Panic, Prosperity, and Progress: Five Centuries of History and the Markets

CHAPTER 9

The Rich Man’s Panic of 1907

On a chart of the financial history of the United States, the downturn that took place in stocks in 1907 is a barely recognizable blip. What took place during that year, however, completely altered the financial structure of the world. It is an astonishing story of what the financial universe of the United States was like before the nation had its own permanent central bank.

In the early twentieth century, it was not as if the United States had never had a central bank to call its own. Indeed, there was one in place long before, but President Andrew Jackson let the charter of the Second Bank of the United States expire in 1836, and the banks of the United States relied on one another to navigate the roiling waves of the nineteenth century. Unfortunately, this system produced periodic panics and bank closures on a surprisingly frequent basis, and a depositor could not be assured of the safety of his money once it was deposited within an institution.

■ A Simpler Time

In sharp contrast to the modern financial world, understanding the mechanics of finance of the early twentieth century is relatively simple. As long as one has a basic understanding of the importance of supply and demand and how the interaction of those two elements affects price, it is relatively easy to comprehend the dynamics of what happened during those years.

In spite of its place as a relatively sophisticated urban center, New York City in the early 1900s was strongly subject ...