18 Jul THE PANIC OF 1907 DIFFERS FROM THE OTHER NATIONAL BANKING ERAS SINCE FINANCIAL INTERMEDIARIES ENCOUNTERED PANIC-RELATED WITHDRAWALS.
Introduction
Written from the angle of the “poor victim’s bankers”, the panic of the American economic crisis of 1907 stirred professional embezzlers and helpdesk. Bruner, who is an author, pointed out that the crisis was as a result of the depositors getting out of line to demand their property back. In his book, “The Panic of 1907: Lessons Learned from the Market’s Perfect Storm”, Bruner sheds lights on the panic itself, followed by the analysis of the characteristics of the financial crisis. The book credited a famous quote by Thomas Jefferson who said if the private banks controlled the issue of the currency in America; the economy would slumber in deflation, inflation and panic. The people would be deprived of their properties by the bank until their children would wake up in the continent of their homeless fathers conquered in a sub-prime mess that would seek out parallels in subsequent generations. The bank crisis and the heroic efforts of some powerful individual to quell the storm provided a clinical telling that Bruner uses to explain how the Federal reserves came about. The fragility of the banking systems, the waning confidence of people and the subsequent multiplying losses of the Panic of 1907 were closely mirrored in 2008 crisis in America. In 2008, America suffered a credit crisis which brought the economic growth to a halt. Whilst in 1907, President Teddy Roosevelt and J.P. Morgan helped to contain the economic situation by creating a Federal Reserve to control the amount of borrowing and lending by the commercial banks (Bruner & Carr, 2008).
Nonetheless, there were other banking crises that occurred before such as the crisis of 1893 and 1873, although they were not as severe as the panic and the bank crisis of 1907. The panic of 1907 differs from the other National Banking Eras since financial intermediaries encountered panic-related withdrawals. Notably, the withdrawals prior to the panic were centered in the New York City trust companies, and they played a major role since they had large amounts of net aggregates and net deposits after the national banks. The problem of the trust companies influenced some reforms such as the monetary policies. For example, the Panic of 1907 was a proximate catalyst for the political leaders who pushed through for the creation of a Central Bank or the Federal Reserve. The paper examines the 1907 bank crisis and the panic among the trust companies (Bruner & Carr, 2008).
Characteristics on 1907 banking Crisis and the Panic
Contemporary economists attributed the Banking panic and the financial distress to the inflexible structure of the National Banking System. The system during that time did not have a central banking institution that could adjust the stock of the high-powered money through the sale or purchase of the marketable short-term assets. In other words, the economic system lacked a reliable financial institution to control the aggregate liquidity provision. The independent treasury at the time attempted to perform the role of fiscal positioning, but they were incapable of maintaining consistency. Consequently, the aggregate supply of liquidity could not succumb to the economic shocks that were external to the domestic monetary system (Bruner & Carr, 2008).
Furthermore, the financial systems did not have a lender of last resort to turn to during the widespread withdrawal of deposits. The banks did not have a lending institution to get a loan for the emergency leading to the panic. The New York Clearing House attempted to perform the role of the liquidity lender, but their lack of some crucial powers rendered them unsuccessful. In order to address the liquidity demands, the New York Clearing House used the clearing loan certificates as a way to increase the credit availability to individual banks. Clearing loan certificate was a transaction liability contract that could be exchanged at par value among the members of the clearing house. The contract was also transferrable among the members so that it would serve as a substitute for the specie of the termination of the payment and as a legal tender. Nevertheless, these certificates could not be issued to the intermediary members outside the clearing house since they were an inadequate substitute for the legal tender and the specie. The housing certificates were also a temporary debt contract, and this subjected many banks to the changing depositor liquidity demands (Bruner & Carr, 2008).
The members of the clearing house included the “Big Six” national banks: Chase National, First National, the National Bank of Commerce and the City national. The Hanover and the National Park were also members of the New York Clearing House Association. The Trust Companies were excluded from the New York Clearing House since they were state-chartered institutions that were considered by the other intermediaries as vague. For instance, they engaged in some activities that were prohibited by the national banks such as direct investment in real-states and stock equity. Although Trusts competed equally for the retail deposits with the national banks, they were not classified as part of the high-volume-check-clearing payment systems. The reason for the out-listing was because the trust companies’ deposits did not turn at the same rates as the national banks. The eschewed membership of the Trust Companies was also because the costs of the membership cash reserve requirement were higher than the gains of the more efficient check clearing. As a result, the Trust Companies did not apply for a membership in the New York Clearing House when the offer was given in 1903 (Bruner & Carr, 2008).
