By Jon Moen and Mary Tone Rodgers
John Pierpont Morgan never enjoyed the security of working alongside a central bank in the United States. It took an investment banker like Morgan, steeped in syndicated loan experience and with exceptional ties to London, to connect the financial resources of the country to restore financial stability following a crisis before the founding of the Federal Reserve in 1913. In a span of 50 years, Morgan intervened more than 40 times in 10 financial crises— learning the art of last resort lending by trial and error. And many of the issues he faced remain relevant in the early 21st century.
Morgan experienced a wide range of outcomes as a result of his interventions. For example, his 1895 Gold loan to the US Treasury was every investment banker’ s dream: a simple initial term sheet, two quick albeit tough negotiation meetings, no argument about flotation, an oversubscribed offering and massive profit on the opening public trade. On the other end of the spectrum, the Panic of 1907 crisis was every investment banker’ s worst nightmare: a poorly written term sheet to save the trust company shadow banks, a mispriced loan, an unravelling loan syndicate as members retracted committed funds and— not surprisingly— horrendous losses that took years for Morgan to make up.
Distrust of Central Banks
In the late 19th and early 20th centuries, distrust of banks, especially central banks, was widespread in the United States. Such suspicion ultimately contributed to the glaring absence of a lender of last resort. Resistance to centralized authority had led to three domestic pools of purposefully disconnected reserves: the US Treasury, the banks and private individuals, none of which had formal ties to the even greater reserves of the central banks of England or France.
Portrait of John Pierpont Morgan by Fedor Encke, 1903.
Lord Nathaniel Rothschild, a British member of the Morgan syndicate during the 1895 US Treasury Gold loan, boosted Morgan’ s profits by driving a hard bargain while supplying the sought-after gold.
The US Treasury collected taxes but kept the proceeds in its regional vaults, not in banks. If the Treasury was running a surplus, it could choose to help a distressed bank, but that might come with the political cost of showing favoritism to some banks. Its uneven responses to crises ranged from depositing no funds into commercial banks during the Panic of 1884 to depositing more than $ 50 million into the banks in both the Panics of 1890 and 1907.
Banks organized by the National Banking Act( 1863) or by state banking regulations kept reserves but limited their collective crisis responses to the cities in which they were domiciled. And private wealth resources were scattered all over the country with individuals deciding how to store wealth in a world lacking bank deposit insurance. This meant that lock boxes for cash and gold played an important role.
Of the three pools of disconnected reserves, the commercial banks— especially in large cities— were the most readily available to jointly respond to a financial crisis. Beyond the domestic sphere, the central banks of England and France could be called upon in a crisis, but their sovereign concerns were prioritized over America’ s, and their strict collateral requirements and protocols often made their reserves inaccessible to foreign borrowers.
Syndicates
The device that seems to have been most effective at quelling crises by coordinating responses from otherwise siloed reserves was the investment banker’ s syndicated loan, and Morgan was its maestro. Granted, lender of last resort instruments were not completely absent in the United States, but they were significantly circumscribed compared to those in nations with central banks. The prime example was a financial innovation in cities where banks formed clearinghouses to net the deposits and withdrawals between members— the Clearing House loan certificate. This became the key tool for providing general liquidity during panics.
Designed to increase liquidity at banks and serve as collateral for maintaining loans during a panic, the certificate was a collateralized debt obligation of the entire Clearing House membership but issued by single member banks only as needed to maintain liquidity. If a member bank defaulted on a certificate, the risk of default was spread across the entire Clearing House, not just allocated to the defaulting, individual bank. Such risk sharing strengthened the lender of last resort ability of the Clearing House, providing a way to coordinate reserves within the commercial banking system. The syndicated loan also spread risk among its members, but by including participants from all nodes of the financial network, not just from commercial banks like the Clearing House device, it had potential to access more liquidity and more informed experts from investment banks both domestic and foreign, shadow banks, wealthy individuals and ultimately from English and French central bankers.
The investment banker’ s syndicated last resort loan did not require a society-wide consensus to form a lender of last resort role in a US central bank, thus making it appealing to a society loathe to cede power to a central authority. The syndicate was different from a group or a firm because it had a short, explicitly defined life; it was not an ongoing commitment, but rather, it was a temporary alliance. It lasted only as long as it took to complete the sale of a bond or equity to the end-investor, usually no
www. MoAF. org | Winter 2026 | FINANCIAL HISTORY 29