The 1907 Panic

The Panic of 1907

The Panic on Wall Street, image courtesy of Wikipedia

was described, in part, by the Wikipedia this way:

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. The interrelated contraction, bank panic and falling stock market resulted in significant economic disruption. Industrial production dropped further than after any previous bank run, 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.

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.

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. 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. Senator Nelson Aldrich (RRI), the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems.

The resultant legislation, based on the report of the National Monetary Commission, was designed to create a central banking authority.  The findings of the Commission, however, in no way contemplated that the central bank would be operating other than in the context of the classical gold standard which had served America, and the world, very well. 

That development would come later. 

Keynes, writing from Britain, (gloating) would describe the drift away from gold in his 1924 Tract on Monetary Reform:

"Whilst economists dozed, the academic dream of a hundred years, doffing its cap and gown, clad in paper rags, has crept into the real world by means of the bad fairies--always so much more potent than the good--the wicked ministers of finance."