy of The Economist)
|