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Campfire Sage
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Campfire Sage
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Posts: 131,556 |
The problem with that argument is that there is no intrinsic unit of value. The concept of value is a human invention that has no basis in the natural world. Money (whatever it is) serves as a medium of exchange and it's the market and the market alone that establishes exchange rates for every physical commodity (including gold), every product, and every service known to humankind. Markets fluctuate based on the simple law of supply and demand. The problem is that both supply and demand are subject to nearly infinite forces including human emotions.
Yes there are people who hold on to the idea of gold being somehow apart from market forces, but such a world only exists in their dreams. Everything is relative, but it's instructive to consider how gold and silver became money for human civilization, and remained such throughout our history on earth. It didn't become that due to the power of the state declaring that these two metals were money. It was chosen as such at the grass roots all over the world. There was a reason for this. An excellent one. Gold and silver are very stable preservers of value over time. Gold and silver don't spoil in storage. Gold and silver make commerce convenient. Fiat currencies do the last, but not as well as gold and silver, but not nearly so well on spoilage and preserving value over time. The only reason people make use of fiat currency is because you will be arrested or in some other way have your life destroyed by the force of government if you don't. Not because it's good at being money. Sorry, the world is run by movers and shakers, not this Joe guy who wants to sit on his ass and do nothing with whatever money he has saved. Even so, the government offers Treasury Inflation-Protected Securities (TIPS) for the Joes of the world so that they can preserve the market value of their money. Unlike investing in gold there's no risk in buying TIPS. No risk? I guess that's true, since it's certain to eventually fail, as all fiat currencies have in the past. You can, however, still take an ancient coin with the image of some long dead emperor on it and exchange it for about the same quantity of food staples, basic tools, etc., as you could the day it was minted. Likely more, even. I didn't say anything about debt, so your claim is a lie. Inflation is better than deflation and anyone who doesn't know that is of the flat Earth mentality. Correction: Inflation (the natural result of fractional reserve banking in a fiat currency) is better for those who lend money at interest (despite the common opinion that the opposite is the case), but for the frugal and conscientious businessman (or any frugal saver, for that matter), deflation is much better. It's all relative, but there is no real down side to deflation, unless you're a fractional reserve banker in fiat currency/legal tender law system. A banker in that system depends on the inadvisability of saving (due to certain loss through inflation), i.e., a debt based economy. Such economies are designed to impoverish the workers and producers, while enriching the bankers, through a series of booms (encouraging malinvestment) and busts (during which the banks acquire title to your hard assets).
![[Linked Image from images7.memedroid.com]](https://images7.memedroid.com/images/UPLOADED555/651dcaab819c9.jpeg)
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Campfire Sage
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Campfire Sage
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Campfire Outfitter
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Campfire Outfitter
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Panic of 1907
A swarm gathers on Wall Street during the bank panic in October 1907. Federal Hall, with its statue of George Washington, is seen on the right.The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.[1]
The crisis was triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Company. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company�New York City's third-largest trust. The collapse of the Knickerbocker spread fear throughout the city's trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
The panic may have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system. At the time, the United States did not have a central bank to inject liquidity back into the market. By November the financial contagion had largely ended, yet a further crisis emerged when a large brokerage firm borrowed heavily using the stock of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. Collapse of TC&I's stock price was averted by an emergency takeover by Morgan's U.S. Steel Corporation�a move approved by anti-monopolist president Theodore Roosevelt. The following year, Senator Nelson W. Aldrich established and chaired a commission to investigate the crisis and propose future solutions, leading to the creation of the Federal Reserve System.
Economic conditions
The 1906 San Francisco earthquake badly damaged the U.S. economy, further exacerbating the vulnerability of the national banking system.When U.S. President Andrew Jackson allowed the charter of the Second Bank of the United States to expire in 1836, the U.S. was without any sort of central bank, and the money supply in New York City fluctuated with the country's annual agricultural cycle. Each autumn money flowed out of the city as harvests were purchased and�in an effort to attract money back�interest rates were raised. Foreign investors then sent their money to New York to take advantage of the higher rates.[2] From the January 1906 Dow Jones Industrial Average high of 103, the market began a modest correction that would continue throughout the year. The April 1906 earthquake that devastated San Francisco contributed to the market instability, prompting an even greater flood of money from New York to San Francisco to aid reconstruction.[3][4] A further stress on the money supply occurred in late 1906, when the Bank of England raised its interest rates, partly in response to UK insurance companies paying out so much to US policyholders, and more funds remained in London than expected.[5] From their peak in January, stock prices declined 18% by July 1906. By late September, stocks had recovered about half of their losses.
Theodore Roosevelt commanding two large bears "Interstate Commerce Commission" and "Federal Courts" to attack Wall Street (Puck, May 8, 1907)The Hepburn Act, which gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, became law in July 1906.[6] This depreciated the value of railroad securities.[7] Between September 1906 and March 1907, the stock market slid, losing 7.7% of its capitalization.[8] Between March 9 and 26, stocks fell a further 9.8%.[9] (This March collapse is sometimes referred to as a "rich man's panic".)[10] The economy remained volatile through the summer. A number of shocks hit the system: the stock of Union Pacific�among the most common stocks used as collateral�fell 50 points; that June an offering of New York City bonds failed; in July the copper market collapsed; in August the Standard Oil Company was fined $29 million for antitrust violations.[11] In the first nine months of 1907, stocks were lower by 24.4%.[12]
On July 27, The Commercial & Financial Chronicle noted that "the market keeps unstable ... no sooner are these signs of new life in evidence than something like a suggestion of a new outflow of gold to Paris sends a tremble all through the list, and the gain in values and hope is gone".[13] Several bank runs occurred outside the US in 1907: in Egypt in April and May; in Japan in May and June; in Hamburg and Chile in early October.[14] The fall season was always a vulnerable time for the banking system�combined with the roiled stock market, even a small shock could have grave repercussions.[15]
Monday, October 14
Otto Heinze begins purchasing to corner the stock of United Copper.
Wednesday, October 16
Heinze's corner fails spectacularly. Heinze's brokerage house, Gross & Kleeberg is forced to close. This is the date traditionally cited as when the corner failed.
Thursday, October 17
The Exchange suspends Otto Heinze and Company. The State Savings Bank of Butte, Montana, owned by Augustus Heinze announces it is insolvent. Augustus is forced to resign from Mercantile National Bank. Runs begin at Augustus' and his associate Charles W. Morse's banks.
Sunday, October 20
The New York Clearing House forces Augustus and Morse to resign from all their banking interests.
Monday, October 21
Charles T. Barney is forced to resign from the Knickerbocker Trust Company because of his ties to Morse and Heinze. The National Bank of Commerce says it will no longer serve as clearing house.
Tuesday, October 22
A bank run forces the Knickerbocker to suspend operations.
Wednesday, October 23
J.P. Morgan persuades other trust company presidents to provide liquidity to the Trust Company of America, staving off its collapse.
Thursday, October 24
Treasury Secretary George Cortelyou agrees to deposit Federal money in New York banks. Morgan persuades bank presidents to provide $23 million to the New York Stock Exchange to prevent an early closure.
Friday October 25
Crisis is again narrowly averted at the Exchange.
Sunday, October 27
The City of New York tells Morgan associate George Perkins that if they cannot raise $20�30 million by November 1, the city will be insolvent.
Tuesday, October 29
Morgan purchased $30 million in city bonds, discreetly averting bankruptcy for the city.
Saturday, November 2
Moore & Schley, a major brokerage, nears collapse because its loans were backed by the Tennessee Coal, Iron & Railroad Company (TC&I), a stock whose value is uncertain. A proposal is made for U.S. Steel to purchase TC&I.
Sunday, November 3
A plan is finalized for U.S. Steel to take over TC&I.
Monday, November 4
President Theodore Roosevelt approves U.S. Steel's takeover of TC&I, despite anticompetitive concerns.
Tuesday, November 5
Markets are closed for Election Day.
Wednesday, November 6
U.S. Steel completes takeover of TC&I. Markets begin to recover. Destabilizing runs at the trust companies do not begin again.
The 1907 panic began with a stock manipulation scheme to corner the market in F. Augustus Heinze's United Copper Company. Heinze had made a fortune as a copper magnate in Butte, Montana. In 1906 he moved to New York City, where he formed a close relationship with notorious Wall Street banker Charles W. Morse. Morse had once successfully cornered New York City's ice market, and together with Heinze gained control of many banks�the pair served on at least six national banks, ten state banks, five trust companies and four insurance firms.[17]
The panic began in the vibrant marketplace for stocks that took place on the curb outside the New York Stock Exchange; this curb market later became the American Stock Exchange.Augustus's brother, Otto, devised the scheme to corner United Copper, believing that the Heinze family already controlled a majority of the company. A significant number of the Heinzes' shares had been borrowed, and Otto believed that many of these had been loaned to investors who hoped the stock price would drop, and that they could thus repurchase the borrowed shares cheaply, pocketing the difference�a technique known as short selling. Otto proposed a short squeeze, whereby the Heinzes would aggressively purchase as many remaining shares as possible, and then force the short sellers to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and, being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then name their price.[18]
To finance the scheme, Otto, Augustus and Charles Morse met with Charles T. Barney, president of the city's third-largest trust, the Knickerbocker Trust Company. Barney had provided financing for previous Morse schemes. Morse, however, cautioned Otto that he needed much more money than he had to attempt the squeeze and Barney declined to provide funding.[19] Otto decided to attempt the corner anyway. On Monday, October 14, he began aggressively purchasing shares of United Copper, which rose in one day from $39 to $52 per share. On Tuesday, he issued the call for short sellers to return the borrowed stock. The share price rose to nearly $60, but the short sellers were able to find plenty of United Copper shares from sources other than the Heinzes. Otto had misread the market, and the share price of United Copper began to collapse.[20]
The stock closed at $30 on Tuesday and fell to $10 by Wednesday. Otto Heinze was ruined. The stock of United Copper was traded outside the hall of the New York Stock Exchange, literally an outdoor market "on the curb" (this curb market would later become the American Stock Exchange). After the crash, The Wall Street Journal reported, "Never has there been such wild scenes on the Curb, so say the oldest veterans of the outside market".[21]
[edit] Contagion spreads
The failure of the corner left Otto unable to meet his obligations and sent his brokerage house, Gross & Kleeberg, into bankruptcy. On Thursday, October 17, the New York Stock Exchange suspended Otto's trading privileges. As a result of United Copper's collapse, the State Savings Bank of Butte Montana (owned by F. Augustus Heinze) announced its insolvency. The Montana bank had held United Copper stock as collateral against some of its lending and had been a correspondent bank for the Mercantile National Bank in New York City, of which F. Augustus Heinze was then president.