Efforts to Reverse the Financial Panic
In contrast to the previous economic crises in the United States, the National Banks were officially on a gold standard during the panic of 1907. As a result, the US Treasury experienced constraints on the financial interventions due to the gold standard. The treasury could not ensure credit availability or standardize the stock of the high-powered money. In particular, the limitations were caused by the budget surplus balances and the gold reserve balances. The US Treasury injected forty million US dollars to the stock of the high-powered money but could not meet the financial crises on 25th, October, 1907, due to the limitation of the budget surplus (Bruner & Carr, 2008).
The reserve requirement banking structure concentrated funds in the New York City while the country banks reserve holdings declined. The New York City banks used the funds coming from the interior bankers to top up call money loans in the New York Stock Exchange. The call money loans acted as buffer liquidity for the national banks in New York City. During the financial markets, the national banks allowed idiosyncratic oscillations of the liquidity demands and the banker balances by extending the call loans of the liquidators. However, during the crisis, the call markets did not succeed, and the stock equity values fell precipitously, resulting to the liquidation of the call loans security both of uncertain value and unprofitable. In addition, the threshold value of the collateral as a binding contract to pay the loans fell significantly together with the nominal value (Bruner & Carr, 2008).
During the National Banking Era, the scapegoat for the financial panic was the lack of a reliable mechanism in the banking system to rapidly increase the base money supply. The mechanism could have met the demand for credit or cash by the interior banks. The main cause of the banking panic was the failure on the part of the major financial intermediary by sharply raising the call money loan interest and reducing the equity stock values. For instance, when the trust companies and the banks provided less credit to the stock market when there was a contraction of demand for the credit, the interest on the call for money increased exorbitantly. In addition, the structure of the US banking system also led to the weak balance of payment between the foreign buyers of the US goods and the New York City banks. The equilibrium in the balance of payments was altered by the demands of the interior banks which exhausted cash balances held by the New York City bank. The drained cash was used to finance the shipment of grains harvested, leading to the seasonal rise in the interest rates while the rates in the New York City fell (Bruner & Carr, 2008).
The US Treasury also attempted to resolve the bank panic by introducing the copper stock in the financial market, but the strategy did not work. The financial market continued to be vulnerable to the financial stresses such as the restrictions from the Bank of England. In 1907, the Bank of England restricted issuance of American bills in London, creating a barrier against the free flow of capital to the United States. The bills were anticipated to ease the flow of gold at the arrival of the agricultural shipments in England. However, the restriction of the American finance bills was a result of the 1906 exacerbated outflow of the gold from England under the issuance of Treasury Secretary Leslie Shaw. The outflow of gold had drained gold reserves from England resulting to the Lloyd of England making insurance payments to the policyholders of San Francisco (Bruner & Carr, 2008).
The banking crises aggravated to economic contraction. The fractional reserve banking system in US experienced the problem run on deposits. During the crises, the depositors withdrew large sums of money causing an abrupt shift in the money supply. The run on deposits resulted to major contractions in the banks’ balance sheets and the subsequent reduction on the outstanding credit. The impact of the reduction was the imposition of real costs on the economy due to the untimely cancelation of the positive net present value loans. As a result of the contraction of the money supply, there were 75 bank suspensions, and 13 among the New York City intermediaries (Bruner & Carr, 2008).
The Proximate Causes of the Banking Crisis
The timeline events of the Panic of 1907 reveal that the problem at the Heinze-Morse Thomas banks was the key catalyst of the panic. Other banks that were connected to the individual banks were the Mercantile National, Mechanics and Traders, New Amsterdam National and the National Bank of North America. The Heinze-Morse Thomas banks experienced the problems of bank runs that caused the widespread disruption of the banking activities in New York City. The aggregate interests of the Heinze-Morse Thomas banks amounted to $71 million dollars of deposits. Out of the aforementioned deposits, $56 million were in other members of the clearing house banks (Bruner & Carr, 2008).
