Panic of 1907
Known as the first modern stock market crash, the Bank Panic of 1907 was the result of shrinking market liquidity and dwindling depositor confidence. In addition to this, trust companies faced increased public scrutiny for adhering to less regulation than national or state banks. This skepticism triggered a run on the trust companies that continued to worsen even as banks stabilized. This undermined the public's confidence in the financial industry and accelerated the ongoing bank runs. The aftermath of the 1907 bank run led to the creation of the Federal Reserve while the recession prompted new reforms like Dodd-Frank.
The Panic was triggered by the San Francisco Earthquake of 1906—the Earthquake that spawned a need to rebuild the city.
- In 1906, this meant shipping gold across the country to San Francisco via train or boat.
- This resulted in a drain of liquidity from New York and London.
- These companies took deposits like banks but made risky investments with the funds (unlike a bank)
- Depositors started to pull funds from the trust companies and they were forced to sell assets
- This triggered a run on the Trust which caused a panic
- The Knickerbocker Trust Company—New York City's third-largest trust—was unable to withstand the run and failed in late October. This was the first run.
Without a central bank, leading financiers like J.P. Morgan stepped in and provided some vital liquidity.
- JP Morgan Sr. lead the response and coordinated other bankers to save the day from the panic.
- The realization that JP Morgan won't be around forever lead to the need/support for the Federal Reserve (the country can't rely on one man as the last support)