F. Augustus Heinze's association with the corner and the insolvent State Savings Bank proved too much for the board of the Mercantile to accept. Although they forced him to resign before lunch time,[22] by then it was too late. As news of the collapse spread, depositors rushed en masse to withdraw money from the Mercantile National Bank. The Mercantile had enough capital to withstand a few days of withdrawals, but depositors began to pull cash from the banks of the Heinzes' associate Charles W. Morse. Runs occurred at Morse's National Bank of North America and the New Amsterdam National. Afraid of the impact the tainted reputations of Augustus Heinze and Morse could have on the banking system, the New York Clearing House (a consortium of the city's banks) forced Morse and Heinze to resign all banking interests.[23] By the weekend after the failed corner, there was not yet systemic panic. Funds were withdrawn from Heinze-associated banks, only to be deposited with other banks in the city.[24]
[edit] Panic hits the trusts
In the early 1900s, trust companies were booming; in the decade before 1907, their assets had grown by 244%. During the same period, national bank assets grew by 97%, while state banks in New York grew by 82%.[25] The leaders of the high-flying trusts were mainly prominent members of New York's financial and social circles. One of the most respected was Charles T. Barney, whose late father-in-law William Collins Whitney was a famous financier. Barney's Knickerbocker Trust Company was the third-largest trust in New York.[26]
The headquarters of the Knickerbocker Trust Company at the northwest corner of Fifth Avenue and 34th Street.Because of past association with Charles W. Morse and F. Augustus Heinze, on Monday, October 21, the board of the Knickerbocker asked that Barney resign (depositors may have first begun to pull deposits from the Knickerbocker on October 18, prompting the concern).[27] That day, the National Bank of Commerce announced it would not serve as clearing house for the Knickerbocker. On October 22, the Knickerbocker faced a classic bank run. From the bank's opening, the crowd grew. As The New York Times reported, "as fast as a depositor went out of the place ten people and more came asking for their money [and the police] were asked to send some men to keep order".[28] In less than three hours, $8 million was withdrawn from the Knickerbocker. Shortly after noon it was forced to suspend operations.[29]
As news spread, other banks and trust companies were reluctant to lend any money. The interest rates on loans to brokers at the stock exchange soared and, with brokers unable to get money, stock prices fell to a low not seen since December 1900.[30] The panic quickly spread to two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence.[31]
[edit] Enter J.P. Morgan
When the chaos began to shake the confidence of New York's banks, the city's most famous banker was out of town. J.P. Morgan, president of the eponymous J.P. Morgan & Co., was attending a church convention in Richmond, Virginia. Morgan was not only the city's wealthiest and most well-connected banker, but he had experience with crisis�he helped rescue the U.S. Treasury during the Panic of 1893. As news of the crisis gathered, Morgan returned to Wall Street from his convention late on the night of Saturday, October 19. The following morning, the library of Morgan's brownstone at Madison Avenue and 36th St. had become a revolving door of New York City bank and trust company presidents arriving to share information about (and seek help surviving) the impending crisis.[32][33]
J.P. Morgan, the dominant banker in New York City, had rescued the U.S. Treasury during the Panic of 1893.Morgan and his associates examined the books of the Knickerbocker Trust, but decided it was insolvent and did not intervene to stop the run. Its failure, however, triggered runs on even healthy trusts, prompting Morgan to take charge of the rescue operation. On the afternoon of Tuesday, October 22, the president of the Trust Company of America asked Morgan for assistance. That evening Morgan conferred with George F. Baker, the president of First National Bank, James Stillman of the National City Bank of New York (the ancestor of Citibank), and the United States Secretary of the Treasury, George B. Cortelyou. Cortelyou said that he was ready to deposit government money in the banks to help shore up their deposits. After an overnight audit of the Trust Company of America showed the institution to be sound, on Wednesday afternoon Morgan declared, �This is the place to stop the trouble, then".[34]
As a run began on the Trust Company of America, Morgan worked with Stillman and Baker to liquidate the company's assets to allow the bank to pay depositors. The bank survived to the close of business, but Morgan knew that additional money would be needed to keep it solvent through the following day. That night he assembled the presidents of the other trust companies and held them in a meeting until midnight when they agreed to provide loans of $8.25 million to allow the Trust Company of America to stay open the next day.[35] On Thursday morning Cortelyou deposited around $25 million into a number of New York banks.[36] John D. Rockefeller, the wealthiest man in America, deposited a further $10 million in Stillman's National City Bank.[37] Rockefeller's massive deposit left the National City Bank with the deepest reserves of any bank in the city. To instill public confidence, Rockefeller phoned Melville Stone, the manager of the Associated Press, and told him that he would pledge half of his wealth to maintain America's credit.[38]
[edit] Stock exchange nears collapse
Despite the infusion of cash, the banks of New York were reluctant to make the short-term loans they typically provided to facilitate daily stock trades. Unable to obtain these funds, prices on the exchange began to crash. At 1:30 p.m. Thursday, October 24, Ransom Thomas, the president of the New York Stock Exchange, rushed to Morgan's offices to tell him that he would have to close the exchange early. Morgan was emphatic that an early close of the exchange would be catastrophic.[39][40]
The floor of the New York Stock Exchange (pictured in 1908) where trading nearly collapsed at the end of October as banks were reluctant to lend.Morgan summoned the presidents of the city's banks to his office. They started to arrive at 2 p.m.; Morgan informed them that as many as 50 stock exchange houses would fail unless $25 million was raised in 10 minutes. By 2:16 p.m., 14 bank presidents had pledged $23.6 million to keep the stock exchange afloat. The money reached the market at 2:30 p.m., in time to finish the day's trading, and by the 3 o'clock market close, $19 million had been loaned out. Disaster was averted. Morgan usually eschewed the press, but as he left his offices that night he made a statement to reporters: "If people will keep their money in the banks, everything will be all right".[41]
Friday, however, saw more panic on the exchange. Morgan again approached the bank presidents, but this time was only able to convince them to pledge $9.7 million. In order for this money to keep the exchange open, Morgan decided the money could not be used for margin sales. The volume of trading on Friday was 2/3 that of Thursday. The markets again narrowly made it to the closing bell.[42]
[edit] Crisis of confidence
Morgan, Stillman, Baker and the other city bankers were unable to pool money indefinitely. Even the U.S. Treasury was low on funds. Public confidence needed to be restored, and on Friday evening the bankers formed two committees�one to persuade the clergy to calm their congregations on Sunday, and second to explain to the press the various aspects of the financial rescue package. Europe's most famous banker, Lord Rothschild, sent word of his "admiration and respect" for Morgan.[43] In an attempt to gather confidence, the Treasury Secretary Cortelyou agreed that if he returned to Washington it would send a signal to Wall Street that the worst had passed.[44][45]
(Clockwise from top left) John D. Rockefeller, George B. Cortelyou, Lord Rothschild, and James Stillman. Some of the best-known names on Wall Street issued positive statements to help restore confidence in the economy.
To ensure a free flow of funds on Monday, the New York Clearing House issued $100 million in loan certificates to be traded between banks to settle balances, allowing them to retain cash reserves for depositors.[46] Reassured both by the clergy and the newspapers, and with bank balance sheets flushed with cash, a sense of order returned to New York that Monday.[47]
Unbeknownst to Wall Street, a new crisis was being averted in the background. On Sunday, Morgan's associate, George Perkins, was informed that the City of New York required at least $20 million by November 1 or it would go bankrupt. The city tried to raise money through a standard bond issue, but failed to gather enough financing. On Monday and again on Tuesday, New York Mayor George McClellan approached Morgan for assistance. In an effort to avoid the disastrous signal that a New York City bankruptcy would send, Morgan contracted to purchase $30 million worth of city bonds.[48][45]
[edit] Drama at the Library
Although calm was largely restored in New York by Saturday, November 2, yet another crisis loomed. One of the exchange's largest brokerage firms, Moore & Schley, was heavily in debt and in danger of collapse. The firm had borrowed heavily, using stock from the Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. With the value of the thinly-traded stock under pressure, many banks would likely call the loans of Moore & Schley on Monday and force an en masse liquidation of the stock. If that occurred it would send shares of TC&I plummeting, devastating Moore and Schley and causing a further panic in the market.[49]
In order to prevent the collapse of Moore & Schley, Morgan called an emergency conference at his library Saturday morning. A proposal was made that the U.S. Steel Corporation, a company Morgan had helped form through the merger of the steel companies of Andrew Carnegie and Elbert Gary, would acquire TC&I. This would effectively save Moore & Schley and avert the crisis. After the executives and board of U.S. Steel studied the situation and, recognizing a positive role they could play during the panic, they offered to either loan Moore & Schley $5 million, or buy TC&I for $90 a share. By 7 P.M. an agreement had not been reached and the meeting adjourned.[50]
By then, J.P. Morgan was drawn into another situation. There was a major concern that the Trust Company of America and the Lincoln Trust could fail to open on Monday due to continuing runs. On Saturday evening 40�50 bankers had gathered at the library to discuss the crisis, with the clearing-house bank presidents in the East room and the trust company executives in the West room. Morgan and those dealing with the Moore & Schley situation had moved to the librarian�s office. There Morgan told his counselors that he would agree to help shore up Moore & Schley only if the trust companies would work together to bail out their weakest brethren.[51] The discussion among the bankers continued late Saturday night but without any real progress. Then, around midnight, J.P. Morgan informed a leader of the trust company presidents of the Moore & Schley situation that was going to require $25 million, and that he was not willing to proceed with that unless the problems with the trust companies could also be solved. This indicated that the trust companies would not be receiving further help from Morgan and that they had to reach their own solution.
At 3 a.m. about 120 bank and trust company officials were assembled to hear a full report on the status of the failing trust companies. While the Trust Company of America was barely solvent, the Lincoln Trust Company was probably $1 million short of what it needed to pay depositors. As the discussions continued, the bankers realized that Morgan had locked them in the library and pocketed the key to force a solution,[52] the type of tactic he had been known to use in the past.[53] Morgan then entered the talks and told the trust companies that they must provide a loan of $25 million to save the weaker institutions. The trust presidents were still reluctant to act, but Morgan informed them that if they did not it would result in a complete collapse of the banking system. Through his considerable influence, at about 4:45 a.m. he persuaded the unofficial leader of the trust companies to sign the agreement, and the rest of them followed.[53] With this assurance that the situation would be resolved, Morgan then allowed the bankers to go home.[54]
On Sunday afternoon and into the evening, Morgan, Perkins, Baker and Stillman, along with U.S. Steel's Gary and Henry Clay Frick, worked at the library to finalize the deal for U.S. Steel to buy TC&I and by Sunday night had a plan for acquisition. But, one obstacle remained: the anti-trust crusading President Theodore Roosevelt, who had made breaking up monopolies a focus of his presidency.[55]
Frick and Gary traveled overnight by train to the White House to implore Roosevelt to set aside the principles of the Sherman Antitrust Act and allow�before the market opened�a company that already had a 60% market share to make a massive acquisition. Roosevelt's secretary refused to see them, yet Frick and Gary convinced James Rudolph Garfield, the Secretary of the Interior, to bypass the secretary and allow them to go directly to the president. With less than an hour before markets opened, Roosevelt and Secretary of State Elihu Root began to review the proposed takeover and absorb the news of a potential crash if the merger was not approved.[56][57] Roosevelt relented, and he later recalled of the meeting, "It was necessary for me to decide on the instant before the Stock Exchange opened, for the situation in New York was such that any hour might be vital. I do not believe that anyone could justly criticize me for saying that I would not feel like objecting to the purchase under those circumstances".[58] When news reached New York, confidence soared. The Commercial & Financial Chronicle reported that "the relief furnished by this transaction was instant and far-reaching".[59] The final crisis of the panic had been averted.[60]
[edit] Aftermath
Dow Jones Industrial Average's weekly close from January 1904 to December 1909. The market bottom of 53 was recorded on the close of November 15, 1907.The panic of 1907 occurred during a lengthy economic contraction�measured by the National Bureau of Economic Research as occurring between May 1907 and June 1908.[61][62] The interrelated contraction, bank panic and falling stock market resulted in significant economic disruption. Robert Bruner and Sean Carr cite a number of statistics quantifying the damage in The Panic of 1907: Lessons Learned from the Market's Perfect Storm. Industrial production dropped further than after any bank run before then, while 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3%. Immigration dropped to 750,000 people in 1909, from 1.2 million two years earlier.[63]
Since the end of the Civil War, the United States had experienced panics of varying severity. Economists Charles Calomiris and Gary Gorton rate the worst panics as those leading to widespread bank suspensions�the panics of 1873, 1893, and 1907, and a suspension in 1914. Widespread suspensions were forestalled through coordinated actions during both the 1884 and the 1890 panics. A bank crisis in 1896, in which there was a perceived need for coordination, is also sometimes classified as a panic.[64]
The frequency of crises and the severity of the 1907 panic added to concern about the outsized role of J.P. Morgan which led to renewed impetus toward a national debate on reform.[65] In May 1908, Congress passed the Aldrich�Vreeland Act that established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking.[66] Senator Nelson Aldrich (R�RI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems.
[edit] Central bank
Main article: History of the Federal Reserve System
A significant difference between the European and U.S. banking systems was the absence of a central bank in the United States. European states were able to extend the supply of money during periods of low cash reserves. The belief that the U.S. economy was vulnerable without a central bank was not new. Early in 1907, banker Jacob Schiff of Kuhn, Loeb & Co. warned in a speech to the New York Chamber of Commerce that "unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history".[67]
Aldrich convened a secret conference with a number of the nation's leading financiers at the Jekyll Island Club, off the coast of Georgia, to discuss monetary policy and the banking system in November 1910. Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department), Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (James Stillman's successor as president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), produced a design for a "National Reserve Bank".[68]
Forbes magazine founder B. C. Forbes wrote several years later:
Picture a party of the nation�s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written.[69]
The final report of the National Monetary Commission was published on January 11, 1911. For nearly two years legislators debated the proposal and it was not until December 22, 1913, that Congress passed the Federal Reserve Act. President Woodrow Wilson signed the legislation immediately and the legislation was enacted on the same day, December 22, 1913, creating the Federal Reserve System.[70] Charles Hamlin became the Fed's first chairman, and none other than Morgan's deputy Benjamin Strong became president of the Federal Reserve Bank of New York, the most important regional bank with a permanent seat on the Federal Open Market Committee.[70]
[edit] Pujo Committee
Main article: Pujo Committee
A February 2, 1910 editorial cartoon in Puck titled: "The Central Bank�Why should Uncle Sam establish one, when Uncle Pierpont is already on the job?"Although Morgan was briefly seen as a hero, widespread fears concerning plutocracy and concentrated wealth soon eroded this view. Morgan's bank had survived, but the trust companies that were a growing rival to traditional banks were badly damaged. Some analysts believed that the panic had been engineered to damage confidence in trust companies so that banks would benefit.[71][72] Others believed Morgan took advantage of the panic to allow his U.S. Steel company to acquire TC&I.[73] Although Morgan lost $21 million in the panic, and the significance of the role he played in staving off worse disaster is undisputed, he also became the focus of intense scrutiny and criticism.[74][75][76]
The chair of the House Committee on Banking and Currency, Representative Ars�ne Pujo, (D�La. 7th) convened a special committee to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion).[77]
Although suffering ill health, J.P. Morgan testified before the Pujo Committee and faced several days of questioning from Samuel Untermyer. Untermyer and Morgan's famous exchange on the fundamentally psychological nature of banking�that it is an industry built on trust�is often quoted in business articles:[78][79]
Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir. The first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it ... a man I do not trust could not get money from me on all the bonds in Christendom.[78]
Associates of Morgan blamed his continued physical decline on the hearings. In February he became very ill and died on March 31, 1913�nine months before the "money trust" would be officially replaced as lender of last resort by the Federal Reserve.[78]
dave
![[Linked Image]](https://upload.wikimedia.org/wikipedia/commons/e/ea/Logo_Schmidt_%26_Bender.jpg) Only accurate rifles are interesting.