Trusts Companies and the panic
On 18th, October, 1907, a run on Knickerbockers was reported to have commenced. The National Bank of Commerce was giving credit to the trust company to clear the debt resulting from the withdrawals. The Knickerbockers Trust Company financial panic turned worse when the National Bank of Commerce announced that it would no longer act as a clearing agent for the company on 21st, October, 1907. The decline was caused by the huge debt balance of $7 million that was assumed arose from the dealings with the New York Clearing House. The legal requirement resulting from the clearing agent relationship imposed the ramification to exposure of the Knickerbockers to possible suspension. On 22nd, October, 1907, the Knickerbockers were forced to suspend, and their 1907 balance sheets showed contraction in deposits in other institutions (Bruner & Carr, 2008).
Liquidation of Assets and Clearing of House Certificates
The run on trust companies and their interconnection with bank through the bank balances, railway bond market and the call loan market bore deeply during the duration financial panic. As a result, the trust companies contracted at 36 percent, over an estimate of the total contraction of $ 200 million in deposits. The sparked panic by the trust companies in New York led to the liquidation of assets and cash reserves. Initially, the trust companies held about $ 100 million of reserved depositories, but the deposits reduced by over $ 30 million on 19th, December, 1907, forcing the liquidation of banks’ assets. Also, the trust companies caused distress in the call markets by calling in large amounts of loans and failing to restrict payment to depositors during the panic period. To that effect, the trust companies issued quality house certificate to depositors as specie for commitment to repay the outstanding debts. Liquidation took several forms such as the first line after cash vault and the selling of the high-quality railway bonds (Bruner & Carr, 2008).
Central Bank Movement
The Panic of 1907 revealed that the New York Clearing House faced financial risks that were beyond their capacity. As such, the intermediary financial institution did not negate the previous crises, prompting for the need of a central financial regulatory institution. Under the Influence of Nelson Aldrich, who observed the trends in the international markets, he proposed for the establishment of the central bank to prevent future financial panics. After the implementation of Aldrich-Vreeland Act in 1908 on emergency financial provision, the amendment prevented recurrence of the financial panic in 1914. Apparently, critiques argue that the state of the New York Clearing House and the other institution had the capacity to quell the bank crisis; therefore, the panic was caused by the institutional failure. Given the runs on trust companies, the New York Clearing House may have been sufficient to remove imminent sources of the panic. In comparison, critiques viewed the Chicago Clearing House maintained the trust companies stable throughout the financial panic period, considering the trust companies were located outside the New York Clearing House (Howden & Salerno, 2014).
The Difference Between thePanic of 1907 and the Panics of 1873 and 1893
The panic withdrawals created a significant burden on the corresponding banks for the three years of panic in the United States. However, the aggregate bank balance sheet across the three panics differed for the New York Clearing House. For instance, the reserves, loans and deposits fell significantly during the panics. However, during the Panic of 1907, the loans increased, the deposits merely stayed at the same level while the aggregate cash reserve balance for the associate banks of the New York Clearing House fell. In addition, the national banks of the New York City in 1907 had the capacity to prevent the extensive withdrawals by the depositors, unlike the other two panics. For instance, after the Knickerbockers closed on 22nd, October, 1907, the New York Clearing transferred the transactions of the trust depositors to the national banks. In addition, the national banks also acquired the trust companies’ loans at a high liquidity ratio; they could have managed the debt crises of the trust companies (Bruner & Carr, 2008).
Conclusion
The Panic of 1907 was vital to the evolution and the economic events in America and the basis of the financial structure in relation to the global economy. For instance, the economic contraction experienced in 1907 was so adverse that it led to the establishment of the Federal Reserve System for preventing future financial panics. The 1907-crisis is analogous to the recent financial crisis of 2008. The operations of the investment banks outside the Federal Reserve watchdog was similar to the trust companies in 1907. Despite the years of separation of the historical economic events, they are important sources for analyzing the modern financial crises (Bruner & Carr, 2008).
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.