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What Caused the Panic of 1907? – How It Transformed Banking


  • The Panic of 1907 was a major U.S. financial crisis in the fall of 1907.
  • It exposed deep weaknesses in the U.S. financial system and raised concerns about bankers’ economic influence.
  • In its aftermath, Congress created the Federal Reserve Bank of the United States, the linchpin of the modern financial system.

In 1907, cars are unreliable luxury goods, electricity is still rare outside urban areas, and penicillin won’t be discovered for another 20 years. The world is a totally different place.

Yet 1907 turns out to be a critical year in the development of the modern American financial system. That fall, financial speculators set off a period of gut-wrenching stock market volatility that spurred numerous bank runs and failures that ruined many investors and countless ordinary folks. 

But it would have been far worse had financier and industrialist J.P. Morgan and richest American John D. Rockefeller not come to the rescue.

What Was the Panic of 1907?

The Panic of 1907 was a major American financial crisis that occurred in the fall of 1907. Also known as the Bankers’ Panic or Knickerbocker Panic, it nearly ruined the New York Stock Exchange. In its aftermath, Congress created the Federal Reserve Bank of the United States.

The crisis began as a result of financial speculation on the New York Stock Exchange but quickly spread throughout the United States. Many banks failed as a direct result of the panic, wiping out thousands of savers and investors, and nearly drove New York City into municipal bankruptcy. 

The crisis ended only after a coordinated effort by private financiers and U.S. Treasury officials to pump tens of millions of dollars into the teetering financial system.

The Panic of 1907 was the last major financial panic to occur before the creation of the Federal Reserve system in 1913. Afterward, Congress investigated the causes of the crisis and recommended that a national bank be created to prevent similar panics in the future. 

What Caused the Panic of 1907?

The immediate cause of the Panic of 1907 was a failed scheme by financial speculators to buy up a huge number of shares in a company called United Copper. However, at the time, the U.S. financial system had some underlying weaknesses that increased the risk that such a scheme would cause severe turmoil in financial markets. 

  • Seasonal decline in bank reserves. In the early 1900s, many banks’ reserves were closely tied to the agricultural calendar. Banks typically had less cash on hand after the fall harvest, leaving them more vulnerable to bank runs.
  • San Francisco’s rebuilding effort. A devastating earthquake leveled much of San Francisco in 1906, and a capital-intensive rebuilding effort was in full swing by late 1907. New York banks were providing much of the financing, further depleting their reserves.
  • Ongoing economic recession in the U.S. The Panic of 1907 began in October 1907, by which time the U.S. economy had been in recession for months. Financial institutions and smaller investors were already stretched, laying the groundwork for a panic.
  • Widespread weakness at New York’s trust companies. Trust companies were a vital source of short-term loans for stock market investors. But they had much smaller cash reserves than banks and were even more vulnerable to runs and failures.
  • A failed attempt to corner United Copper’s stock. F. Augustus Heinze, a financier and part-owner of United Copper Company, joined forces with his brother Otto and his associate Charles Morse to buy as much United Copper stock as possible. The idea was to drive the price up and then sell the shares at a massive profit. The scheme failed, ruining the Heinzes and weakening several financial institutions associated with them.
  • Crisis of confidence in trust companies. As worry spread through New York’s investor community, customers began to pull cash from a trust company run by an associate of the Heinzes and a fellow speculator named Charles W. Morse. This led to a full-blown run that quickly spread to other trust companies.
  • Liquidity crisis on the New York Stock Exchange. As the panic grew, trust companies dramatically slowed lending to investors in an effort to preserve capital. Traditional banks followed suit. Stock prices fell sharply and concerns grew about the viability of the New York Stock Exchange, or NYSE — the country’s most important financial exchange.

Within a matter of days, a seemingly isolated financial maneuver had consumed New York City’s financial industry, and about a dozen banks and trust companies in the city had already failed. 