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Joined: Jun 2010
Posts: 3,529
Campfire Tracker
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Campfire Tracker
Joined: Jun 2010
Posts: 3,529 |
Everything is relative, but it's instructive to consider how gold and silver became money for human civilization, and remained such throughout our history on earth. It didn't become that due to the power of the state declaring that these two metals were money. It was chosen as such at the grass roots all over the world. There was a reason for this. Other commodities were also used as money such as salt. Any commodity or thing can be used as money as long as it's rare or hard to make. The problem with gold based money is that it's rarity made it untenable as the world�s economies started to rapidly expand with the industrial revolution. Gold and silver are very stable preservers of value over time. Not really. Those who bought gold in the mid 80's saw the real value of their gold drop for nearly 15 years. Once again there is no intrinsic unit of value. The value of anything is determined by the market and the market alone. Right now gold is around $1,235 per troy ounce, but if Republicans win back the house or the senate they will put a quick end to Obama's change agenda and businesses will once again feel safe in expanding and investing. As the economy picks up (even if employment doesn't) investors will find they can get a higher return in the stock market and the price of gold will crash back to $500 or so. On the other hand, if Israel bombs Iran and an all out war starts over there then gold could go over $2,000 an ounce. How then is gold a preservers of value over time? No risk? I guess that's true, since it's certain to eventually fail, as all fiat currencies have in the past. Fiat currencies fail when the government backing it fails. Thus, the risk of TIPS failing is the same risk of the U.S. government failing. If that's the risk you are planning for you should follow Burt Gummer's example. ![[Linked Image]](https://upload.wikimedia.org/wikipedia/en/9/92/Burt_Gummer.jpg) Correction: Inflation (the natural result of fractional reserve banking in a fiat currency) is better for those who lend money at interest (despite the common opinion that the opposite is the case), but for the frugal and conscientious businessman (or any frugal saver, for that matter), deflation is much better. It only seems deflation is better to those who have money to sit on and are not interested in making more (retired folks). For everyone else it's a disaster as it shrinks and then stagnates the economy such that the standard of living declines. This happens because as prices fall the value of money increases, and therefore people gain value by holding on to their money. Deflation rewards the do-nothing types of the world for doing nothing and the longer that continues the more the economy shrinks.
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Joined: Jun 2002
Posts: 131,556
Campfire Sage
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Campfire Sage
Joined: Jun 2002
Posts: 131,556 |
Panic of 1907
A swarm gathers on Wall Street during the bank panic in October 1907. Federal Hall, with its statue of George Washington, is seen on the right.The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.[1]
The crisis was triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Company. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company�New York City's third-largest trust. The collapse of the Knickerbocker spread fear throughout the city's trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
The panic may have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system. At the time, the United States did not have a central bank to inject liquidity back into the market. By November the financial contagion had largely ended, yet a further crisis emerged when a large brokerage firm borrowed heavily using the stock of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. Collapse of TC&I's stock price was averted by an emergency takeover by Morgan's U.S. Steel Corporation�a move approved by anti-monopolist president Theodore Roosevelt. The following year, Senator Nelson W. Aldrich established and chaired a commission to investigate the crisis and propose future solutions, leading to the creation of the Federal Reserve System.
Economic conditions
The 1906 San Francisco earthquake badly damaged the U.S. economy, further exacerbating the vulnerability of the national banking system.When U.S. President Andrew Jackson allowed the charter of the Second Bank of the United States to expire in 1836, the U.S. was without any sort of central bank, and the money supply in New York City fluctuated with the country's annual agricultural cycle. Each autumn money flowed out of the city as harvests were purchased and�in an effort to attract money back�interest rates were raised. Foreign investors then sent their money to New York to take advantage of the higher rates.[2] From the January 1906 Dow Jones Industrial Average high of 103, the market began a modest correction that would continue throughout the year. The April 1906 earthquake that devastated San Francisco contributed to the market instability, prompting an even greater flood of money from New York to San Francisco to aid reconstruction.[3][4] A further stress on the money supply occurred in late 1906, when the Bank of England raised its interest rates, partly in response to UK insurance companies paying out so much to US policyholders, and more funds remained in London than expected.[5] From their peak in January, stock prices declined 18% by July 1906. By late September, stocks had recovered about half of their losses.
Theodore Roosevelt commanding two large bears "Interstate Commerce Commission" and "Federal Courts" to attack Wall Street (Puck, May 8, 1907)The Hepburn Act, which gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, became law in July 1906.[6] This depreciated the value of railroad securities.[7] Between September 1906 and March 1907, the stock market slid, losing 7.7% of its capitalization.[8] Between March 9 and 26, stocks fell a further 9.8%.[9] (This March collapse is sometimes referred to as a "rich man's panic".)[10] The economy remained volatile through the summer. A number of shocks hit the system: the stock of Union Pacific�among the most common stocks used as collateral�fell 50 points; that June an offering of New York City bonds failed; in July the copper market collapsed; in August the Standard Oil Company was fined $29 million for antitrust violations.[11] In the first nine months of 1907, stocks were lower by 24.4%.[12]
On July 27, The Commercial & Financial Chronicle noted that "the market keeps unstable ... no sooner are these signs of new life in evidence than something like a suggestion of a new outflow of gold to Paris sends a tremble all through the list, and the gain in values and hope is gone".[13] Several bank runs occurred outside the US in 1907: in Egypt in April and May; in Japan in May and June; in Hamburg and Chile in early October.[14] The fall season was always a vulnerable time for the banking system�combined with the roiled stock market, even a small shock could have grave repercussions.[15]
Monday, October 14
Otto Heinze begins purchasing to corner the stock of United Copper.
Wednesday, October 16
Heinze's corner fails spectacularly. Heinze's brokerage house, Gross & Kleeberg is forced to close. This is the date traditionally cited as when the corner failed.
Thursday, October 17
The Exchange suspends Otto Heinze and Company. The State Savings Bank of Butte, Montana, owned by Augustus Heinze announces it is insolvent. Augustus is forced to resign from Mercantile National Bank. Runs begin at Augustus' and his associate Charles W. Morse's banks.
Sunday, October 20
The New York Clearing House forces Augustus and Morse to resign from all their banking interests.
Monday, October 21
Charles T. Barney is forced to resign from the Knickerbocker Trust Company because of his ties to Morse and Heinze. The National Bank of Commerce says it will no longer serve as clearing house.
Tuesday, October 22
A bank run forces the Knickerbocker to suspend operations.
Wednesday, October 23
J.P. Morgan persuades other trust company presidents to provide liquidity to the Trust Company of America, staving off its collapse.
Thursday, October 24
Treasury Secretary George Cortelyou agrees to deposit Federal money in New York banks. Morgan persuades bank presidents to provide $23 million to the New York Stock Exchange to prevent an early closure.
Friday October 25
Crisis is again narrowly averted at the Exchange.
Sunday, October 27
The City of New York tells Morgan associate George Perkins that if they cannot raise $20�30 million by November 1, the city will be insolvent.
Tuesday, October 29
Morgan purchased $30 million in city bonds, discreetly averting bankruptcy for the city.
Saturday, November 2
Moore & Schley, a major brokerage, nears collapse because its loans were backed by the Tennessee Coal, Iron & Railroad Company (TC&I), a stock whose value is uncertain. A proposal is made for U.S. Steel to purchase TC&I.
Sunday, November 3
A plan is finalized for U.S. Steel to take over TC&I.
Monday, November 4
President Theodore Roosevelt approves U.S. Steel's takeover of TC&I, despite anticompetitive concerns.
Tuesday, November 5
Markets are closed for Election Day.
Wednesday, November 6
U.S. Steel completes takeover of TC&I. Markets begin to recover. Destabilizing runs at the trust companies do not begin again.
The 1907 panic began with a stock manipulation scheme to corner the market in F. Augustus Heinze's United Copper Company. Heinze had made a fortune as a copper magnate in Butte, Montana. In 1906 he moved to New York City, where he formed a close relationship with notorious Wall Street banker Charles W. Morse. Morse had once successfully cornered New York City's ice market, and together with Heinze gained control of many banks�the pair served on at least six national banks, ten state banks, five trust companies and four insurance firms.[17]
The panic began in the vibrant marketplace for stocks that took place on the curb outside the New York Stock Exchange; this curb market later became the American Stock Exchange.Augustus's brother, Otto, devised the scheme to corner United Copper, believing that the Heinze family already controlled a majority of the company. A significant number of the Heinzes' shares had been borrowed, and Otto believed that many of these had been loaned to investors who hoped the stock price would drop, and that they could thus repurchase the borrowed shares cheaply, pocketing the difference�a technique known as short selling. Otto proposed a short squeeze, whereby the Heinzes would aggressively purchase as many remaining shares as possible, and then force the short sellers to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and, being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then name their price.[18]
To finance the scheme, Otto, Augustus and Charles Morse met with Charles T. Barney, president of the city's third-largest trust, the Knickerbocker Trust Company. Barney had provided financing for previous Morse schemes. Morse, however, cautioned Otto that he needed much more money than he had to attempt the squeeze and Barney declined to provide funding.[19] Otto decided to attempt the corner anyway. On Monday, October 14, he began aggressively purchasing shares of United Copper, which rose in one day from $39 to $52 per share. On Tuesday, he issued the call for short sellers to return the borrowed stock. The share price rose to nearly $60, but the short sellers were able to find plenty of United Copper shares from sources other than the Heinzes. Otto had misread the market, and the share price of United Copper began to collapse.[20]
The stock closed at $30 on Tuesday and fell to $10 by Wednesday. Otto Heinze was ruined. The stock of United Copper was traded outside the hall of the New York Stock Exchange, literally an outdoor market "on the curb" (this curb market would later become the American Stock Exchange). After the crash, The Wall Street Journal reported, "Never has there been such wild scenes on the Curb, so say the oldest veterans of the outside market".[21]
[edit] Contagion spreads
The failure of the corner left Otto unable to meet his obligations and sent his brokerage house, Gross & Kleeberg, into bankruptcy. On Thursday, October 17, the New York Stock Exchange suspended Otto's trading privileges. As a result of United Copper's collapse, the State Savings Bank of Butte Montana (owned by F. Augustus Heinze) announced its insolvency. The Montana bank had held United Copper stock as collateral against some of its lending and had been a correspondent bank for the Mercantile National Bank in New York City, of which F. Augustus Heinze was then president.
