From the October 2007 issue of Research Magazine • Subscribe!

October 1, 2007

T.R. vs. J.P.

It would be called the Bankers' Panic, the Roosevelt Panic, or simply the Panic of 1907. A hundred years ago this month was the culmination of a financial crisis that swept through the stock market, spurred far-reaching changes in the U.S. economy, and put a stark light on the differing philosophies and personalities of the country's two most powerful men: President Theodore Roosevelt, and financier John Pierpont Morgan.

The two men were never exactly friends, never entirely enemies. J.P. had been a friend of Roosevelt's revered father, but also had been an owner of Northern Securities, a railroad-controlling financial institution that was dissolved after T.R., early in his first term, filed an antitrust suit against it. Roosevelt's fulminations against concentrations of economic power disturbed, or at least irritated, J.P., who nonetheless reluctantly supported T.R's 1904 election campaign when it became clear the popular president was going to win.

The president had turned aside the financier's effort to negotiate a private resolution to the Northern Securities matter, later remarking that "Mr. Morgan could not help regarding me as a big rival operator who either intended to ruin all his interests or could be induced to come to an agreement to ruin none."

Morgan has gone down in history as saying "I owe the public nothing," although biographer Jean Strouse has raised doubts about whether he actually said this. In any event, the financier had little sympathy for the expanded government role Roosevelt was trying to bring to the economy. Business, Morgan thought, should be big. Similar to his friends named Rockefeller and Carnegie, J.P. believed it was more efficient to combine businesses than to have them compete. And he had grown vastly rich overseeing the mergers that led to such massive companies as General Electric and U.S. Steel.

The stock market boomed midway through Roosevelt's presidency, the Dow pushing above the 100 level early in 1906. In December of that year the president acclaimed the nation's "literally unprecedented prosperity," adding that "reckless speculation and disregard of legitimate business methods on the part of the business world" could pose a threat to these good times. By this point, the economy was slowing, credit was tightening, and investors were worrying about matters ranging from T.R.'s own trustbusting to the big insurance payouts for the 1906 San Francisco Earthquake.

On March 13, 1907, the Dow started heading downward in a serious way, dropping nearly 4 percent from 86.53 to 83.12. The next day was worse, the index falling another 8.29 percent to 76.23. The market remained weak through the summer, slipping gradually downward. It seemed, however, that the worst might be over. Some thought what was unfolding was similar to a slump that had occurred in 1903, known as the Rich Man's Panic, which by its very name suggested it hadn't done all that much damage.

Roosevelt, meanwhile, ratcheted up his rhetorical pressure against business titans who resisted his regulatory efforts, lambasting them in an August speech as "certain malefactors of great wealth." Although the president didn't mention Morgan by name, it was hard to believe he didn't have the bulbous-nosed banker in mind as one of those "malefactors."

In October, the market began crumbling again. Prompting the panic this time was a failed attempt to gain control of United Copper Company by speculators led by F. Augustus Heinze, a Brooklyn native who had made a fortune in Montana copper before returning to New York as head of Mercantile National Bank. United Copper's share price plunged, losing three quarters of its value on October 16, while newspaper reports revealed that various financial institutions stood to lose money on Heinze's speculations, including Knickerbocker Trust, previously seen as a paragon of stability.

Runs on banks promptly followed, and on Wall Street, a general rout ensued. Call rates soared to over 100 percent as troubled lenders called in their margin loans. The Dow slid below the 60 line and continued to drop. The market was back at levels not seen since the autumn of 1904.

Roosevelt was hunting in Louisiana's canebrakes as the crisis broke. He showed little initial interest in the financial tumult, telling reporters instead about the animals he had bagged, which included "three bears, six deer, one wild turkey, 12 squirrels, one duck, one opossum, and one wildcat." With the news from Wall Street getting worse, he headed back to Washington, trying not to look too rushed to avoid exacerbating the panic.

Morgan, too, was away from his desk at the outset of the crisis. Aged 70 and semi-retired, he was attending an Episcopal Church convention in Richmond, Va., listening as a lay delegate to debates about prayer books and such, when increasingly desperate telegrams began flowing in from the J.P. Morgan bank's headquarters at 23 Wall Street. Before long, he called for his private railroad car. "They are in trouble in New York," he told his friend Bishop William Lawrence. "They do not know what to do, and I don't know what to do, but I am going back."

Yet whatever doubts he had seemed to dissolve quickly. Back in New York, Morgan moved decisively. In a whirlwind of activity, conducted largely from the well-appointed library of his Madison Avenue home, J.P. assembled teams of analysts and money men to figure out which financial institutions could be saved and to channel funds to them for the stability of financial markets and the national economy.

J.P. was acting like a central bank, an institution nonexistent in the United States at this time. And the U.S. government was playing a distinctly secondary role. While Roosevelt tried to keep up with the fast-changing situation, his treasury secretary, George Cortelyou, went to New York at Morgan's request to work by the financier's side. The U.S. government did provide public funds to back up the money Morgan's men were throwing around. But it was J.P. who was calling the shots, at one point locking the doors of his library and pocketing the key until the bankers therein reached an agreement.

