The Panic of 1907

Abstract

The case discusses and analyzes the runup to the financial panic of 1907 and its aftermath. Market conditions and institutional responses are highlighted. We sketch the broader economic context and the monetary situation in particular. The case draws on the Bruner and Carr (2007) book, "The Panic of 1907: Lessons Learned from the Market's Perfect Storm" and on the Friedman and Schwartz (1963) book, "A Monetary History of the United States, 1867–1960." The case allows for a contrast-and-compare exercise with the 2007 credit crunch in the United States.

Excerpt

UVA-G-0619

Rev. Oct. 22, 2010

The Panic of 1907

Knickerbocker Trust Company under Siege

On the morning of October 22, 1907, an hour before the Knickerbocker Trust Company (Knickerbocker) opened its bronze doors at 5th Avenue and 34th Street in New York, a large crowd of depositors waited patiently on the sidewalk to reclaim their money. Shortly after it opened, a long line extended from inside the company onto the sidewalk, while company officers and policemen tried to control the growing crowd.

Around noon, a Knickerbocker officer stood on a chair in the middle of the anxious crowd and read a statement emphasizing that the New York State banking department had examined Knickerbocker and found it solvent. A weak-hearted cheer erupted, but nobody dropped out of line. The payments continued at first, but the demand was so great that the bank officer then announced that no more payments would be made. Within barely two and a half hours, Knickerbocker had returned more than $ 8 million to its depositors. What had triggered this large-scale withdrawal of funds by private individuals as well as banks were the events of the previous day.

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Keywords: financial crisis, credit crunch