F. Augustus Heinze's association with the corner and the insolvent State Savings Bank proved too much for the board of the Mercantile to accept. Although they forced him to resign before lunch time,[22] by then it was too late. As news of the collapse spread, depositors rushed en masse to withdraw money from the Mercantile National Bank. The Mercantile had enough capital to withstand a few days of withdrawals, but depositors began to pull cash from the banks of the Heinzes' associate Charles W. Morse. Runs occurred at Morse's National Bank of North America and the New Amsterdam National. Afraid of the impact the tainted reputations of Augustus Heinze and Morse could have on the banking system, the New York Clearing House (a consortium of the city's banks) forced Morse and Heinze to resign all banking interests.[23] By the weekend after the failed corner, there was not yet systemic panic. Funds were withdrawn from Heinze-associated banks, only to be deposited with other banks in the city.[24]
[edit] Panic hits the trusts
In the early 1900s, trust companies were booming; in the decade before 1907, their assets had grown by 244%. During the same period, national bank assets grew by 97%, while state banks in New York grew by 82%.[25] The leaders of the high-flying trusts were mainly prominent members of New York's financial and social circles. One of the most respected was Charles T. Barney, whose late father-in-law William Collins Whitney was a famous financier. Barney's Knickerbocker Trust Company was the third-largest trust in New York.[26]
The headquarters of the Knickerbocker Trust Company at the northwest corner of Fifth Avenue and 34th Street.Because of past association with Charles W. Morse and F. Augustus Heinze, on Monday, October 21, the board of the Knickerbocker asked that Barney resign (depositors may have first begun to pull deposits from the Knickerbocker on October 18, prompting the concern).[27] That day, the National Bank of Commerce announced it would not serve as clearing house for the Knickerbocker. On October 22, the Knickerbocker faced a classic bank run. From the bank's opening, the crowd grew. As The New York Times reported, "as fast as a depositor went out of the place ten people and more came asking for their money [and the police] were asked to send some men to keep order".[28] In less than three hours, $8 million was withdrawn from the Knickerbocker. Shortly after noon it was forced to suspend operations.[29]
As news spread, other banks and trust companies were reluctant to lend any money. The interest rates on loans to brokers at the stock exchange soared and, with brokers unable to get money, stock prices fell to a low not seen since December 1900.[30] The panic quickly spread to two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence.[31]
[edit] Enter J.P. Morgan
When the chaos began to shake the confidence of New York's banks, the city's most famous banker was out of town. J.P. Morgan, president of the eponymous J.P. Morgan & Co., was attending a church convention in Richmond, Virginia. Morgan was not only the city's wealthiest and most well-connected banker, but he had experience with crisis�he helped rescue the U.S. Treasury during the Panic of 1893. As news of the crisis gathered, Morgan returned to Wall Street from his convention late on the night of Saturday, October 19. The following morning, the library of Morgan's brownstone at Madison Avenue and 36th St. had become a revolving door of New York City bank and trust company presidents arriving to share information about (and seek help surviving) the impending crisis.[32][33]
J.P. Morgan, the dominant banker in New York City, had rescued the U.S. Treasury during the Panic of 1893.Morgan and his associates examined the books of the Knickerbocker Trust, but decided it was insolvent and did not intervene to stop the run. Its failure, however, triggered runs on even healthy trusts, prompting Morgan to take charge of the rescue operation. On the afternoon of Tuesday, October 22, the president of the Trust Company of America asked Morgan for assistance. That evening Morgan conferred with George F. Baker, the president of First National Bank, James Stillman of the National City Bank of New York (the ancestor of Citibank), and the United States Secretary of the Treasury, George B. Cortelyou. Cortelyou said that he was ready to deposit government money in the banks to help shore up their deposits. After an overnight audit of the Trust Company of America showed the institution to be sound, on Wednesday afternoon Morgan declared, �This is the place to stop the trouble, then".[34]
As a run began on the Trust Company of America, Morgan worked with Stillman and Baker to liquidate the company's assets to allow the bank to pay depositors. The bank survived to the close of business, but Morgan knew that additional money would be needed to keep it solvent through the following day. That night he assembled the presidents of the other trust companies and held them in a meeting until midnight when they agreed to provide loans of $8.25 million to allow the Trust Company of America to stay open the next day.[35] On Thursday morning Cortelyou deposited around $25 million into a number of New York banks.[36] John D. Rockefeller, the wealthiest man in America, deposited a further $10 million in Stillman's National City Bank.[37] Rockefeller's massive deposit left the National City Bank with the deepest reserves of any bank in the city. To instill public confidence, Rockefeller phoned Melville Stone, the manager of the Associated Press, and told him that he would pledge half of his wealth to maintain America's credit.[38]
[edit] Stock exchange nears collapse
Despite the infusion of cash, the banks of New York were reluctant to make the short-term loans they typically provided to facilitate daily stock trades. Unable to obtain these funds, prices on the exchange began to crash. At 1:30 p.m. Thursday, October 24, Ransom Thomas, the president of the New York Stock Exchange, rushed to Morgan's offices to tell him that he would have to close the exchange early. Morgan was emphatic that an early close of the exchange would be catastrophic.[39][40]
The floor of the New York Stock Exchange (pictured in 1908) where trading nearly collapsed at the end of October as banks were reluctant to lend.Morgan summoned the presidents of the city's banks to his office. They started to arrive at 2 p.m.; Morgan informed them that as many as 50 stock exchange houses would fail unless $25 million was raised in 10 minutes. By 2:16 p.m., 14 bank presidents had pledged $23.6 million to keep the stock exchange afloat. The money reached the market at 2:30 p.m., in time to finish the day's trading, and by the 3 o'clock market close, $19 million had been loaned out. Disaster was averted. Morgan usually eschewed the press, but as he left his offices that night he made a statement to reporters: "If people will keep their money in the banks, everything will be all right".[41]
Friday, however, saw more panic on the exchange. Morgan again approached the bank presidents, but this time was only able to convince them to pledge $9.7 million. In order for this money to keep the exchange open, Morgan decided the money could not be used for margin sales. The volume of trading on Friday was 2/3 that of Thursday. The markets again narrowly made it to the closing bell.[42]
[edit] Crisis of confidence
Morgan, Stillman, Baker and the other city bankers were unable to pool money indefinitely. Even the U.S. Treasury was low on funds. Public confidence needed to be restored, and on Friday evening the bankers formed two committees�one to persuade the clergy to calm their congregations on Sunday, and second to explain to the press the various aspects of the financial rescue package. Europe's most famous banker, Lord Rothschild, sent word of his "admiration and respect" for Morgan.[43] In an attempt to gather confidence, the Treasury Secretary Cortelyou agreed that if he returned to Washington it would send a signal to Wall Street that the worst had passed.[44][45]
(Clockwise from top left) John D. Rockefeller, George B. Cortelyou, Lord Rothschild, and James Stillman. Some of the best-known names on Wall Street issued positive statements to help restore confidence in the economy.
To ensure a free flow of funds on Monday, the New York Clearing House issued $100 million in loan certificates to be traded between banks to settle balances, allowing them to retain cash reserves for depositors.[46] Reassured both by the clergy and the newspapers, and with bank balance sheets flushed with cash, a sense of order returned to New York that Monday.[47]
Unbeknownst to Wall Street, a new crisis was being averted in the background. On Sunday, Morgan's associate, George Perkins, was informed that the City of New York required at least $20 million by November 1 or it would go bankrupt. The city tried to raise money through a standard bond issue, but failed to gather enough financing. On Monday and again on Tuesday, New York Mayor George McClellan approached Morgan for assistance. In an effort to avoid the disastrous signal that a New York City bankruptcy would send, Morgan contracted to purchase $30 million worth of city bonds.[48][45]
[edit] Drama at the Library
Although calm was largely restored in New York by Saturday, November 2, yet another crisis loomed. One of the exchange's largest brokerage firms, Moore & Schley, was heavily in debt and in danger of collapse. The firm had borrowed heavily, using stock from the Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. With the value of the thinly-traded stock under pressure, many banks would likely call the loans of Moore & Schley on Monday and force an en masse liquidation of the stock. If that occurred it would send shares of TC&I plummeting, devastating Moore and Schley and causing a further panic in the market.[49]
In order to prevent the collapse of Moore & Schley, Morgan called an emergency conference at his library Saturday morning. A proposal was made that the U.S. Steel Corporation, a company Morgan had helped form through the merger of the steel companies of Andrew Carnegie and Elbert Gary, would acquire TC&I. This would effectively save Moore & Schley and avert the crisis. After the executives and board of U.S. Steel studied the situation and, recognizing a positive role they could play during the panic, they offered to either loan Moore & Schley $5 million, or buy TC&I for $90 a share. By 7 P.M. an agreement had not been reached and the meeting adjourned.[50]
By then, J.P. Morgan was drawn into another situation. There was a major concern that the Trust Company of America and the Lincoln Trust could fail to open on Monday due to continuing runs. On Saturday evening 40�50 bankers had gathered at the library to discuss the crisis, with the clearing-house bank presidents in the East room and the trust company executives in the West room. Morgan and those dealing with the Moore & Schley situation had moved to the librarian�s office. There Morgan told his counselors that he would agree to help shore up Moore & Schley only if the trust companies would work together to bail out their weakest brethren.[51] The discussion among the bankers continued late Saturday night but without any real progress. Then, around midnight, J.P. Morgan informed a leader of the trust company presidents of the Moore & Schley situation that was going to require $25 million, and that he was not willing to proceed with that unless the problems with the trust companies could also be solved. This indicated that the trust companies would not be receiving further help from Morgan and that they had to reach their own solution.
At 3 a.m. about 120 bank and trust company officials were assembled to hear a full report on the status of the failing trust companies. While the Trust Company of America was barely solvent, the Lincoln Trust Company was probably $1 million short of what it needed to pay depositors. As the discussions continued, the bankers realized that Morgan had locked them in the library and pocketed the key to force a solution,[52] the type of tactic he had been known to use in the past.[53] Morgan then entered the talks and told the trust companies that they must provide a loan of $25 million to save the weaker institutions. The trust presidents were still reluctant to act, but Morgan informed them that if they did not it would result in a complete collapse of the banking system. Through his considerable influence, at about 4:45 a.m. he persuaded the unofficial leader of the trust companies to sign the agreement, and the rest of them followed.[53] With this assurance that the situation would be resolved, Morgan then allowed the bankers to go home.[54]
On Sunday afternoon and into the evening, Morgan, Perkins, Baker and Stillman, along with U.S. Steel's Gary and Henry Clay Frick, worked at the library to finalize the deal for U.S. Steel to buy TC&I and by Sunday night had a plan for acquisition. But, one obstacle remained: the anti-trust crusading President Theodore Roosevelt, who had made breaking up monopolies a focus of his presidency.[55]
Frick and Gary traveled overnight by train to the White House to implore Roosevelt to set aside the principles of the Sherman Antitrust Act and allow�before the market opened�a company that already had a 60% market share to make a massive acquisition. Roosevelt's secretary refused to see them, yet Frick and Gary convinced James Rudolph Garfield, the Secretary of the Interior, to bypass the secretary and allow them to go directly to the president. With less than an hour before markets opened, Roosevelt and Secretary of State Elihu Root began to review the proposed takeover and absorb the news of a potential crash if the merger was not approved.[56][57] Roosevelt relented, and he later recalled of the meeting, "It was necessary for me to decide on the instant before the Stock Exchange opened, for the situation in New York was such that any hour might be vital. I do not believe that anyone could justly criticize me for saying that I would not feel like objecting to the purchase under those circumstances".[58] When news reached New York, confidence soared. The Commercial & Financial Chronicle reported that "the relief furnished by this transaction was instant and far-reaching".[59] The final crisis of the panic had been averted.[60]
[edit] Aftermath
Dow Jones Industrial Average's weekly close from January 1904 to December 1909. The market bottom of 53 was recorded on the close of November 15, 1907.The panic of 1907 occurred during a lengthy economic contraction�measured by the National Bureau of Economic Research as occurring between May 1907 and June 1908.[61][62] The interrelated contraction, bank panic and falling stock market resulted in significant economic disruption. Robert Bruner and Sean Carr cite a number of statistics quantifying the damage in The Panic of 1907: Lessons Learned from the Market's Perfect Storm. Industrial production dropped further than after any bank run before then, while 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3%. Immigration dropped to 750,000 people in 1909, from 1.2 million two years earlier.[63]
Since the end of the Civil War, the United States had experienced panics of varying severity. Economists Charles Calomiris and Gary Gorton rate the worst panics as those leading to widespread bank suspensions�the panics of 1873, 1893, and 1907, and a suspension in 1914. Widespread suspensions were forestalled through coordinated actions during both the 1884 and the 1890 panics. A bank crisis in 1896, in which there was a perceived need for coordination, is also sometimes classified as a panic.[64]
The frequency of crises and the severity of the 1907 panic added to concern about the outsized role of J.P. Morgan which led to renewed impetus toward a national debate on reform.[65] In May 1908, Congress passed the Aldrich�Vreeland Act that established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking.[66] Senator Nelson Aldrich (R�RI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems.
[edit] Central bank
Main article: History of the Federal Reserve System
A significant difference between the European and U.S. banking systems was the absence of a central bank in the United States. European states were able to extend the supply of money during periods of low cash reserves. The belief that the U.S. economy was vulnerable without a central bank was not new. Early in 1907, banker Jacob Schiff of Kuhn, Loeb & Co. warned in a speech to the New York Chamber of Commerce that "unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history".[67]
Aldrich convened a secret conference with a number of the nation's leading financiers at the Jekyll Island Club, off the coast of Georgia, to discuss monetary policy and the banking system in November 1910. Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department), Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (James Stillman's successor as president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), produced a design for a "National Reserve Bank".[68]
Forbes magazine founder B. C. Forbes wrote several years later:
Picture a party of the nation�s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written.[69]
The final report of the National Monetary Commission was published on January 11, 1911. For nearly two years legislators debated the proposal and it was not until December 22, 1913, that Congress passed the Federal Reserve Act. President Woodrow Wilson signed the legislation immediately and the legislation was enacted on the same day, December 22, 1913, creating the Federal Reserve System.[70] Charles Hamlin became the Fed's first chairman, and none other than Morgan's deputy Benjamin Strong became president of the Federal Reserve Bank of New York, the most important regional bank with a permanent seat on the Federal Open Market Committee.[70]
[edit] Pujo Committee
Main article: Pujo Committee
A February 2, 1910 editorial cartoon in Puck titled: "The Central Bank�Why should Uncle Sam establish one, when Uncle Pierpont is already on the job?"Although Morgan was briefly seen as a hero, widespread fears concerning plutocracy and concentrated wealth soon eroded this view. Morgan's bank had survived, but the trust companies that were a growing rival to traditional banks were badly damaged. Some analysts believed that the panic had been engineered to damage confidence in trust companies so that banks would benefit.[71][72] Others believed Morgan took advantage of the panic to allow his U.S. Steel company to acquire TC&I.[73] Although Morgan lost $21 million in the panic, and the significance of the role he played in staving off worse disaster is undisputed, he also became the focus of intense scrutiny and criticism.[74][75][76]
The chair of the House Committee on Banking and Currency, Representative Ars�ne Pujo, (D�La. 7th) convened a special committee to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion).[77]
Although suffering ill health, J.P. Morgan testified before the Pujo Committee and faced several days of questioning from Samuel Untermyer. Untermyer and Morgan's famous exchange on the fundamentally psychological nature of banking�that it is an industry built on trust�is often quoted in business articles:[78][79]
Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir. The first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it ... a man I do not trust could not get money from me on all the bonds in Christendom.[78]
Associates of Morgan blamed his continued physical decline on the hearings. In February he became very ill and died on March 31, 1913�nine months before the "money trust" would be officially replaced as lender of last resort by the Federal Reserve.[78]
dave Banking panics are the natural and predictable consequence of permitting the crime known as fractional reserve banking, which is just another name for fraudulently putting other people's money at risk for personal gain. It would be like if I ran a grain warehouse (elevator) and handed out slips representing X amount of grain to all the people who store their grain in my facility, and then when people started exchanging these slips with each other for other goods I realized I could make a profit by printing up phony slips (not actually representing grain in my store house) and using them myself to purchase real hard assets in the market, i.e., to make myself rich via fraud. Eventually someone's going to get wise that there's not enough grain in my warehouse to cover all the claim slips for grain that are changing hands in the market, and folks holding them will all at once rush to my place of business demanding delivery on their grain slips. Only, were I to do this with grain, I'd be clapped in irons and sent to prison. Somehow bankers were able to buy enough influence in government to have this identical scam made legal for them. Not only that, but to have the tax payer insure them through the FDIC in case enough people get wind of the scam. Only if you permit this banking scam do you need a "lender of last resort," i.e., a national central bank, but even that is doomed to eventually fail, but especially so if the currency is fiat. The solution is to outlaw the scam, not to make the tax payer the guarantors of the scammers.
