Monetary Policy and the Copper Price Bust: A Reassessment of the Causes of the Panic of 1907

49 Pages Posted: 14 Nov 2017 Last revised: 22 Nov 2017

See all articles by Mary T. Rodgers

Mary T. Rodgers

State University of New York at Oswego

James E. Payne

Benedictine University - Office of Academic Affairs

Date Written: November 8, 2017

Abstract

We find evidence that the runs on banks and trust companies in the Panic of 1907 were linked to the Bank of England’s contractionary monetary policy actions taken in 1906 and 1907 through the medium of copper prices. Results from our VAR models and copper stockpile data support our argument that a copper commodity price channel may have been active in transmitting the Bank’s policy to the New York markets. Archival evidence suggests that the plunge in copper prices may have partially triggered both the initiation and the failure of an attempt to corner the shares of United Copper, and in turn, the bank and trust company runs related to that transaction’s failure. We suggest that the substantial short-term uncertainties accompanying the development of the copper-intensive electrical and telecommunications industries may have also played a role in the sharp drop in copper prices. Additionally, we find evidence that the copper price transmission mechanism was also likely active in five other financial systems that year. While we do not argue that copper caused the 1907 crisis, we suggest that it was an active policy transmission channel amplifying the classic effect that was already spreading through the money market channel. If, as we argue, the bust in copper prices partially provided a trigger to that bank panic, then it provides additional evidence that contractionary monetary policy may have had an unintended, adverse consequence of contributing to a bank panic and, therefore, supports other recent findings that monetary policy deliberations might benefit from considering the policy impact on asset prices.

Keywords: monetary policy, commodity prices, boom/bust, Panic of 1907, copper, financial crisis, bank runs

JEL Classification: N11, N21, N51, N71, G01, G21, E52, E58, E65, E61

Suggested Citation

Rodgers, Mary T. and Payne, James, Monetary Policy and the Copper Price Bust: A Reassessment of the Causes of the Panic of 1907 (November 8, 2017). Available at SSRN: https://ssrn.com/abstract=3069033 or http://dx.doi.org/10.2139/ssrn.3069033

Mary T. Rodgers (Contact Author)

State University of New York at Oswego ( email )

7060 Route 104
Oswego, NY 13126
United States
727-417-2741 (Phone)
315-312-5449 (Fax)

HOME PAGE: http://https://www.oswego.edu/business/content/mary-tone-rodgers

James Payne

Benedictine University - Office of Academic Affairs ( email )

Lisle, IL 60532
United States

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