Our last stop on the issues of railroad regulation during President Theodore Roosevelt’s Second Term focused on the June 29, 1906, adoption of the Hepburn Act regarding limits on railroad freight rates and the subsequent reactions that year to this statute. Before we look at the continued controversy over these issues in 1907, we need to review what was happening in 1906 and 1907 in the economy and securities markets and their increasing intertwining with the railroad issues.[1]
1906
In 1906 the economy and securities markets were adversely affected by April’s major San Francisco earthquake destroying two-thirds of the city and leaving over 200,000 residents homeless and by the subsequent increase of interest rates by the Bank of England responding to the outflow of English funds paying earthquake insurance claims. From a peak in January stock market prices had fallen by 18% by July of that year, and after the adoption of the Hepburn Act railroad securities were especially hard hit. By late September stocks generally had recovered about one-half of their losses.
January-February 1907
At the start of 1907, however, the U.S. appeared to be prosperous. Railroads had difficulty finding enough freight cars to meet demand. Banks had a lot of cash. Wages and prices were rising. This redounded to the credit of President Theodore Roosevelt, who had just been awarded the Nobel Peace Prize for ending the Japanese-Russian war.
The U.S. stock market, however, was sending contrary signals. Between September 1906 and March 8, 1907, the stock market slid, losing 7.7% of its capitalization. Indeed, in January John D. Rockefeller predicted that Roosevelt’s policies would result in a depression.
March-May 1907
On March 12th, reacting to the troubled securities markets and to rumors that President Theodore Roosevelt was planning some new measures against the railroads, J.P. Morgan, the major Wall Street financier and New York Central Railroad Director, met with the President to discuss “the present business situation, particularly as affecting railroads.” According to Morgan, he urged Roosevelt to take some action “to allay the public anxiety now threatening to obstruct railroad investments and construction” and advised the President that “the financial interests of the country are greatly alarmed at the attitude of the Administration towards corporations, and particularly the railroads.” Afterwards Morgan told the press that Roosevelt would soon meet with the heads of four leading railroads to see what might be done to “allay public anxiety.”[2]
This news did not calm the securities markets. The next day (March 13th) New York Stock Exchange prices collapsed. And on March 14th, the Dow Jones Industrial Average dropped by another 25%. These two days were sometimes referred to as “the Rich Man’s Panic” since most ordinary people were not stock market investors.
At the markets close that day, the 25 most active stocks on the New York Stock Exchange had a total shrinkage in value since the first of the year of $ 970 million. This was especially true for the following railroad stocks:
| Railroad |
ShrinkageMillion $ |
ShrinkagePercentage |
| A.T. & S.F. |
$ 23.5 |
22.8% |
| Baltimore & Ohio |
$ 30.5 |
20.0% |
| Canadian Pacific |
$ 34.0 |
28.1% |
| Chesapeake & Ohio |
$ 11.0 |
17.5% |
| M. & St. Paul |
$ 21.0 |
25.3% |
| Great. Northern. (Pfd.) |
$ 87.0 |
58.2% |
| Missouri Pacific |
$ 21.5 |
27.8% |
| N.Y. Central |
$ 35.5 |
19.9% |
| Norfolk & Western |
$ 13.0 |
19.7% |
| Northern. Pacific |
$113.0 |
72.9% |
| Pennsylvania RR |
$ 62.5 |
20.0% |
| Reading |
$ 31.0 |
44.3% |
| Southern Pacific |
$ 47.0 |
23.8% |
| Union Pacific |
$117.0 |
59.9% |
After the close of the markets on the 14th, the U.S. Treasury injected $25 million of cash into New York City banks by buying some of their holdings of U.S. bonds, which calmed the markets for the moment.
Reacting to the market developments of the 14th, William C. Brown, Senior Vice President of the New York Central Railroad (and my maternal great-great uncle) issued a public statement that said, “The diminishing net earnings of railroads, while alarming, are overshadowed by the apparent hostility as evinced by recently enacted or introduced Federal and state legislation. The growth and development of the country will soon be at a standstill unless transportation facilities can be tremendously increased. Hundreds of millions of dollars should be expended in this direction as rapidly as material can be assembled and men employed. On account of the above conditions confidence has been so shaken that investments of this character are regarded as so hazardous and unattractive as to make it impossible to sell any kind of railroad security except at such discount and rate of interest as to make it prohibitive; and these improvements, so vital to the prosperity of the country, are being greatly curtailed or entirely dropped.”
Brown concluded this statement with a plea for the railroads and the President to cooperate in stopping evils and abuse. In addition, “the President and the press should co-operate with the railroads and with all food citizens in working for a restoration of public confidence, based upon the widest publicity of corporation affairs and absolute fairness, equality, and stability of rates.”