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Posts: 131,556
Campfire Sage
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Campfire Sage
Joined: Jun 2002
Posts: 131,556 |
Other commodities were also used as money such as salt. Any commodity or thing can be used as money as long as it's rare or hard to make. The problem with gold based money is that it's rarity made it untenable as the world�s economies started to rapidly expand with the industrial revolution. This is a common error in logic usually made by those without a proper grounding in real economics. The only result of the situation you describe is a gradual increase in the purchasing power of gold, meaning you need less and less of it to make the same purchases. If two hundred years ago you needed an ounce to purchase a nice rifle, and today (due to increased rarity per user) you need only a half or quarter ounce, that's not such a terrible problem, now is it? If the amount becomes so small as to be difficult to manage (let's say, one gram buys your weekly groceries), that's where other metals, such as silver and copper come in handy. Don't like that, then have paper claims for one gram of gold, or one-tenth gram of gold, one-one-hundredth, etc., which are drawn from 100% reserve banks held to the same legal standards as grain warehouses.
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Campfire 'Bwana
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Campfire 'Bwana
Joined: Nov 2006
Posts: 34,261 |
Panic of 1907
A swarm gathers on Wall Street during the bank panic in October 1907. Federal Hall, with its statue of George Washington, is seen on the right.The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops.[1]
The crisis was triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Company. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company—New York City's third-largest trust. The collapse of the Knickerbocker spread fear throughout the city's trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
The panic may have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system. At the time, the United States did not have a central bank to inject liquidity back into the market. By November the financial contagion had largely ended, yet a further crisis emerged when a large brokerage firm borrowed heavily using the stock of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. Collapse of TC&I's stock price was averted by an emergency takeover by Morgan's U.S. Steel Corporation—a move approved by anti-monopolist president Theodore Roosevelt. The following year, Senator Nelson W. Aldrich established and chaired a commission to investigate the crisis and propose future solutions, leading to the creation of the Federal Reserve System.
Economic conditions
The 1906 San Francisco earthquake badly damaged the U.S. economy, further exacerbating the vulnerability of the national banking system.When U.S. President Andrew Jackson allowed the charter of the Second Bank of the United States to expire in 1836, the U.S. was without any sort of central bank, and the money supply in New York City fluctuated with the country's annual agricultural cycle. Each autumn money flowed out of the city as harvests were purchased and—in an effort to attract money back—interest rates were raised. Foreign investors then sent their money to New York to take advantage of the higher rates.[2] From the January 1906 Dow Jones Industrial Average high of 103, the market began a modest correction that would continue throughout the year. The April 1906 earthquake that devastated San Francisco contributed to the market instability, prompting an even greater flood of money from New York to San Francisco to aid reconstruction.[3][4] A further stress on the money supply occurred in late 1906, when the Bank of England raised its interest rates, partly in response to UK insurance companies paying out so much to US policyholders, and more funds remained in London than expected.[5] From their peak in January, stock prices declined 18% by July 1906. By late September, stocks had recovered about half of their losses.
Theodore Roosevelt commanding two large bears "Interstate Commerce Commission" and "Federal Courts" to attack Wall Street (Puck, May 8, 1907)The Hepburn Act, which gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, became law in July 1906.[6] This depreciated the value of railroad securities.[7] Between September 1906 and March 1907, the stock market slid, losing 7.7% of its capitalization.[8] Between March 9 and 26, stocks fell a further 9.8%.[9] (This March collapse is sometimes referred to as a "rich man's panic".)[10] The economy remained volatile through the summer. A number of shocks hit the system: the stock of Union Pacific—among the most common stocks used as collateral—fell 50 points; that June an offering of New York City bonds failed; in July the copper market collapsed; in August the Standard Oil Company was fined $29 million for antitrust violations.[11] In the first nine months of 1907, stocks were lower by 24.4%.[12]
On July 27, The Commercial & Financial Chronicle noted that "the market keeps unstable ... no sooner are these signs of new life in evidence than something like a suggestion of a new outflow of gold to Paris sends a tremble all through the list, and the gain in values and hope is gone".[13] Several bank runs occurred outside the US in 1907: in Egypt in April and May; in Japan in May and June; in Hamburg and Chile in early October.[14] The fall season was always a vulnerable time for the banking system—combined with the roiled stock market, even a small shock could have grave repercussions.[15]
Monday, October 14
Otto Heinze begins purchasing to corner the stock of United Copper.
Wednesday, October 16
Heinze's corner fails spectacularly. Heinze's brokerage house, Gross & Kleeberg is forced to close. This is the date traditionally cited as when the corner failed.
Thursday, October 17
The Exchange suspends Otto Heinze and Company. The State Savings Bank of Butte, Montana, owned by Augustus Heinze announces it is insolvent. Augustus is forced to resign from Mercantile National Bank. Runs begin at Augustus' and his associate Charles W. Morse's banks.
Sunday, October 20
The New York Clearing House forces Augustus and Morse to resign from all their banking interests.
Monday, October 21
Charles T. Barney is forced to resign from the Knickerbocker Trust Company because of his ties to Morse and Heinze. The National Bank of Commerce says it will no longer serve as clearing house.
Tuesday, October 22
A bank run forces the Knickerbocker to suspend operations.
Wednesday, October 23
J.P. Morgan persuades other trust company presidents to provide liquidity to the Trust Company of America, staving off its collapse.
Thursday, October 24
Treasury Secretary George Cortelyou agrees to deposit Federal money in New York banks. Morgan persuades bank presidents to provide $23 million to the New York Stock Exchange to prevent an early closure.
Friday October 25
Crisis is again narrowly averted at the Exchange.
Sunday, October 27
The City of New York tells Morgan associate George Perkins that if they cannot raise $20–30 million by November 1, the city will be insolvent.
Tuesday, October 29
Morgan purchased $30 million in city bonds, discreetly averting bankruptcy for the city.
Saturday, November 2
Moore & Schley, a major brokerage, nears collapse because its loans were backed by the Tennessee Coal, Iron & Railroad Company (TC&I), a stock whose value is uncertain. A proposal is made for U.S. Steel to purchase TC&I.
Sunday, November 3
A plan is finalized for U.S. Steel to take over TC&I.
Monday, November 4
President Theodore Roosevelt approves U.S. Steel's takeover of TC&I, despite anticompetitive concerns.
Tuesday, November 5
Markets are closed for Election Day.
Wednesday, November 6
U.S. Steel completes takeover of TC&I. Markets begin to recover. Destabilizing runs at the trust companies do not begin again.
The 1907 panic began with a stock manipulation scheme to corner the market in F. Augustus Heinze's United Copper Company. Heinze had made a fortune as a copper magnate in Butte, Montana. In 1906 he moved to New York City, where he formed a close relationship with notorious Wall Street banker Charles W. Morse. Morse had once successfully cornered New York City's ice market, and together with Heinze gained control of many banks—the pair served on at least six national banks, ten state banks, five trust companies and four insurance firms.[17]
The panic began in the vibrant marketplace for stocks that took place on the curb outside the New York Stock Exchange; this curb market later became the American Stock Exchange.Augustus's brother, Otto, devised the scheme to corner United Copper, believing that the Heinze family already controlled a majority of the company. A significant number of the Heinzes' shares had been borrowed, and Otto believed that many of these had been loaned to investors who hoped the stock price would drop, and that they could thus repurchase the borrowed shares cheaply, pocketing the difference—a technique known as short selling. Otto proposed a short squeeze, whereby the Heinzes would aggressively purchase as many remaining shares as possible, and then force the short sellers to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and, being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then name their price.[18]
To finance the scheme, Otto, Augustus and Charles Morse met with Charles T. Barney, president of the city's third-largest trust, the Knickerbocker Trust Company. Barney had provided financing for previous Morse schemes. Morse, however, cautioned Otto that he needed much more money than he had to attempt the squeeze and Barney declined to provide funding.[19] Otto decided to attempt the corner anyway. On Monday, October 14, he began aggressively purchasing shares of United Copper, which rose in one day from $39 to $52 per share. On Tuesday, he issued the call for short sellers to return the borrowed stock. The share price rose to nearly $60, but the short sellers were able to find plenty of United Copper shares from sources other than the Heinzes. Otto had misread the market, and the share price of United Copper began to collapse.[20]
The stock closed at $30 on Tuesday and fell to $10 by Wednesday. Otto Heinze was ruined. The stock of United Copper was traded outside the hall of the New York Stock Exchange, literally an outdoor market "on the curb" (this curb market would later become the American Stock Exchange). After the crash, The Wall Street Journal reported, "Never has there been such wild scenes on the Curb, so say the oldest veterans of the outside market".[21]
[edit] Contagion spreads
The failure of the corner left Otto unable to meet his obligations and sent his brokerage house, Gross & Kleeberg, into bankruptcy. On Thursday, October 17, the New York Stock Exchange suspended Otto's trading privileges. As a result of United Copper's collapse, the State Savings Bank of Butte Montana (owned by F. Augustus Heinze) announced its insolvency. The Montana bank had held United Copper stock as collateral against some of its lending and had been a correspondent bank for the Mercantile National Bank in New York City, of which F. Augustus Heinze was then president.