But what happens in New York’s financial industry doesn’t always stay in New York’s financial industry. Financial panic spread outward and numerous hinterland banks experienced runs of their own. A broader economic crisis loomed, demanding intervention at the highest levels of government and industry.

What Happened During the Panic of 1907?

The Panic of 1907 began as an isolated, ill-advised exercise in financial speculation and morphed into a widespread crisis of confidence in the American financial system. 

Key Participants

Countless individuals and hundreds of financial institutions directly or indirectly participated in the Panic of 1907, but the number of central players was relatively small. They included individual financiers, financial institutions, and top-ranking U.S. government officials.

  • Financier F. Augustus Heinze and brother Otto Heinze. The Heinze brothers’ failed attempt to corner shares in United Copper set the panic in motion. It also bankrupted them and essentially ran them out of the banking industry.
  • Financier Charles W. Morse. A close associate of the Heinzes and fellow financial speculator, Morse was also ruined in the panic. His association with Knickerbocker Trust Company president Charles T. Barney sparked the first of many runs on New York trust companies.
  • Financier Charles T. Barney. Knickerbocker Trust Company was the third-largest trust company in New York before the panic. Though Barney refused to fund the United Copper scheme, his close ties to Morse proved too much for investors, which drained Knickerbocker’s cash reserves and forced it to suspend operations for five months.
  • Financier and industrialist J.P. Morgan. Reprising his role from the Panic of 1893, J.P. Morgan organized a group of bankers, industrialists, and U.S. government officials to stabilize the financial system as the crisis grew.
  • Industrialist John D. Rockefeller. Then the richest person in the United States, Rockefeller personally deposited $10 million in National City Bank (Citibank’s predecessor institution) at Morgan’s urging. The gesture temporarily increased investor confidence but wasn’t enough to resolve the crisis.
  • U.S. Treasury Secretary George B. Cortelyou. Cortelyou worked closely with Morgan on a bailout for Trust Company of America, the failure of which would have deepened the crisis. Cortelyou ultimately deposited more than $25 million in U.S. government funds in several key New York banks and trust companies. 
  • NYSE President Ransom Thomas. As credit dried up and trading volumes plummeted at his institution, Thomas approached Morgan’s group for a bailout. Morgan and several other prominent bankers put up nearly $35 million to keep the exchange afloat.
  • New York City Mayor George McClellan. The market panic deepened New York City’s existing financial woes. Facing a looming loan payment deadline, McClellan asked Morgan for a $20 million loan. He obliged, averting municipal bankruptcy.
  • Industrialist Elbert Gary. Gary, Morgan, and other U.S. Steel co-founders organized U.S. Steel’s purchase of TC&I, a distressed industrial company. That helped avert bankruptcy at a major New York brokerage firm that borrowed against TC&I’s near-worthless shares.
  • U.S. President Theodore Roosevelt. The TC&I deal needed Roosevelt’s blessing to go through. Forced to choose between compromising his anti-monopoly principles and worsening an already dire financial panic, Roosevelt went with the less-bad option. 

Key Events & Impact

The Panic of 1907 lasted from Oct. 16 to Nov. 2. It began with the Heinzes’ failed effort to corner United Copper and ended with the forced merger of U.S. Steel and TC&I.

