FIGURE 1 : Comparison of US GDP per Capita to Recent Historical Trends
Source : From Bruner and Carr ( 2023 ) page 221 . Authors ’ figure based on data in Maddison Project Database , version 2020 . Bolt , Jutta and Jan Luiten van Zanden ( 2020 ), “ Maddison style estimates of the evolution of the world economy . A new 2020 update ” downloaded May 12 , 2022 , from https :// www . rug . nl / ggdc / historicaldevelopment / maddison / releases / maddison-project-database-2020 ? lang = en .
Panic of 1907 and its recession proved to be a major setback for the nation .
The ultimate lesson of taking the long view is that a financial crisis is not a mere “ moment ,” but rather a cascade of events , behaviors and information problems that gather into bank runs , market crashes , hoarding , spillovers into the real economy and political and social reactions . To understand financial crises , one must follow the entire progression of crisis , from early benign conditions that sowed the crisis , through to the ultimate recovery in the economy , polity and society that frames a new orthodoxy in thinking . Unfortunately , the “ short view ” ignores notable events and forces that summon the crisis , as well as the shocks and spillovers that ensue .
2 . Why did the trust companies resist acting ?
The Panic of 1907 centered on the shadow banks of the day , trust companies . J . P . Morgan struggled for weeks to organize the trust companies of New York City into a mutual assistance system , such as the banks enjoyed in the New York Clearing House . Again and again , the trust companies resisted . The classic treatise on collective action by Mancur Olsen in 1971 argued that the more numerous and diverse are the members of a community , the more difficult it will be for them to act collectively .
A 2014 study by Bradley Hansen found that the New York trust companies in 1907 were a diverse lot , based on differences in business models ( wholesale to corporate customers versus retail to families and individuals ). Yet more recent studies suggested that market power and affiliation with Morgan and the financial elites explained differences among trust companies . An analysis of the gains or losses in deposits by the Manhattan trust companies confirms Hansen ’ s view that business model , not affiliation , was the significant source of difference in the experience of trust companies during the crisis .
This is an important lesson for fighting modern financial crises . To stop runs , panics and crashes requires persuading market participants to act collectively in a positive way . But it is erroneous to see the collective as homogeneous . Instead , participants in a market will be subdivided by information asymmetries , inefficiencies , risk appetite , interests and even ideologies . Thus , to quell a crisis requires more than the calming bromides uttered by financial and political leaders , and instead requires addressing the substantive and systemic sources of division among important players . A large number and diversity of financial institutions can impede collective action .
3 . Who mattered more to the resolution of the panic , J . P . Morgan or George B . Cortelyou ?
Much of the public discourse following the panic centered on the actions of J . P . Morgan and his circle . And rich archival resources document Morgan ’ s detailed actions . On the other hand , US Treasury Secretary George Cortelyou mobilized substantial resources of the federal government and left behind data and reports that documented a dramatic change in government policy toward financial crises . Should Cortelyou be granted status as a crisis-fighter equal to Morgan ?
Review of Treasury reports reveal that on short notice , Cortelyou deposited between $ 54 million and $ 64 million in cash into the national banks across the nation , of which a maximum of $ 34 million went to seven large New York banks . Jon Moen and Mary Tone Rodgers estimate that J . P . Morgan deployed about $ 96 million , mainly to distressed institutions in New York City . Based on gross commitments , it appears that Morgan mobilized more money , but that Cortelyou was still a major player .
What may matter more than size of rescue funds was the impact they achieved . Moen and Rodgers note that “[ p ] erhaps the timing of Morgan ’ s facilities was more important than their sizes because they occurred near the beginning of the crisis , thus blunting contagion early on .” And the focus of Morgan ’ s facilities was targeted toward particular rescues , serving as a lender of last resort on-the-spot at the center of the crisis . In contrast , Cortelyou briefly visited New York City during the crisis and deployed funds from Washington , DC to national banks across the country whom he expected would reliquefy the financial system and direct funds to best use . Finally , Cortelyou ’ s public expressions of confidence lent the weight of the federal government to the effort of redirecting public sentiment from fear to recovery .
20 FINANCIAL HISTORY | Summer 2023 | www . MoAF . org