F. Augustus Heinze's association with the corner and the insolvent State Savings Bank proved too much for the board of the Mercantile to accept. Although they forced him to resign before lunch time,[22] by then it was too late. As news of the collapse spread, depositors rushed en masse to withdraw money from the Mercantile National Bank. The Mercantile had enough capital to withstand a few days of withdrawals, but depositors began to pull cash from the banks of the Heinzes' associate Charles W. Morse. Runs occurred at Morse's National Bank of North America and the New Amsterdam National. Afraid of the impact the tainted reputations of Augustus Heinze and Morse could have on the banking system, the New York Clearing House (a consortium of the city's banks) forced Morse and Heinze to resign all banking interests.[23] By the weekend after the failed corner, there was not yet systemic panic. Funds were withdrawn from Heinze-associated banks, only to be deposited with other banks in the city.[24]
[edit] Panic hits the trusts
In the early 1900s, trust companies were booming; in the decade before 1907, their assets had grown by 244%. During the same period, national bank assets grew by 97%, while state banks in New York grew by 82%.[25] The leaders of the high-flying trusts were mainly prominent members of New York's financial and social circles. One of the most respected was Charles T. Barney, whose late father-in-law William Collins Whitney was a famous financier. Barney's Knickerbocker Trust Company was the third-largest trust in New York.[26]
The headquarters of the Knickerbocker Trust Company at the northwest corner of Fifth Avenue and 34th Street.Because of past association with Charles W. Morse and F. Augustus Heinze, on Monday, October 21, the board of the Knickerbocker asked that Barney resign (depositors may have first begun to pull deposits from the Knickerbocker on October 18, prompting the concern).[27] That day, the National Bank of Commerce announced it would not serve as clearing house for the Knickerbocker. On October 22, the Knickerbocker faced a classic bank run. From the bank's opening, the crowd grew. As The New York Times reported, "as fast as a depositor went out of the place ten people and more came asking for their money [and the police] were asked to send some men to keep order".[28] In less than three hours, $8 million was withdrawn from the Knickerbocker. Shortly after noon it was forced to suspend operations.[29]
As news spread, other banks and trust companies were reluctant to lend any money. The interest rates on loans to brokers at the stock exchange soared and, with brokers unable to get money, stock prices fell to a low not seen since December 1900.[30] The panic quickly spread to two other large trusts, Trust Company of America and Lincoln Trust Company. By Thursday, October 24, a chain of failures littered the street: Twelfth Ward Bank, Empire City Savings Bank, Hamilton Bank of New York, First National Bank of Brooklyn, International Trust Company of New York, Williamsburg Trust Company of Brooklyn, Borough Bank of Brooklyn, Jenkins Trust Company of Brooklyn and the Union Trust Company of Providence.[31]
[edit] Enter J.P. Morgan
When the chaos began to shake the confidence of New York's banks, the city's most famous banker was out of town. J.P. Morgan, president of the eponymous J.P. Morgan & Co., was attending a church convention in Richmond, Virginia. Morgan was not only the city's wealthiest and most well-connected banker, but he had experience with crisis—he helped rescue the U.S. Treasury during the Panic of 1893. As news of the crisis gathered, Morgan returned to Wall Street from his convention late on the night of Saturday, October 19. The following morning, the library of Morgan's brownstone at Madison Avenue and 36th St. had become a revolving door of New York City bank and trust company presidents arriving to share information about (and seek help surviving) the impending crisis.[32][33]
J.P. Morgan, the dominant banker in New York City, had rescued the U.S. Treasury during the Panic of 1893.Morgan and his associates examined the books of the Knickerbocker Trust, but decided it was insolvent and did not intervene to stop the run. Its failure, however, triggered runs on even healthy trusts, prompting Morgan to take charge of the rescue operation. On the afternoon of Tuesday, October 22, the president of the Trust Company of America asked Morgan for assistance. That evening Morgan conferred with George F. Baker, the president of First National Bank, James Stillman of the National City Bank of New York (the ancestor of Citibank), and the United States Secretary of the Treasury, George B. Cortelyou. Cortelyou said that he was ready to deposit government money in the banks to help shore up their deposits. After an overnight audit of the Trust Company of America showed the institution to be sound, on Wednesday afternoon Morgan declared, “This is the place to stop the trouble, then".[34]
As a run began on the Trust Company of America, Morgan worked with Stillman and Baker to liquidate the company's assets to allow the bank to pay depositors. The bank survived to the close of business, but Morgan knew that additional money would be needed to keep it solvent through the following day. That night he assembled the presidents of the other trust companies and held them in a meeting until midnight when they agreed to provide loans of $8.25 million to allow the Trust Company of America to stay open the next day.[35] On Thursday morning Cortelyou deposited around $25 million into a number of New York banks.[36] John D. Rockefeller, the wealthiest man in America, deposited a further $10 million in Stillman's National City Bank.[37] Rockefeller's massive deposit left the National City Bank with the deepest reserves of any bank in the city. To instill public confidence, Rockefeller phoned Melville Stone, the manager of the Associated Press, and told him that he would pledge half of his wealth to maintain America's credit.[38]
[edit] Stock exchange nears collapse
Despite the infusion of cash, the banks of New York were reluctant to make the short-term loans they typically provided to facilitate daily stock trades. Unable to obtain these funds, prices on the exchange began to crash. At 1:30 p.m. Thursday, October 24, Ransom Thomas, the president of the New York Stock Exchange, rushed to Morgan's offices to tell him that he would have to close the exchange early. Morgan was emphatic that an early close of the exchange would be catastrophic.[39][40]
The floor of the New York Stock Exchange (pictured in 1908) where trading nearly collapsed at the end of October as banks were reluctant to lend.Morgan summoned the presidents of the city's banks to his office. They started to arrive at 2 p.m.; Morgan informed them that as many as 50 stock exchange houses would fail unless $25 million was raised in 10 minutes. By 2:16 p.m., 14 bank presidents had pledged $23.6 million to keep the stock exchange afloat. The money reached the market at 2:30 p.m., in time to finish the day's trading, and by the 3 o'clock market close, $19 million had been loaned out. Disaster was averted. Morgan usually eschewed the press, but as he left his offices that night he made a statement to reporters: "If people will keep their money in the banks, everything will be all right".[41]
Friday, however, saw more panic on the exchange. Morgan again approached the bank presidents, but this time was only able to convince them to pledge $9.7 million. In order for this money to keep the exchange open, Morgan decided the money could not be used for margin sales. The volume of trading on Friday was 2/3 that of Thursday. The markets again narrowly made it to the closing bell.[42]
[edit] Crisis of confidence
Morgan, Stillman, Baker and the other city bankers were unable to pool money indefinitely. Even the U.S. Treasury was low on funds. Public confidence needed to be restored, and on Friday evening the bankers formed two committees—one to persuade the clergy to calm their congregations on Sunday, and second to explain to the press the various aspects of the financial rescue package. Europe's most famous banker, Lord Rothschild, sent word of his "admiration and respect" for Morgan.[43] In an attempt to gather confidence, the Treasury Secretary Cortelyou agreed that if he returned to Washington it would send a signal to Wall Street that the worst had passed.[44][45]
(Clockwise from top left) John D. Rockefeller, George B. Cortelyou, Lord Rothschild, and James Stillman. Some of the best-known names on Wall Street issued positive statements to help restore confidence in the economy.
To ensure a free flow of funds on Monday, the New York Clearing House issued $100 million in loan certificates to be traded between banks to settle balances, allowing them to retain cash reserves for depositors.[46] Reassured both by the clergy and the newspapers, and with bank balance sheets flushed with cash, a sense of order returned to New York that Monday.[47]
Unbeknownst to Wall Street, a new crisis was being averted in the background. On Sunday, Morgan's associate, George Perkins, was informed that the City of New York required at least $20 million by November 1 or it would go bankrupt. The city tried to raise money through a standard bond issue, but failed to gather enough financing. On Monday and again on Tuesday, New York Mayor George McClellan approached Morgan for assistance. In an effort to avoid the disastrous signal that a New York City bankruptcy would send, Morgan contracted to purchase $30 million worth of city bonds.[48][45]
[edit] Drama at the Library
Although calm was largely restored in New York by Saturday, November 2, yet another crisis loomed. One of the exchange's largest brokerage firms, Moore & Schley, was heavily in debt and in danger of collapse. The firm had borrowed heavily, using stock from the Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. With the value of the thinly-traded stock under pressure, many banks would likely call the loans of Moore & Schley on Monday and force an en masse liquidation of the stock. If that occurred it would send shares of TC&I plummeting, devastating Moore and Schley and causing a further panic in the market.[49]
In order to prevent the collapse of Moore & Schley, Morgan called an emergency conference at his library Saturday morning. A proposal was made that the U.S. Steel Corporation, a company Morgan had helped form through the merger of the steel companies of Andrew Carnegie and Elbert Gary, would acquire TC&I. This would effectively save Moore & Schley and avert the crisis. After the executives and board of U.S. Steel studied the situation and, recognizing a positive role they could play during the panic, they offered to either loan Moore & Schley $5 million, or buy TC&I for $90 a share. By 7 P.M. an agreement had not been reached and the meeting adjourned.[50]
By then, J.P. Morgan was drawn into another situation. There was a major concern that the Trust Company of America and the Lincoln Trust could fail to open on Monday due to continuing runs. On Saturday evening 40–50 bankers had gathered at the library to discuss the crisis, with the clearing-house bank presidents in the East room and the trust company executives in the West room. Morgan and those dealing with the Moore & Schley situation had moved to the librarian’s office. There Morgan told his counselors that he would agree to help shore up Moore & Schley only if the trust companies would work together to bail out their weakest brethren.[51] The discussion among the bankers continued late Saturday night but without any real progress. Then, around midnight, J.P. Morgan informed a leader of the trust company presidents of the Moore & Schley situation that was going to require $25 million, and that he was not willing to proceed with that unless the problems with the trust companies could also be solved. This indicated that the trust companies would not be receiving further help from Morgan and that they had to reach their own solution.
At 3 a.m. about 120 bank and trust company officials were assembled to hear a full report on the status of the failing trust companies. While the Trust Company of America was barely solvent, the Lincoln Trust Company was probably $1 million short of what it needed to pay depositors. As the discussions continued, the bankers realized that Morgan had locked them in the library and pocketed the key to force a solution,[52] the type of tactic he had been known to use in the past.[53] Morgan then entered the talks and told the trust companies that they must provide a loan of $25 million to save the weaker institutions. The trust presidents were still reluctant to act, but Morgan informed them that if they did not it would result in a complete collapse of the banking system. Through his considerable influence, at about 4:45 a.m. he persuaded the unofficial leader of the trust companies to sign the agreement, and the rest of them followed.[53] With this assurance that the situation would be resolved, Morgan then allowed the bankers to go home.[54]
On Sunday afternoon and into the evening, Morgan, Perkins, Baker and Stillman, along with U.S. Steel's Gary and Henry Clay Frick, worked at the library to finalize the deal for U.S. Steel to buy TC&I and by Sunday night had a plan for acquisition. But, one obstacle remained: the anti-trust crusading President Theodore Roosevelt, who had made breaking up monopolies a focus of his presidency.[55]
Frick and Gary traveled overnight by train to the White House to implore Roosevelt to set aside the principles of the Sherman Antitrust Act and allow—before the market opened—a company that already had a 60% market share to make a massive acquisition. Roosevelt's secretary refused to see them, yet Frick and Gary convinced James Rudolph Garfield, the Secretary of the Interior, to bypass the secretary and allow them to go directly to the president. With less than an hour before markets opened, Roosevelt and Secretary of State Elihu Root began to review the proposed takeover and absorb the news of a potential crash if the merger was not approved.[56][57] Roosevelt relented, and he later recalled of the meeting, "It was necessary for me to decide on the instant before the Stock Exchange opened, for the situation in New York was such that any hour might be vital. I do not believe that anyone could justly criticize me for saying that I would not feel like objecting to the purchase under those circumstances".[58] When news reached New York, confidence soared. The Commercial & Financial Chronicle reported that "the relief furnished by this transaction was instant and far-reaching".[59] The final crisis of the panic had been averted.[60]
[edit] Aftermath
Dow Jones Industrial Average's weekly close from January 1904 to December 1909. The market bottom of 53 was recorded on the close of November 15, 1907.The panic of 1907 occurred during a lengthy economic contraction—measured by the National Bureau of Economic Research as occurring between May 1907 and June 1908.[61][62] The interrelated contraction, bank panic and falling stock market resulted in significant economic disruption. Robert Bruner and Sean Carr cite a number of statistics quantifying the damage in The Panic of 1907: Lessons Learned from the Market's Perfect Storm. Industrial production dropped further than after any bank run before then, while 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3%. Immigration dropped to 750,000 people in 1909, from 1.2 million two years earlier.[63]
Since the end of the Civil War, the United States had experienced panics of varying severity. Economists Charles Calomiris and Gary Gorton rate the worst panics as those leading to widespread bank suspensions—the panics of 1873, 1893, and 1907, and a suspension in 1914. Widespread suspensions were forestalled through coordinated actions during both the 1884 and the 1890 panics. A bank crisis in 1896, in which there was a perceived need for coordination, is also sometimes classified as a panic.[64]
The frequency of crises and the severity of the 1907 panic added to concern about the outsized role of J.P. Morgan which led to renewed impetus toward a national debate on reform.[65] In May 1908, Congress passed the Aldrich–Vreeland Act that established the National Monetary Commission to investigate the panic and to propose legislation to regulate banking.[66] Senator Nelson Aldrich (R–RI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems.