  1. The Heinzes wash out. Otto Heinze started buying up United Copper shares on Monday, Oct. 14, and continued into the next day. But he underestimated the number of shares outstanding and ran out of money. The scheme unraveled on Oct. 16, with the stock dropping by more than 80%.
  2. Concerns grow around Heinze- and Morse-affiliated institutions. Augustus Heinze and Charles Morse sat on the boards of more than two dozen financial institutions. One Heinze-controlled bank failed on Oct. 17 and several others experienced runs on Oct. 17 and 18.
  3. Run on Knickerbocker Trust Company. Spooked by Knickerbocker president Charles Barney’s connection to the United Copper scheme, customers started pulling funds on Friday, Oct. 18. The run deepened the following Monday. By Tuesday, Oct. 22, Knickerbocker had suspended operations. It remained closed until March 1908.
  4. Trust Company of America bailout. The Knickerbocker run spread to other New York trust companies, most notably the Trust Company of America. On the evening of Oct. 22, a group of bankers and government officials led by J.P. Morgan raised $8 million to keep it afloat. 
  5. New York Stock Exchange bailout. As panic grew, trust companies stopped providing the short-term loans that kept NYSE traders solvent — and the NYSE itself operational. Facing an unprecedented suspension of operations, the NYSE asked for and received about $25 million on Thursday, Oct. 24, and another $9 million on Oct. 25.
  6. New York bank bailouts. By Oct. 24, more than a dozen New York banks and trust companies had failed. That evening, Treasury Secretary Cortelyou committed $25 million in U.S. government funds to shore up several others. John D. Rockefeller deposited $10 million in National City Bank. 
  7. Public relations blitz to restore confidence. Anticipating further panic when markets opened on Monday, Oct. 28, Morgan, Cortelyou, and others talked to every reporter they could over the weekend. They explained the steps they’d taken to avert the crisis and what more they’d be willing to do if need be.
  8. New York Clearing House provides short-term credit. Also over the weekend, New York Clearing House — a critical player in the city’s financial markets — announced it would provide up to $100 million in credit for banks and trust companies. This stemmed cash outflows and calmed financial markets.
  9. New York City municipal bailout. With a $20 million municipal loan repayment coming due on Nov. 1, Mayor McClellan reached out to Morgan in secret to ask for a bailout. Fearing renewed market panic if word got out, Morgan quietly bought city bonds worth $30 million.
  10. Moore & Schley bailout and trust company crisis resolution. The market turmoil put intense pressure on the finances of brokerage firm Moore & Schley, which had borrowed heavily against nearly worthless TC&I stock. In marathon overnight negotiations on Nov. 2 and 3, Morgan brokered a grand bargain to bail out Moore & Schley and several trust companies that remained at risk of failure.
  11. U.S. Steel-TC&I merger. The Moore & Schley bailout required U.S. Steel to purchase TC&I at a favorable price. Under normal circumstances, the merger would have violated antitrust law, but Morgan and high-ranking government officials persuaded President Roosevelt to approve it anyway.

The “panic” part of the Panic of 1907 peaked on Oct. 24 and 25. Although the early interventions led by Morgan and Cortelyou kept things from totally spiraling out of control, the real turning point was New York Clearing House’s massive credit extension over the weekend of the 25th. That gave Morgan and friends breathing room to shore up New York City’s finances and stabilize the troubled trust companies.

Response & Interventions

The Panic of 1907 unfolded over the course of about three weeks. A lot happened during that time, and the main participants in the response probably experienced it as a sleep-deprived blur of action and reaction. 

In hindsight, the panic had several distinct phases. Each generated a specific response from the financiers, industrialists, and government officials who’d taken it upon themselves to limit the damage.

  • Initial fallout from the United Copper scheme. This phase preceded the full-blown panic. It consisted of largely unsuccessful efforts by bank owners and executives, most notably at Knickerbocker Trust Company, to quell runs on their own institutions.
  • Morgan-Cortelyou alliance. Morgan and Cortelyou got involved on Oct. 22, once it became clear that the trust companies couldn’t manage the crisis on their own. They collectively raised nearly $50 million to keep the industry afloat.
  • NYSE bailout. The NYSE got the single biggest bailout — nearly $35 million — because it was the single most important institution at risk of failure. Its collapse would have had devastating consequences for the U.S. financial system and economy.
  • Restoring confidence in the U.S. banking system. This was the most public phase of the crisis management effort. Morgan, Cortelyou, and his associates blitzed the press, assuring Americans that their money was safe in the bank. New York Clearing House’s massive credit line was critical to this effort as well.
  • New York City municipal bailout. Though they arose independently, New York City’s financial woes deepened during the Panic of 1907, and Morgan felt obligated to step in. He judged that the crisis would reignite if the city declared bankruptcy at such a sensitive time.
  • Grand bargain. This was the Panic of 1907’s final act. Both Morgan’s group of capitalists and the decidedly progressive Roosevelt administration agreed that all outstanding threats to the financial system had to be resolved as quickly as possible.

