Easing the financial panic

During the financial panic of 1907, J. Pierpont Morgan saved from insolvency several trust companies and a leading brokerage house, bailed out New York City, and rescued the New York Stock Exchange.

Panic of 1907In October 1907, J. Pierpont Morgan summoned New York City’s major financiers to his library on East 36th Street to find a way to restore liquidity to desperate markets.

The situation was grim. Markets had been wildly unsettled for months and in March, despite record corporate earnings, the American stock market crashed. Prices crumbled, brokerage houses closed, interest rates soared. There were runs on U.S. banks with no central bank to intervene since the Federal Reserve System was not yet formed.

The crisis was global. The Bank of England sent $3 million in gold to Alexandria to stop the Egyptian Stock Exchange’s slide, only to find itself short of cash. Banks throughout Japan failed. French investors sold American stocks to buy gold to send home, badly depleting U.S. reserves.

With no central bank, J.P. Morgan & Co. was the only institution with the experience and authority to act. J. Pierpont Morgan helped to save several trust companies and a leading brokerage house from insolvency, bailed out New York City and rescued the New York Stock Exchange.

He also persuaded the team of financiers to supply liquidity to the markets, including underwriting $30 million worth of New York City bonds to keep the city from defaulting.

In 1908, Congress passed a Currency Act authorizing banks to form reserve associations that could issue money temporarily in emergencies. The Federal Reserve was established five years later, shortly after Morgan's death.

 

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