[edit] Central bank
Main article: History of the Federal Reserve System
A significant difference between the European and U.S. banking systems was the absence of a central bank in the United States. European states were able to extend the supply of money during periods of low cash reserves. The belief that the U.S. economy was vulnerable without a central bank was not new. Early in 1907, banker Jacob Schiff of Kuhn, Loeb & Co. warned in a speech to the New York Chamber of Commerce that "unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history".[67]
Aldrich convened a secret conference with a number of the nation's leading financiers at the Jekyll Island Club, off the coast of Georgia, to discuss monetary policy and the banking system in November 1910. Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department), Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (James Stillman's successor as president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), produced a design for a "National Reserve Bank".[68]
Forbes magazine founder B. C. Forbes wrote several years later:
Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written.[69]
The final report of the National Monetary Commission was published on January 11, 1911. For nearly two years legislators debated the proposal and it was not until December 22, 1913, that Congress passed the Federal Reserve Act. President Woodrow Wilson signed the legislation immediately and the legislation was enacted on the same day, December 22, 1913, creating the Federal Reserve System.[70] Charles Hamlin became the Fed's first chairman, and none other than Morgan's deputy Benjamin Strong became president of the Federal Reserve Bank of New York, the most important regional bank with a permanent seat on the Federal Open Market Committee.[70]
[edit] Pujo Committee
Main article: Pujo Committee
A February 2, 1910 editorial cartoon in Puck titled: "The Central Bank—Why should Uncle Sam establish one, when Uncle Pierpont is already on the job?"Although Morgan was briefly seen as a hero, widespread fears concerning plutocracy and concentrated wealth soon eroded this view. Morgan's bank had survived, but the trust companies that were a growing rival to traditional banks were badly damaged. Some analysts believed that the panic had been engineered to damage confidence in trust companies so that banks would benefit.[71][72] Others believed Morgan took advantage of the panic to allow his U.S. Steel company to acquire TC&I.[73] Although Morgan lost $21 million in the panic, and the significance of the role he played in staving off worse disaster is undisputed, he also became the focus of intense scrutiny and criticism.[74][75][76]
The chair of the House Committee on Banking and Currency, Representative Ars�ne Pujo, (D–La. 7th) convened a special committee to investigate a "money trust", the de facto monopoly of Morgan and New York's other most powerful bankers. The committee issued a scathing report on the banking trade, and found that the officers of J.P. Morgan & Co. also sat on the boards of directors of 112 corporations with a market capitalization of $22.5 billion (the total capitalization of the New York Stock Exchange was then estimated at $26.5 billion).[77]
Although suffering ill health, J.P. Morgan testified before the Pujo Committee and faced several days of questioning from Samuel Untermyer. Untermyer and Morgan's famous exchange on the fundamentally psychological nature of banking—that it is an industry built on trust—is often quoted in business articles:[78][79]
Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir. The first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it ... a man I do not trust could not get money from me on all the bonds in Christendom.[78]
Associates of Morgan blamed his continued physical decline on the hearings. In February he became very ill and died on March 31, 1913—nine months before the "money trust" would be officially replaced as lender of last resort by the Federal Reserve.[78]
dave Banking panics are the natural and predictable consequence of permitting the crime known as fractional reserve banking, which is just another name for fraudulently putting other people's money at risk for personal gain. It would be like if I ran a grain warehouse (elevator) and handed out slips representing X amount of grain to all the people who store their grain in my facility, and then when people started exchanging these slips with each other for other goods I realized I could make a profit by printing up phony slips (not actually representing grain in my store house) and using them myself to purchase real hard assets in the market, i.e., to make myself rich via fraud. Eventually someone's going to get wise that there's not enough grain in my warehouse to cover all the claim slips for grain that are changing hands in the market, and folks holding them will all at once rush to my place of business demanding delivery on their grain slips. Only, were I to do this with grain, I'd be clapped in irons and sent to prison. Somehow bankers were able to buy enough influence in government to have this identical scam made legal for them. Not only that, but to have the tax payer insure them through the FDIC in case enough people get wind of the scam. Only if you permit this banking scam do you need a "lender of last resort," i.e., a national central bank, but even that is doomed to eventually fail, but especially so if the currency is fiat. The solution is to outlaw the scam, not to make the tax payer the guarantors of the scammers. DITTOS +1,000
Don't vote knothead, it only encourages them. Anonymous
"Never underestimate the power of stupid people in large groups." Anonymous
"Self-reliance, free thinking, and wealth is anathema to both the power of the State and the Church." Derby Dude
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Campfire 'Bwana
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Other commodities were also used as money such as salt. Any commodity or thing can be used as money as long as it's rare or hard to make. The problem with gold based money is that it's rarity made it untenable as the world’s economies started to rapidly expand with the industrial revolution. This is a common error in logic usually made by those without a proper grounding in real economics. The only result of the situation you describe is a gradual increase in the purchasing power of gold, meaning you need less and less of it to make the same purchases. If two hundred years ago you needed an ounce to purchase a nice rifle, and today (due to increased rarity per user) you need only a half or quarter ounce, that's not such a terrible problem, now is it? If the amount becomes so small as to be difficult to manage (let's say, one gram buys your weekly groceries), that's where other metals, such as silver and copper come in handy. Don't like that, then have paper claims for one gram of gold, or one-tenth gram of gold, one-one-hundredth, etc., which are drawn from 100% reserve banks held to the same legal standards as grain warehouses. DITTOS on that one to.
Don't vote knothead, it only encourages them. Anonymous
"Never underestimate the power of stupid people in large groups." Anonymous
"Self-reliance, free thinking, and wealth is anathema to both the power of the State and the Church." Derby Dude
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Campfire Tracker
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Decreasing the stability of prices and the value of money/savings through inflation of the money supply is theft, pure and simple. One of the three functions of money is to hold its value through time. The problem with that argument is that there is no intrinsic unit of value. The concept of value is a human invention that has no basis in the natural world. Money (whatever it is) serves as a medium of exchange and it's the market and the market alone that establishes exchange rates for every physical commodity (including gold), every product, and every service known to humankind. Markets fluctuate based on the simple law of supply and demand. The problem is that both supply and demand are subject to nearly infinite forces including human emotions. Yes there are people who hold on to the idea of gold being somehow apart from market forces, but such a world only exists in their dreams. This is so that the average Joe, who might not have the time, desire, or intelligence to "invest wisely" and be rewarded for his efforts can also put money aside for rainy days and retirement, without having to risk losing it in the stock and bond markets, which he more than likely does not understand. Sorry, the world is run by movers and shakers, not this Joe guy who wants to sit on his ass and do nothing with whatever money he has saved. Even so, the government offers Treasury Inflation-Protected Securities (TIPS) for the Joes of the world so that they can preserve the market value of their money. Unlike investing in gold there's no risk in buying TIPS. You must be a banker, as your defense of inflation and debt fit in well with that subset of parasite. I didn't say anything about debt, so your claim is a lie. Inflation is better than deflation and anyone who doesn't know that is of the flat Earth mentality. Do you go by the handle Johnnie Bravo over on Zero Hedge? Your posts sound as amazingly stupid as his. Yes, the gold standard was suspended during WW I, for three and a half months in 1914, and for gold EXPORT in 1917, so I'll give you the former, but not the latter. I had forgotten this suspension, so I stand partially corrected. As to intrinsic value and use as money, yes, various things have been used as money in the past, but people have used gold and silver as money more often than not because they indeed DO have universally recognized intrinsic value, because they meet the requirements for use as money much easier than seashells, or even paper money, as they are much more rare and harder to obtain, thus keeping their value. The three functions of money are, 1. As a unit of account. 2. as a medium of exchange. 3. as a store of value through time. Gold and silver have historically met these criteria better than anything else, and will again. Riddle me this Batman, if gold has no intrinsic value as you maintain, then why do most central banks hold it as part of their monetary reserves, and fight to keep the price of gold suppressed on the open market? As to who is Joe, and his role in society, he's the guy who fixes your car, drives the truck that delivers your food and gas, works the refineries, mines the coal and pretty much does most of the work in the country. He's the one who loses through the banksters trick of paper money and fractional reserve banking. He is much more of a "mover and shaker" than any of the skimmers who gain from his efforts, and he deserves to be protected from the thievery of his wealth through inflation induced by banksters and their political servants. BTW, the idea that a TIP is a safer "investment" than gold or silver is too naively stupid to address right now, but why don't you look at the way the CPI is calculated before you make that kind of joke again. As to debt, the paper money that you hold so dear IS debt, and issue of more of it increases the burden on all citizens every day. A note by definition is a debt, and a promise to pay, and our Federal Reserve NOTES are the same thing as a Treasury note or Bill, so when you propose inflating the amounts of them, you are advocating for increasing debt.
If the American People allow private banks to control the issuance of their currency, first by inflation, then by deflation, the banks..., will deprive the People of all their Property,...Thomas Jefferson
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The only result of the situation you describe is a gradual increase in the purchasing power of gold, meaning you need less and less of it to make the same purchases. But that's not really the case. The purchasing power of gold has stayed almost constant over hundreds of years when measured against things that also don't change in value. For example, a nice meal in a fancy restaurant or a mid-to-high-end handmade suit cost just about exactly the same in gold today as they did in the fifteenth and sixteenth centuries. A rifle, on the other hand, costs less in gold today than it did two hundred years ago not because the value of the gold has increased, but because the value of the rifle has decreased. Two hundred years ago, the rifle would have been made by hand, requiring great human skill and effort. Today, it's probably made by a CNC milling machine, which is much easier and cheaper (provided the cost of the machine and its programming is amortized over hundreds or thousands of rifles).
"But whether the Constitution really be one thing, or another, this much is certain--that it has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist." --Lysander Spooner, 1867
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Fiat currencies fail when the government backing it fails. Or, more accurately, fiat currencies fail when the governments backing them overestimate the stupidity of their subjects and accidentally trigger hyperinflation, which then kills the currency and most likely the government behind it as well. Failure of fiat currency and government are certainly related, as you state, but you have the cause and effect backwards. Thus, the risk of TIPS failing is the same risk of the U.S. government failing. Again, not exactly. The risk of TIPS failing is the risk of the government repudiating its debts, which some are already suggesting it could do and not fail. Fail or not, the US government is obviously going to repudiate its debt sooner or later. It's certainly not going to pay it back, and when that becomes generally apparent, the cost of perpetuating and servicing it is going to rise past the realm of possibility as well. What's left? Hyperinflation, I suppose, which may not technically be the same as repudiation, but will have the same effect.It only seems deflation is better to those who have money to sit on and are not interested in making more (retired folks). For everyone else it's a disaster as it shrinks and then stagnates the economy such that the standard of living declines. Hardly. Prices are lower: your money buys more than it used to. Why would you reduce your standard of living rather than increase it? This happens because as prices fall the value of money increases, and therefore people gain value by holding on to their money. Yes, but they gain even more by investing it. If my money gains ten percent in value every year, then it's true that if I hold onto $1000 over ten years, it'll be worth the equivalent of about $2600 at the end of that time. But if I invest it in some venture that returns 5% interest per year, it's not like the 10% disappears. I still get the 10%, as well as the 5% on top of it. In that case, if I take the money out of the investment at the end of ten years, I'll have the equivalent of more than $4000. Deflation will increase, not decrease, the general amount of investment, because it decreases risk: even if my investment doesn't pan out as I hoped, I still have a cushion of profit because of the deflation. Under inflation, on the other hand, an investment has to credibly promise me a return greater than the rate of inflation, or I will hold onto my money rather than investing it. The result is much like what happens when the Federal Reserve pushes interest rates down below where the market wants them, except that when the Fed does that it produces an empty bubble of malinvestment that will eventually pop and cause a recession, but under deflation the investment is fully supported by the free market and there's no boom/bust cycle. The only thing wrong with deflation is that governments don't like it, because it makes the immense debt they accumulate harder to pay; people see this and demand higher interest rates to cover the increased risk in lending to the government, which makes further loans harder to get and reduces the amount of power they wield. So they march out their intellectuals to scare the general population into accepting deliberate inflation (theft) instead.
"But whether the Constitution really be one thing, or another, this much is certain--that it has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist." --Lysander Spooner, 1867
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Campfire 'Bwana
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Can't argue with any of the above.
Don't vote knothead, it only encourages them. Anonymous
"Never underestimate the power of stupid people in large groups." Anonymous
"Self-reliance, free thinking, and wealth is anathema to both the power of the State and the Church." Derby Dude
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Campfire Ranger
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Campfire Ranger
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The Scary Story of the Three Little Pigs and the Big Bad Box of Free Money
--by Martin McCannell
Chapter One: Retirement, the Golden Years
In their later years, they bought a yacht and sailed the seven seas. The three little pigs each had a bag of gold coins to spend at the various ports of call. They lived the good life: no wolf, no central bank, no worries.
Or so they thought.
One dark and stormy night, they were shipwrecked on a deserted tropical island.
They spluttered ashore each with their coin purses clutched greedily.
Chapter Two: One Year Later
At first they spent their days waiting expectantly for help to arrive. But days turned into months and they had no choice but to survive on their own somehow. After some trial and some error, they established a common-sense division of labor. Each pig specialized in doing one thing so their combined output was more than if each had to do everything for himself. And they were able to trade with each other using their gold coins.
It wasn't what you'd call the good life anymore, but it was pretty good and it worked. Here is how it worked.
One pig used a heavy stone tool to cut down trees and whittle them into good square timbers stored flat in his lumber shed. He became the Lumberpig and worked day and night making one good square-cut length of timber every month--moving a little more slowly than in his brick-laying younger days.
Another pig, the Fisherpig, specialized in fishing from a small raft and offering fresh seafood for sale on the beach every day before lunch...and bird watching all afternoon.
The third pig used a small bucket that had washed ashore to go back and forth to the spring in the middle of the island to collect water for sale to his brothers. They started calling him Bucketpig, or Buck for short.
Buck would often join Fisherpig in the evening for drinks and fish feasts on the beach in front of a cozy little fire of lumber pieces.
All work and no play made Lumberpig a dull pig. However, as the years went by, he saved up a respectable hoard of lumber. Not huge, but respectable. It gave him peace of mind to know that he could slow down as he got older and live off his accumulated work just fine.
Chapter Three: The Capitalist Pigs' Dream
Like many a businessman over drinks after work, Buck and Fisherpig would brag and tell lies to each other about their plans to hit it big. The truth was that they did each have a pretty good plan.
Fisherpig was planning to plough his savings into new lumber to build a fishing boat with oars and a mast so that he could get out to where the big hauls were. That way he could start drying and salting fish inventory and take time to explore the other side of the island where so many birds seemed to live.
For his part, Buck had in fact already drawn up plans for a tube-shaped lumber aqueduct to bring water in from the spring. This would save his aching feet and give him time to start working on his wind-power idea to save him even more labor.
