By Robert F . Bruner and Sean D . Carr
At the centennial of the Panic of 1907 , we published an account drawing on our own archival research and a synthesis of scholarly studies . Soon followed the Financial Crisis of 2008 , which rekindled scholarly interest in the earlier event . The Panic of 1907 afforded a simpler laboratory in which to test theories about the causes , consequences and dynamics of financial crises . Subsequently some four dozen articles and books emerged . In the interest of integrating the new insights into the narrative — and introducing some new research insights of our own — we published a revised edition , The Panic of 1907 : Heralding a New Era of Finance , Capitalism and Democracy ( John Wiley & Sons , 2023 ). New with this edition were extensions of coverage to communities across the United States and internationally , surveys of the long build-up to the Panic and the long “ tail ” of civic reactions to the crisis , profiles of more protagonists and original empirical analyses of causes and dynamics . The result yields new insights and lessons for analysts of financial crises .
The Panic of 1907
The Panic of 1907 progressed in five acts . First , an economic recovery from 1897 to 1906 gathered into one of the largest growth spurts in the country ’ s history : business optimism rose , as did leverage and strains on the financial system . The good times peaked in early 1906 , when it seemed that nothing could go wrong .
Second , shocks battered the system . As in Greek tragedies , nemesis follows hubris . To destabilize a financial system , a shock must be real ( not cosmetic ), large and costly , unambiguous and surprising — the San Francisco earthquake of April 1906 surely qualifies .
Third , trouble broke out among the less prepared and more vulnerable financial institutions , what in modern parlance would be the “ shadow financial system .” A system is only as strong as its most vulnerable link . Financial institutions on the periphery ( out of sight and out of mind to the rest of the industry ) have tended to be the vulnerable links . Then trouble traveled to other parts of the system through relations among institutions and markets . The responses to the crisis were initially halting because financial systems are complex and opaque , and it was difficult for people to know what was going on . This bred fear .
Fourth , the contagion of panic spread , at first locally , then nationally and internationally . Security prices slumped . Companies and individuals hoarded cash . Ultimately , the crisis spilled over into the real economy , causing widespread distress and
A crowd forms on Wall Street during the Panic of 1907 . dislocation in unemployment , bankruptcies , suspension of activity and a rise in various social ills .
Fifth , J . P . Morgan and US Treasury Secretary George B . Cortelyou intervened with cash infusions , imports of gold and rescues of companies and the stock market . This stanched the contagion . The crisis began to ebb — but its ripple effects summoned a “ new order ” of progressive sentiment , political power and regulation . The institutional changes that ensued from the Panic of 1907 were as much a part of the entire progression of crisis as the shocks , instability and spillovers .
Lessons Updated
From today ’ s vantage , the Panic of 1907 seems dwarfed by larger subsequent events . But it was one of the pivotal crises in US history . Economic damage of the panic was “ extremely severe ,” according to economists Milton Friedman and Anna Schwartz . Massive political impact of the panic accelerated founding the US Federal Reserve System and ushered out an old guard and its orthodoxy , to be replaced by a new generation of leaders who held new notions . And it stirred controversies that linger on . The new ( and old ) research helps to illuminate the controversies and yield lessons for today . Below are three examples .
1 . Are financial crises momentary episodes of “ madness ” or do they build and subside over long timeframes ? Should one take a “ short view ” or “ long view ” of crises ?
Charles Mackay ’ s classic 1841 book , Extraordinary Popular Delusions and the Madness of Crowds , likened market manias
Cover illustration from the December 11 , 1907 issue of Puck magazine , titled “ Well , for once they can ’ t blame me .” The cartoon directs blame for the Panic of 1907 away from President Theodore Roosevelt and towards “ Wall Street ,” “ overcapitalization ” and “ crooked business .”
to sudden seizures . Economists Hyman Minsky and Charles Kindleberger viewed a crisis as the moment when market euphoria turns to revulsion . An alternative view links crises to systemic strains that grow over months and years . For instance , studies by Oscar Jorda , Moritz Schularick and Alan Taylor ( 2016 ) and Ray Dalio ( 2021 , 2022 ) affirm the significance of years-long economic booms , credit growth and rising speculation as integral to crises .
This narrative of the Panic of 1907 , spanning some 17 years , sustains the virtue of the “ long view .” It documents the extraordinary economic boom , the exceptional expansion of bank lending and the concomitant strains on the financial system . Furthermore , the narrative is extended to many years following the epicenter of the panic . Declines in innovativeness , shifts in voter sentiment , a rise in various measures of social dysfunction and the advent of the US Federal Reserve System were all consequences of the crisis .
The virtue of the “ long view ” is displayed in Figure 1 , which shows that the growth of US gross domestic product per capita performed below trend for years after 1907 . Economists call this “ hysteresis ,” which means the persistence of slower growth , well after the shock that precipitated the slowdown . The economic effects of the
Library of Congress www . MoAF . org | Summer 2023 | FINANCIAL HISTORY 19