Since the beginning of the 2008 crash, bankers, and banking institutions have been characterised as villains- bandits of our modern age, if not the corrupt core of a once imagined, 'moral economy'. Yet, similarly remarkable is the defence made by both central bankers and politicians in sustaining the financial structures of leading banks, arguing that they provide both financial security and overwhelming prosperity to the western world. Simply put, banks are said to provide the high standard of living most of us enjoy in the West, and what many more people may come to enjoy in the East.
Contemporary images of the financial world therefore seem to be placed within two, rather interesting modes of understanding. One, is the most potent of our time- that of greed, indulgence and decadence. The other, however, is a bit more curious- the image of industrious organisations sustaining the structure needed for wider society to enjoy high standards of living. Yet, in assessing the current state of Western liberal economies, though more on the role of banking, I feel that the latter image has much more of a qualitative value. Whilst the former image, projected most visually by the OWS movement (Occupy Wall Street) should certainly be commended for highlighting the way in which banks have profoundly betrayed the communities that helped them stay afloat, the latter image harks back to a forgotten past- when such banks were seen both as valuable institutions of society, but also, in many ways, as moral arbiters, guided by a sense of both purpose and responsibility.
The financial crisis of 1907 was remarkable, in that it bears many similar traits to the crisis we are currently experiencing today; a heavily complex crisis, manifested through unpredictable human errors and managed with a great deal of uncertainty. Simply put, the crisis of 1907 was very much caused after 'scandalous revelations' of investments made by New York financiers resulted in a run on the city's prominent Trust companies. But the legacy of 1907 is not simply limited to its historical context, nor are its lessons only applicable in a bygone era. Indeed, while economic shocks had happened prior to 1907, this particular financial crises was one of the first to be considered in retrospect through a moral framework- one that was sceptical about the degree of 'power' that financiers had, it's somewhat contentious relationship with the state, and the measures designed to prevent such crises happening in the future.
The first Trust companies in the United States were extremely fascinating institutions; Not only did they represent an emerging financial system reflective of the economic dominance being ascertained by the United States, but also, in the words of Charles R. Geisst, eventually came to challenge the American ideals of individualism and self reliance, particularly during the Great Wars of the twentieth century. During the years leading to the First World War, Trust companies in New York City expanded rapidly, and with favourable state law conditions, were able to successfully compete with both national banks and the old dynastic private banks. The advantages of such trust companies were systematically 'exploited' by financiers and new entrants, that by 1906, held $1.364 billion in assets, and posed serious competition to the national banks in New York. Such a powerful impact of the market had placed the new Trust companies not only in a considerable position of power (considering their substantial holding of private equity), but similarly saw a disregard for any means of security in case of panic; In many ways, the new companies fell victim to the very sense of invincibility which had infected the banks of today.
Although the 1907 crisis had little to do with the new Trust companies, The burst of the speculative bubble (originally from shares in United Copper) eventually spread to the companies, who experienced a dangerous run as depositors withdrew their funds from the institutions. In particular, the heavy run on the Knickerbocker trust company, and similarly the Trust Company of America posed a serious threat to other such companies in NYC- where a lack of a coherent security structure caused such institutions to face a potential liquidity crisis. Indeed, the magnitude of the crisis can be measured by memories of 2008- whereby a failure of both national banks and private trusts would not only pose a serious danger to the financial world, but simultaneously cut off the supply of equity required for commerce. As in 2008, a failure of the financial system would grind almost everything else to a complete halt.
On October 23rd 1907, Morgan and his team of high financiers constructed what might be referred to as a 'private bailout' in today's language. An emergency loan package was granted to the Trust Company of America, which constituted both Morgan's own money, as well as collective pledges of over $20 million from all the corporate Trust companies in the United States. This co-ordinated effort allowed the Trust company of America to remain operational, and ultimately worked to minimise the impact on other such companies. Ultimately, the crisis ended through a final move by the then President Roosevelt, when he allowed US Steel to buy the Tennessee Coal, Oil and Railroad company, whose stocks were collateral for the brokerage firm Moore & Schley. This move worked to restore faith in the financial markets once again, through bringing back confidence in the stock market. It seemed that all was well, once again- that the 1907 crisis, just as those that preceded it, had gone away in a little more than a week. More remarkably, it was not government that had adequately protected ordinary Americans from the catastrophe, rather, a seemingly 'moral' financier. And despite some hostility between the private bankers and government senators, the events of 1907 seemed to illustrate a new, all important 'special relationship'- one forged between the worlds of private banking and the political class.
Yet, while I feel this relationship was consolidated in the United States, through the establishment of the Federal Reserve in 1913, the origins, and indeed, the mechanics of the relationship originated much earlier on in the nineteenth century, through the innovation of the Trust companies themselves. These institutions challenged the traditional banking power structures posited by national banks, by operating outside of the standard legal infrastructure, as well as being heavily involved with many U.S utility companies and infrastructure organisations. But it was not so much the control of such utilities that entrenched the conciousness of power that our modern banks have assumed. While this is certainly a complex issue, I feel that some of J.P Morgan's statements during the post-crisis period are extremely valuable in understanding banks in contemporary society. At the Pujo committee in 1912, Morgan was asked by a New York district attorney, Samuel Untermyer whether his market share of American Utilities (alongside other Trust financiers) could be justified. Morgan replied that the role of banking was not a direct intention to control areas of the US economy, but rather a system built on trust, responsibility and honour- and as such, social background was important. Furthermore, he argued that holding a great number of assets, directorships and board positions were not only justified, but inherently necessary, to ensure a fair, balanced and effective commercial banking system. Ultimately, the Pujo Comittee had both successes and failures; while it failed in it's ideological goals of vilifying banking institutions, it did lay a general consensus between the private financiers and the state- one which argued that not only was a flexible system of controlling the money supply essential to prevent further crises, but it would be necessary for future security. Only, rather than allowing private institutions to do this, the state would ultimately assume responsibility for this task. In essence, the establishment of a Federal Reserve system in the post-1907 world, also served a wider, political objective of re-assessing the discourse between private financial companies and the state itself.
In my opinion, the 1907 crisis is really interesting for several reasons. As a historical event, it draws uncanny parallels between then and 2008 in relation to crisis management. Second, it also shows how both private financial companies and the state have previously had rather turbulent relationships built on both disagreement and mutual co-operation in times of emergency. Ultimately, however, it tells us a great deal about the health of our institutions of today- and in particular, how institutions such as the Federal Reserve, or indeed the European Central Bank, have ultimately failed in delivering the objectives it was designed for- protecting citizens from crises that were never supposed to happen in the first place.