Each dreaming pig just needed one hundred lengths of lumber. Each pig just had one problem: Lumberpig charged one coin per length and each pig only had about fifty coins in his piggy bank--in a good month. Who could ever seriously save one hundred coins anyway?
"Ah well," the old pigs thought before going to sleep, "at least dreaming is free."
Chapter Four: Free Money! Real or an Evil Mirage?
One evening, their stories spent, Fisherpig and Buck gazed in silence over the blue-green span of the lagoon.
Something caught their eye. "Do you see what I see, Buck?" asked Fisherpig.
Buck was already up on his hind trotters and halfway there.
"It's a big treasure box washed ashore with two hundred gold coins inside! Free money!" he reported.
"If you promise not to tell Lumberpig, I'll split it with you fifty-fifty," offered Fisherpig slyly.
"Sure," replied Buck. "The island's money supply just got inflated!"
"Yeah! I just love inflation," Fisherpig smirked. "Especially when you get the new money first and nobody else knows about it!"
They laughed and feasted deep into the night, each planning to rise early the next morning to start working on his dreams!
But their dreams would unfortunately turn into nightmares because of the Big Bad Box of Free Money: evil inflation that they did not yet understand.
Chapter Five: Lumberpig Starts Selling Out of Inventory
Lumberpig felt rich again, but at the same time anxious. His brothers had started buying much more lumber than usual--it seemed like they were prospering too. Business was booming on the island like never before. More money was good, all right, but day and night weren't enough time anymore to keep up his inventory level. What scared him was that, at this rate, he was running out of lumber!
He kept his lumber shed locked and only he knew the respectable inventory quantity: about one hundred lengths. As hard as he worked, he could still only make one length a month. Worried sick about his depleting stock, he lay awake staring up at the ceiling.
"What should I do? My brothers are buying so much so fast!"
He thought of raising his price. "Hmmm. That would stop frivolous buying, wouldn't it? Then only the pig who could make the most profitable use of it would pay the higher price, right? And more money would always be nice. No. I can't do that. I'm not a greedy pig. I'll leave my price where it is. Maybe things will work out somehow if... but... zzz... zzz."
And he fell asleep.
Meanwhile, Buck and Fisherpig were happily working on their projects--half done!--and going full steam. Little did they know that before long, Lumberpig was going to hit them with shocking and devastating news.
Chapter Six: The Free Money Wasn't Real After All. It Was A Mirage. It Didn't Create New Resources. It Was a Big Bad Box of Evil Inflation That Confused Capitalist Pigs Into Starting New Projects That Could Not Be Finished.
"Sorry, Buck. Sorry, Fisherpig. See for yourself." Lumberpig opened the shed door wide. "The lumber is all gone."
"AGGHHHH! NO!" cried a stunned Fisherpig. "I'm ruined! I used the raft lumber in my half-built boat! Now I have nothing to fish with to make a living!
"And Lumberpig, you made this disaster worse! Why didn't you raise your price as you started running out of lumber? Then I could have talked Buck into holding off on his harebrained water slide and investing in my boat instead! So much extra waste!"
Lumberpig was speechless and his stomach hurt.
"All our plans! All our dreams!" Fisherpig lowered his voice to a halting whisper now.
"What is to become of weary old pigs like us? If only that evil free money box had never appeared. It tricked us into thinking we had now resources--real new wealth to complete our projects. The new money didn't give us any new resources at all. It gave us misery," he whimpered.
"I'm hungry," said Buck thoughtfully. "And you know what? I messed up too. I've built a water bridge to nowhere. And it makes me shake my head, Fisherpig. If we hadn't been fooled by the Big Bad Box of Inflation, you and I could have pooled our savings and actually completed one of our projects."
There was no happy fire on the beach that night--not even a meager fish dinner--and three thirsty little pigs.
Later they burned the inflation box to keep warm for awhile.
The Big Bad Box of Free Money had brought an economic depression to the island--the dark shadow of a shiny boom. And the three little pigs were scared about their future. Staring into the fire, they thought about how their once promising lives had turned out. Two flames rose up in the shape of ears. In the rising smoke, the pigs imagined they saw the evil face of the Big Bad Wolf.
The End.
"But whether the Constitution really be one thing, or another, this much is certain--that it has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist." --Lysander Spooner, 1867
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Campfire Sage
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The only result of the situation you describe is a gradual increase in the purchasing power of gold, meaning you need less and less of it to make the same purchases. But that's not really the case. The purchasing power of gold has stayed almost constant over hundreds of years when measured against things that also don't change in value. For example, a nice meal in a fancy restaurant or a mid-to-high-end handmade suit cost just about exactly the same in gold today as they did in the fifteenth and sixteenth centuries. A rifle, on the other hand, costs less in gold today than it did two hundred years ago not because the value of the gold has increased, but because the value of the rifle has decreased. Two hundred years ago, the rifle would have been made by hand, requiring great human skill and effort. Today, it's probably made by a CNC milling machine, which is much easier and cheaper (provided the cost of the machine and its programming is amortized over hundreds or thousands of rifles). Good points. I was aware of this when I made the statement, but didn't want to confuse the issue. He was speaking of a hypothetical increase in the purchasing power of gold due to increased rarity per person using gold as money. My point was that, even if this were to happen, XY and Z.
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Campfire Sage
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Campfire Sage
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The Scary Story of the Three Little Pigs and the Big Bad Box of Free Money
--by Martin McCannell
Chapter One: Retirement, the Golden Years
In their later years, they bought a yacht and sailed the seven seas. The three little pigs each had a bag of gold coins to spend at the various ports of call. They lived the good life: no wolf, no central bank, no worries.
Or so they thought.
One dark and stormy night, they were shipwrecked on a deserted tropical island.
They spluttered ashore each with their coin purses clutched greedily.
Chapter Two: One Year Later
At first they spent their days waiting expectantly for help to arrive. But days turned into months and they had no choice but to survive on their own somehow. After some trial and some error, they established a common-sense division of labor. Each pig specialized in doing one thing so their combined output was more than if each had to do everything for himself. And they were able to trade with each other using their gold coins.
It wasn't what you'd call the good life anymore, but it was pretty good and it worked. Here is how it worked.
One pig used a heavy stone tool to cut down trees and whittle them into good square timbers stored flat in his lumber shed. He became the Lumberpig and worked day and night making one good square-cut length of timber every month--moving a little more slowly than in his brick-laying younger days.
Another pig, the Fisherpig, specialized in fishing from a small raft and offering fresh seafood for sale on the beach every day before lunch...and bird watching all afternoon.
The third pig used a small bucket that had washed ashore to go back and forth to the spring in the middle of the island to collect water for sale to his brothers. They started calling him Bucketpig, or Buck for short.
Buck would often join Fisherpig in the evening for drinks and fish feasts on the beach in front of a cozy little fire of lumber pieces.
All work and no play made Lumberpig a dull pig. However, as the years went by, he saved up a respectable hoard of lumber. Not huge, but respectable. It gave him peace of mind to know that he could slow down as he got older and live off his accumulated work just fine.
Chapter Three: The Capitalist Pigs' Dream
Like many a businessman over drinks after work, Buck and Fisherpig would brag and tell lies to each other about their plans to hit it big. The truth was that they did each have a pretty good plan.
Fisherpig was planning to plough his savings into new lumber to build a fishing boat with oars and a mast so that he could get out to where the big hauls were. That way he could start drying and salting fish inventory and take time to explore the other side of the island where so many birds seemed to live.
For his part, Buck had in fact already drawn up plans for a tube-shaped lumber aqueduct to bring water in from the spring. This would save his aching feet and give him time to start working on his wind-power idea to save him even more labor.
Each dreaming pig just needed one hundred lengths of lumber. Each pig just had one problem: Lumberpig charged one coin per length and each pig only had about fifty coins in his piggy bank--in a good month. Who could ever seriously save one hundred coins anyway?
"Ah well," the old pigs thought before going to sleep, "at least dreaming is free."
Chapter Four: Free Money! Real or an Evil Mirage?
One evening, their stories spent, Fisherpig and Buck gazed in silence over the blue-green span of the lagoon.
Something caught their eye. "Do you see what I see, Buck?" asked Fisherpig.
Buck was already up on his hind trotters and halfway there.
"It's a big treasure box washed ashore with two hundred gold coins inside! Free money!" he reported.
"If you promise not to tell Lumberpig, I'll split it with you fifty-fifty," offered Fisherpig slyly.
"Sure," replied Buck. "The island's money supply just got inflated!"
"Yeah! I just love inflation," Fisherpig smirked. "Especially when you get the new money first and nobody else knows about it!"
They laughed and feasted deep into the night, each planning to rise early the next morning to start working on his dreams!
But their dreams would unfortunately turn into nightmares because of the Big Bad Box of Free Money: evil inflation that they did not yet understand.
Chapter Five: Lumberpig Starts Selling Out of Inventory
Lumberpig felt rich again, but at the same time anxious. His brothers had started buying much more lumber than usual--it seemed like they were prospering too. Business was booming on the island like never before. More money was good, all right, but day and night weren't enough time anymore to keep up his inventory level. What scared him was that, at this rate, he was running out of lumber!
He kept his lumber shed locked and only he knew the respectable inventory quantity: about one hundred lengths. As hard as he worked, he could still only make one length a month. Worried sick about his depleting stock, he lay awake staring up at the ceiling.
"What should I do? My brothers are buying so much so fast!"
He thought of raising his price. "Hmmm. That would stop frivolous buying, wouldn't it? Then only the pig who could make the most profitable use of it would pay the higher price, right? And more money would always be nice. No. I can't do that. I'm not a greedy pig. I'll leave my price where it is. Maybe things will work out somehow if... but... zzz... zzz."
And he fell asleep.
Meanwhile, Buck and Fisherpig were happily working on their projects--half done!--and going full steam. Little did they know that before long, Lumberpig was going to hit them with shocking and devastating news.
Chapter Six: The Free Money Wasn't Real After All. It Was A Mirage. It Didn't Create New Resources. It Was a Big Bad Box of Evil Inflation That Confused Capitalist Pigs Into Starting New Projects That Could Not Be Finished.
"Sorry, Buck. Sorry, Fisherpig. See for yourself." Lumberpig opened the shed door wide. "The lumber is all gone."
"AGGHHHH! NO!" cried a stunned Fisherpig. "I'm ruined! I used the raft lumber in my half-built boat! Now I have nothing to fish with to make a living!
"And Lumberpig, you made this disaster worse! Why didn't you raise your price as you started running out of lumber? Then I could have talked Buck into holding off on his harebrained water slide and investing in my boat instead! So much extra waste!"
Lumberpig was speechless and his stomach hurt.
"All our plans! All our dreams!" Fisherpig lowered his voice to a halting whisper now.
"What is to become of weary old pigs like us? If only that evil free money box had never appeared. It tricked us into thinking we had now resources--real new wealth to complete our projects. The new money didn't give us any new resources at all. It gave us misery," he whimpered.
"I'm hungry," said Buck thoughtfully. "And you know what? I messed up too. I've built a water bridge to nowhere. And it makes me shake my head, Fisherpig. If we hadn't been fooled by the Big Bad Box of Inflation, you and I could have pooled our savings and actually completed one of our projects."
There was no happy fire on the beach that night--not even a meager fish dinner--and three thirsty little pigs.
Later they burned the inflation box to keep warm for awhile.
The Big Bad Box of Free Money had brought an economic depression to the island--the dark shadow of a shiny boom. And the three little pigs were scared about their future. Staring into the fire, they thought about how their once promising lives had turned out. Two flames rose up in the shape of ears. In the rising smoke, the pigs imagined they saw the evil face of the Big Bad Wolf.
The End. That was great. Really illustrates malinvestment as a response to an artificially increased money supply resulting in boom leading to bust.
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Campfire Ranger
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That's what I thought when I first saw it.
Also gives the lie to folks who protest about price-gouging during a crisis.
"But whether the Constitution really be one thing, or another, this much is certain--that it has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist." --Lysander Spooner, 1867
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Campfire Sage
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Campfire Sage
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That's what I thought when I first saw it.
Also gives the lie to folks who protest about price-gouging during a crisis. Yep. In fact, price controls during a crisis actually worsen the situation because it's only higher prices that draw more of the needed goods into the area.
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Campfire Ranger
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Campfire Ranger
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That's what I thought when I first saw it.
Also gives the lie to folks who protest about price-gouging during a crisis. Yep. In fact, price controls during a crisis actually worsen the situation because it's only higher prices that draw more of the needed goods into the area. And higher prices also cause the scarce resources not only to be conserved, but also to be directed to the most vital immediate uses rather than being hoarded.
"But whether the Constitution really be one thing, or another, this much is certain--that it has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist." --Lysander Spooner, 1867
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Campfire Sage
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Campfire Sage
Joined: Jun 2002
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That's what I thought when I first saw it.
Also gives the lie to folks who protest about price-gouging during a crisis. Yep. In fact, price controls during a crisis actually worsen the situation because it's only higher prices that draw more of the needed goods into the area. And higher prices also cause the scarce resources not only to be conserved, but also to be directed to the most vital immediate uses rather than being hoarded. Very true.
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