How the Panic of 1907 Affected the Future Economy 

Though it’s barely remembered today, the Panic of 1907 had a deep and durable impact on the American financial system and economy. Its influence rivaled two much better-known financial panics: the Crash of 1929, which sparked the Great Depression, and the Great Financial Crisis of the late 2000s.

Establishment of the Federal Reserve System

The most significant outcome of the Panic of 1907 was the establishment of the Federal Reserve system.

Unlike other industrialized nations in Europe and Asia, the United States had been without a central bank since the 1830s. That mattered because other countries’ central banks could extend credit to private banks as needed to shore up cash reserves and maintain liquidity. They could do this not only during extraordinary financial crises but in response to costly disasters like an earthquake in San Francisco — or even in response to seasonal forces like the capital-intensive fall harvest.

Though many politicians and economists saw the lack of a U.S. central bank as a major economic vulnerability, key players in the financial industry were opposed to the idea of a government-run creditor of last resort. Resistance to the idea continued despite periodic financial panics in the 19th and early 20th centuries.

The Panic of 1907 was a turning point in part because it was the second time in less than 15 years that a single individual — J.P. Morgan — led a broad bailout of the American financial system. The idea that one man held such sway over the economy made even the most committed capitalists nervous. 

So in May 1908, Congress established the National Monetary Commission to study the question of whether the U.S. should have a central bank. The commission reported its findings in 1911 — in short, arguing that the U.S. needed a central bank — and Congress created the Federal Reserve system two years later.

Antitrust Backlash

The Panic of 1907 sparked an intense political backlash against individual plutocrats like J.P. Morgan and the concept of concentrated wealth and influence in general.

The U.S. House of Representatives’ Committee on Banking and Currency established a select committee to examine the “money trust” — the financial institutions controlled or influenced by Morgan and his associates. 

Known as the Pujo Committee, it investigated questionable allegations that Morgan engineered the crisis to profit from the merger of U.S. Steel and TC&I while weakening the power of the trust companies. There was a fair bit of spectacle involved, and people close to Morgan blamed lawmakers’ aggressive questioning for hastening his death shortly after his testimony.

But the Pujo Committee’s final report was a comprehensive (if somewhat exaggerated) accounting of the U.S. economy’s vulnerabilities. Among other revelations, it found that Morgan had ownership in or influence over more than 100 companies worth more than $22 billion, a shocking sum at the time. 

The Pujo Committee’s findings further increased support for a federal income tax, which was already on its way to being enacted via constitutional amendment. That officially happened in 1913. The following year saw the passage of the Clayton Antitrust Act, which strengthened existing antitrust laws and — in a clear swipe at Morgan — prohibited people from serving as directors for competing companies under certain conditions.


Final Word

It’s tempting to dismiss the Panic of 1907 as a relic of a bygone era, like the telegraph or whale-oil lamps. It’s also tempting to downplay it in light of much more recent economic crises, like the financial crisis of the late 2000s or the brief but severe COVID-19 recession in 2020.

But the Panic of 1907 remains relevant today. 

For starters, it was the final financial crisis before the U.S. government set up the Federal Reserve system in the hopes of averting future crises. New York Clearing House’s broad credit guarantees, which headed off further panic, inspired the Federal Reserve system’s discount lending window for troubled banks.

The Panic of 1907 was also an important inflection point for the American financial industry after the excesses of the Gilded Age, as the industry’s leaders realized the limits of self-regulation and gained newfound appreciation for (limited) government intervention.

That said, the reforms instituted in the wake of the Panic of 1907 couldn’t prevent the Great Depression or the late-2000s financial crisis. Those crises prompted their own reforms. Unfortunately, so will future financial panics.

Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.