#52 The Panic of 1907

The Panic of 1907 was a period of monetary contraction leading to a financial/banking crisis which set the tone for the creation of a central bank in the United States (The Federal Reserve). The panic of 1907 was one in a series of economic contractions which happened regularly throughout the history of the United States. Each one likely deserves to be covered in full detail. The common thread of these panics, is always the liquidation of mal-investment and government intervention creating market instability.

Wall Street During the Panic of 1907

The panic coincided with the annual harvest season where money would flow out of the cities as harvests were purchased, to compensate for this, banks would raise interest rates. To take advantage of these new interest rates foreign investment became increasingly attracted to the New York markets. During this time and as well across the first half of the decade, the US saw a massive run-up of the DOW Jones.

In April 1906 San Francisco had a 7.9 magnitude Earth Quake, prompting a large amount of money to make its way to the west coast. In late 1906, the Bank of England also raised its interest rates, slowing foreign investment in NYC.

That same year, the Interstate Commerce Commision passed the Hepburn Act which allowed for a ceiling to be placed on railroad rates. The result was a devastating blow to the railroad securities valuations and so began the market cascade. This was followed by a collapse in the price of copper, a failure in the New York City Bond offering (June of 1906), and major antitrust fines against the Standard Oil company.

At the time, the national banking system had no ability to inject artificial liquidity into the system and naturally the liquidation was painful. This was much to the chagrin of many of the bankers throughout the country. Rothbard wrote on this phenomenon in “The Mystery of Banking”.

It was following this crisis that a man named Nelson Aldrich (father in law of John D Rockefeller) formed a commission to investigate and propose solutions to fix this “problem” of liquidation and money expansion. We will discuss Aldrich and his plan in greater detail in a future post.


Book of the Month:

The Price of Tomorrow: Why Deflation is the Key to an Abundant Future

-“Our economic systems were not built for a world driven by technology where prices keep falling. They were built for a pre-technology era when labour and capital were inextricably linked, an era that counted on growth and inflation, an era where we made money from scarcity and inefficiency. That era is over. But we keep on pretending that those economic systems still work.”

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