Bailouts in 1895 and in 1907 Changed US Finance
Sep 12, 2009 George Garza
The largest government bailout occurred between 2008 and 2009. But in 1895, one man bailed out the US government, then Wall Street in 1907. That was JP Morgan.
In 2009, the country saw massive government intervention in the financial markets. This was not the case one hundred years ago. The defacto policy was for the government to keep out of the affairs of business. This was called laissez-faire. However, the Sherman-Antitrust act of 1890 was enacted because business had become monopolistic and anti-competitive.
The Business Bubble of 1890
The 1880s had been a period of fast and wide economic expansion. Like the tech bubble of the late 1990s and housing bubble of the early 21st century, the expansion became driven by speculation except then that bubbled industry was railroads.
Railroads were over-built and many companies tried to take over others, increasing their own instability. As a spillover, many mines, especially silver ones, were opened with rail connections, and their products began to flood the market. Farmers, particularly in the Midwest, suffered a series of droughts which left them short of cash to pay their debts, and drove down the value of their land. One group of people that was damaged by this speculation was the farmer, who saw the value of the land fall, and debts accumulate.
The Sherman Silver Purchase Act
To combat the falling value of their land, Farmers began to press for control of the purchase of silver. The Sherman Silver Purchase Act was signed into law in 1890. It said, “The Government was to pay for the bullion with Treasury notes which could be redeemed in gold or silver coin at the discretion of the Secretary of the Treasury … the Act declared that it was “the established policy of the U.S. to maintain the two metals on a parity with each other upon the present legal ratio or such ratio as may be provided by law.”
The act forced the U.S. government to buy millions of ounces of silver notes using silver and gold, which drove up the price of the metal. So the government was drawing more and more money from its own coffers, its reserve, in order to pay for the silver it now owned. Foreign banks began to redeem their silver notes demanding gold. Other private parties did likewise. The governments gold reserves were down. The stage was now set for what was to come, a recession and business downturn. This then made it necessary for someone outside of government to step in and rescue the government if it needed it.
JP Morgan and The Rise of the Large Corporation
Before Morgan’s era, a monarch would be approached to help create large costly enterprises such as large manufacturing enterprises and transportation systems, then the royal coffers were used to build those enterprises. Morgan and a few others realized that an opportunity existed to fill such a role by a private party in the United States with the sale of bonds.
In 1892 Morgan was instrumental in creating the merger of Edison General Electric and Thomson-Houston Electric Company to form General Electric. Later he was also instrumental in the creation of the Federal Steel Company which he then merged with the Carnegie Steel and several other metal businesses to form the United States Steel Corporation in 1901.
The Panic of 1893
The anti-business sentiment that was growing by 1890. The Sherman Silver Purchase Act and the protectionist policies of the McKinley tariff in the administration started to affect the economy. Several railroads failed, the Reading and Philadelphia in Pennsylvania creating the panic of 1893.
Other factors in the decline of business included, declining building construction; depressed agricultural production, at least partially attributable to adverse weather; and the gold standard and monetary policy. This started to lead to a credit shortage as foreign banks started to pull their funds out of the US. Business and banks began to fail where as many as 15,000 of one and 600 of the other were lost.74 railroads went under as well.
JP Morgan and the Bailout of 1895
Morgan was already well known in the government for his bailout of the US Army payroll in 1871. In 1895 the US treasury had reserves under 100 million. In large part this was due to the Sherman Silver Purchase Act. Morgan and his group replenished the gold reserve with $62,000,000 in gold, allowing the issue of a federal bond that eventually resulted in a Treasury surplus of $100,000,000. He played the role of central banker, sold government bonds for gold (half obtained abroad through his foreign affiliates), and guaranteed to protect the gold reserve.
JP Morgan and the Bailout of 1907
The New York Stock Exchange in 1907 fell by 50% compared to 1906. There the earthquake in San Francisco in 1906 which drew large amounts of gold out of the banking system. The panic of 1907 was a six week stretch of bank runs which occurred after an attempt to corner the market with the shares of United Copper failed. This created a liquidity crisis as banks stopped lending so borrowers lost faith in banks, which lead to many bank failures. Morgan decided that if the Trust Company of America collapsed it would cause too much damage to the fragile financial system in the US. He pulled together other bankers and garnered funds to bail out the firm.
Over the course of six weeks, as the crisis affected both Wall Street and Washington, Morgan acted many times in different capacities. He saved brokerage firms and rounded up $25 million in cash in less than a half hour to help the New York Stock Exchange stay open. He underwrote municipal bonds for New York City by bringing in gold from Europe, which bolstered the dollar and replenished Washington's coffers.(1)
The recurring bank panics that were addressed by private individuals, especially by JP Morgan, instead of the US government, lead to the eventual creation of the Federal Reserve Bank in 1913.
The beginning of the progressive era, which began with TR, continued through Wilson, and FDR continues today with B.O. none of whom ever ran a business.
JPMorgan Chase was among the eight large U.S. banks to receive the Treasury Department's initial round of capital investments -- money described by Treasury officials not as a bailout, but rather as funds to help bolster "healthy" banks in tough times. Bailouts do not work, 4 years after the panic of 1913 we were at war.
(1)See Moen, Jon. "Panic of 1907". EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001 for additional information.
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