As depositors lined up at Knickerbocker Trust headquarters on 34th Street and Fifth Avenue, future site of the Empire State Building, J.P. had the trust's books audited by young bankers including Benjamin Strong, future governor of the New York Federal Reserve. After they gave him their grim report, J.P. decided Knickerbocker was hopeless and allowed it to fail. Several weeks later, the trust's president, Charles T. Barney, denied a meeting with J.P., would commit suicide.

But J.P. held the line elsewhere, bolstering financial institutions with the pooled money under his control. After getting a favorable report from Strong about the beleaguered Trust Company of America, he authorized a $3 million infusion for that institution, declaring it was "the place to stop the trouble."

Then, on October 24, J.P. rescued the stock market. That day, the president of the New York Stock Exchange, the intriguingly named Ransom H. Thomas, rushed over to Morgan's Wall Street office to tell him that some 50 brokerage firms were about to collapse, unless massive rescue funds could somehow be provided. Thomas began talking about shutting the Exchange.

Morgan asked Thomas what time the Exchange normally closed -- a datum the financier did not know even though he worked just yards away. ("Stock trading was vulgar," explains historian Ron Chernow in his book The House of Morgan.) Informed that would be 3 p.m., J.P. wagged a finger at Thomas and commanded, "It must not close one minute before that hour today."

Morgan promptly assembled a group of bank presidents, got them within minutes to pledge the needed amount -- a cool $25 million -- and at 2:16 pm had a team at the Exchange floor announcing that call money was now available with an interest rate of just 10 percent. Sitting in his office, J.P. heard a commotion from the Exchange; the floor traders were giving him a standing ovation.

Several days later, J.P. followed this up by rescuing New York City from financial disaster. Mayor George B. McClellan Jr., son of the Civil War general, came to Morgan's library looking for help as panicked European investors pulled money out of the city's debt instruments. Morgan quickly arranged a $30 million bailout, drawing up a contract on the spot and setting up a bankers' committee to monitor the city's finances.

While Morgan was emerging in the public eye as hero rather than malefactor, Roosevelt, whom Henry Adams once described as "pure act," came across as a fairly clueless bystander. He didn't entirely seem to grasp what was going on. "Do I look as though those Wall Street fellows were really worrying me?" the president asked a visitor to the White House. "I've got them on the run."

The Panic's final episode involved a rescue J.P. organized for several financial firms including Moore & Schley, a brokerage that held a big stake in the Tennessee Iron and Coal Company. As part of the deal, J.P. wanted U.S. Steel, his cherished creation, to purchase Tennessee Iron and Coal. Since such a takeover might spark an antitrust move by the feds, two U.S. Steel power brokers, Henry Clay Frick and Judge Elbert Gray, went by night train to Washington to see if T.R.'s approval of the deal could be secured.

Visiting the president during breakfast, they made their case. Roosevelt, aware of the shakiness of share prices, replied that it was "no public duty of mine to interpose any objections." News spread that the deal had been cleared through Washington, and the market began to rally soon after its opening on November 4. After the crisis, though, there would be a drumbeat of criticism of Morgan's evident self-dealing in U.S. Steel's windfall, and that Roosevelt had let him do it.

Although his overall role in the crisis won him much admiration, J.P. also had displayed a degree of power that frightened many people. A financial system that depended so heavily on the actions of one heavyset financier clearly needed some kind of a fix. The push for a central bank gained momentum, resulting in the creation of the Federal Reserve in 1913. Never again would a single private individual wield such control over the financial world as Morgan had displayed in the Panic of 1907.

T.R., for his part, pressed for federal regulation of the stock market in the final year of his presidency, but this push led nowhere. His cousin, Franklin D. Roosevelt, would get such regulation enacted a quarter century later, during the Great Depression.

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John Pierpont Morgan's prestige reached a peak with his handling of the Panic of 1907. But over the next several years, anti-J.P. sentiment grew. Muckraking journalist Lincoln Steffens described Morgan as "the boss of the United States." The very virtuosity J.P. had shown in 1907 in stabilizing financial markets and institutions fed fears that his power knew no bounds.

Congressman Charles A. Lindbergh Sr., father of the future famous aviator, introduced a resolution for Congress to probe whether a "Money Trust" cabal ran Wall Street. This led to 1912 hearings of the House Banking and Currency Committee, known as the Pujo hearings (after subcommittee chairman Ars?ne Pujo, Democrat of Louisiana).

Called to testify, J.P. faced off against committee lawyer Samuel Untermyer. In a much-noted exchange, Untermyer inquired into how banks decide to whom to direct their loans. Morgan argued that a key criterion is the personal character of the recipient. "I have known a man to come into my office," he said, "and I have given him a check for a million dollars when I knew that he had not a cent in the world."

"Is not commercial credit based primarily upon money or property?" Untermyer asked. J.P. responded: "No, sir, the first thing is character." When Untermyer suggested that a wealthy bondholder would be more likely to get a loan, J.P. retorted that "a man I do not trust could not get money from me on all the bonds in Christendom." - K.S.

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Kenneth Silber, a New Jersey-based editor and writer, has published on various subjects, and his articles have appeared in the New York Post, Wall Street Journal, Reason and other publications.

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