June-September 1907
Troubles, however, were not over. In June the stock of the Union Pacific Railroad—among the most common stocks used as collateral for bank loans—fell 50 points. That same month an offering of New York City bonds failed. In July the copper market collapsed. In August the Standard Oil Company was fined $29 million for antitrust violations. That same month commodity prices declined, Another negative factor that summer was the Bank of England’s imposing a prohibition of English banks buying U.S. finance bills, thereby closing a major source of refinancing for U.S. debtors. In September industrial production also went down. In the first nine months of 1907, stocks were lower by 24.4%.
October-November 1907 (Financial Panic)
The Fin
ancial Panic of 1907 started on October 9th with the failure of two speculators to take over the United Copper Company and the resulting bankruptcies of two brokerage houses, another mining company and a bank. On October 15th stocks started to tumble, and on October 21st and 22nd a run started on New York City’s third largest and supposedly solid trust, the Knickerbocker Trust Company, causing its bankruptcy.This in turn created fear throughout the U.S. and numerous bankruptcies of state and local banks and other businesses. On October 23rd money was almost unobtainable on Wall Street, call-loan rates had spiked to 125% and the entire U.S. financial system was nearing collapse. To the left is a photo of a crowd of people in front of Manhattan’s Federal Hall, at the corner of Wall and Broad Streets; the New York Stock Exchange is outside the photo to the left.
In response to this crisis, Roosevelt had the U.S. Treasury deposit $25 million in national banks.
The “savior” of the financial system from the Panic, however, was J. P. Morgan, the wealthy Wall Street financier and a New York Central Director. He and other plutocrats (E.H. Harriman, Henry Clay Frick and John D. Rockefeller, Sr.) pledged large sums of their own money, to shore up the U.S. financial system. These efforts had apparently succeeded by October 24th when the New York Stock Exchange did not have to shut down and stock prices started to rebound.
The next week, however, the panic returned when a major brokerage house threatened to cease operations and the City of New York was on the verge of defaulting on its obligations. J.P. Morgan and his colleagues again came to the rescue with a plan for U.S. Steel to buy the shares of Tennessee Coal and Iron Company then held as collateral by the failing brokerage firm. This plan, however, would go forward only if it had President Roosevelt’s approval. That approval was obtained on November 4th at a White House breakfast meeting with U.S. Steel’s Chairman (Elbert H. Gary) and one of its founders (Henry Clay Frick). News of this approval immediately was released, and stock prices began to rally.
Additional support for the financial system and stock market was supplied in November when Roosevelt authorized the U.S. Treasury to increase its injection of funds into the banks to $69 million and to sell $150 million of U.S. and Panama bonds.
All of this occurred in the midst of an economic contraction that had started in May 1907 and that did not end until June 1908. The interrelated contraction, falling stock market and financial panic resulted in significant economic disruption. Industrial production dropped more 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%.
Analysis of the Financial Panic of 1907
100 years later (September 2007) two distinguished professors at the University of Virginia’s Darden School of Business (Robert F. Bruner and Sean D. Carr) concluded that the Panic of 1907 “resulted from a powerful convergence of [the following] seven overlapping and interrelated forces—a ‘perfect storm’ in the financial markets:”
- The financial system’s architecture was “highly fractionalized, localized, and complex” with networks that allowed quick spread of news and rumors while it also was difficult for all actors to be equally well informed.
- Strong economic growth in the U.S. had created a massive demand for external finance, which was met with a significant amount of capital borrowed from European sources.
- There were inadequate safety buffers for a system with many small and undiversified banks plus new and lightly regulated trust companies holding riskier assets.
- Roosevelt was “on the warpath against anticompetitive business practices” as were many state governments.
- Real economic shock from the San Francisco earthquake of April 1906 and the summer 1907 curtailment of acceptance of U.S. finance paper by the Bank of England.
- Undue fear, greed and other behavioral aberrations causing a sharp and self-reinforcing shift from optimism to pessimism.
- Failure of collective action. Yes, J.P. Morgan led a collective effort that helped dampen the worst of the Panic, but it was insufficient in the overall economy and financial system.
Below is a graph comparing the Dow-Jones Industrial Average for January 1906-October 1907 with the same Average for the Financial Panic of 2008:
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[1] This post is based upon Edmund Morris, Theodore Rex at 476-78, 498-501 (Random House; New York; 2001); Lynch, March 13th Stock Market Crash (Jan, 31, 2008); Foldvary, The Panic of 1907 (May 1, 2007); Trumblore, J. P. Morgan-Savior-The Panic of 1907; Harvard Univ. Center for History & Econ, The 1907 Crisis in Historical Perspective; The United States, 1904-1914; Wikipedia, Panic of 1907; Bruner & Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, Financial History (Fall 2007); Stock Collapse Rivals Panics, N.Y. Times (Mar. 15, 1907); Bankers Decry Fear of a Panic, N.Y. Times (Mar. 15, 1907); W.C. Brown’s Appeal, N.Y. Times (Mar. 15, 1907); Stock Crash Over without a Failure, N. Y. Times (Mar. 16, 1907).
[2] As we will see in a subsequent post, the proposed meeting between the President and the four leading railroad executives never happened, and instead the President held meetings individually with quite few such executives in March through May 1907.
