What is the 'Bank Panic of 1907'

The Bank Panic of 1907 surfaced at the beginning of the twentieth century from shrinking market liquidity, dwindling confidence by depositors, and plans to regulate trust companies. At the time, trust companies faced increased public scrutiny for adhering to less regulation than national or state banks.

This skepticism triggered a run on the trust companies that continued to worsen even as banks stabilized. Without a central bank, leading financiers like J.P. Morgan stepped in and provided some vital liquidity. Even then, the Knickerbocker Trust Company – New York City's third-largest trust – was unable to withstand the run and failed in late October. This undermined the public's confidence in the financial industry and accelerated the ongoing bank runs. 

BREAKING DOWN 'Bank Panic of 1907'

The Bank Panic of 1907 was ultimately quelled when the federal government provided over $30 million in aid, and leading financiers like J.P. Morgan and John D. Rockefeller continued orchestrating deals to bring confidence and liquidity back to the financial markets. The panic's impact led to the eventual development of the Federal Reserve System. Today, the central bank operates under a dual mandate to maximize employment and stabilize inflation with monetary policy tools like open market transactions.

At the time, the main difference between Europe and US banking systems was the absence of a central bank in the US. European countries were capable of injecting liquidity into the market during periods of financial distress. Many people felt a central bank system could have prevented The Bank Panic of 1907 by providing an extra source of liquid assets for financial institutions to tap into. This ultimately caused leading financiers to draft an early framework of monetary policy and reform in the banking system. That report was shelved until 1913 when then-President Woodrow Wilson signed the legislation into law. It created the Federal Reserve System with Charles Hamlin as the first chairman and Benjamin Strong – a key member of Morgan's company – as the president of the Federal Reserve Bank of New York.

Parallels to 2008 Financial Recession

The parallels between The Bank Panic of 1907 and 2008 Recession are striking. The recent financial crisis was centered around investment banks without direct access to the Federal Reserve System, whereas its predecessor spread from trust companies that existed beyond the New York Clearing House. In essence, both events started outside of traditional retail banking services but still ushered in distrust for the banking industry among the broader public.

The aftermath of the 1907 bank run led to the creation of the Federal Reserve while the recession prompted new reforms like Dodd-Frank. These mechanisms intended to protect the broader public from a financial meltdown and hinder the big banks from taking unreasonable risks.

  1. Federal Reserve System

    The Federal Reserve System is the central bank of the United ...
  2. Federal Reserve Bank Of Boston

    The Federal Reserve Bank of Boston oversees banks in Massachusetts, ...
  3. Federal Reserve Bank Of Minneapolis

    The Federal Reserve Bank of Minneapolis is one 12 reserve banks ...
  4. Federal Reserve System - FRS

    The Federal Reserve System, commonly known as the Fed, is the ...
  5. International Banking Act of 1978

    The International Banking Act of 1978 put all American bank branches ...
  6. Bank Reserve

    A bank reserve is the currency deposit that is not lent out to ...
Related Articles
  1. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
  2. Investing

    Introduction to the Chinese Banking System

    China's banking system continues to evolve as it steps into a greater role in the global economic system.
  3. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  4. Investing

    What's the Salary of the Chairman of the Federal Reserve?

    The chairman of the Federal Reserve oversees the U.S. banking system.
  5. Personal Finance

    What Is the Bank for International Settlements?

    Headquartered in Basel, Switzerland, Founded in the 1930's the Bank for International Settlements (BIS), is a bank for central banks.
  6. Personal Finance

    Banking Has Changed: What Does It Mean For Consumers?

    Banks have long been leading spenders on technological innovations. Learn the key changes in the banking industry and what institution is right for you.
  7. Personal Finance

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  8. Personal Finance

    Can You Trust Your Bank?

    With the large amount of banks closing their doors, can you trust the institution that has your money?
  1. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  2. What factors are the primary drivers of banks' share prices?

    Find out which factors are most important when determining the share price of banks and other lending institutions in the ... Read Answer >>
  3. Why do commercial banks borrow from the Federal Reserve?

    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Answer >>
  4. What are the 9 major financial institutions?

    There are nine major types of financial institutions. Understand the major types of financial institutions that exist and ... Read Answer >>
  5. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
Trading Center