In the Panic of 1893 and the depression that followed, people exchanged their government paper for reliable gold. The depression also plunged the federal budget into deficit, forcing the Treasury to dip into its gold reserves. The result: U.S. gold reserves had fallen below $50 million by February 1895, raising fears that the government would default, shattering the economy even further.
Working with Grover Cleveland
Through Assistant Secretary of the Treasury, William Curtis, President Grover Cleveland sounded out Morgan for ideas to avert a catastrophe. Morgan suggested a sale of $50 million in government bonds to a group of investors organized by him, with an option of another $50 million. News of a possible deal with Morgan revived Wall Street and slowed the pace of gold withdrawals.
However, Cleveland dragged his feet, wary of political damage from appearing to sell out to Morgan. The markets resumed their panic and Morgan rushed to Washington to meet Cleveland. Morgan alleviated Cleveland's concerns. He referred to a Civil War statute still on the books allowing the president to buy coin money with bonds. With Morgan's added guarantee to stop the gold drain, Cleveland assented and Morgan's syndicate bought $62 million in government bonds with gold coin. By mid-February, the crisis eased and gold flowed back into the Treasury.
Panic of 1907
Twelve years later, another panic shook the economy. Too many trust companies had become extremely speculative, loaning so much against stocks and bonds that half of the bank loans in New York were backed by securities, according to James Chace. They didn't maintain high cash reserves for its commercial banks, thus becoming susceptible to sudden runs. By October, the banking system was tottering as well as other sectors of the economy.
On October 22, Morgan met Treasury Secretary George Cortelyou and Cortelyou released $25 million at Morgan's disposal. Two days later, New York Stock Exchange president Ransom H. Thomas reported to Morgan that stock trading had stopped and if $25 million wasn't raised immediately, at least 50 brokerage houses would fail. Morgan gathered leading New York bankers and in 16 minutes coaxed the $25 million. News of the available money cheered Wall Street.
In November, Morgan proceeded to save the brokerage house Moore and Schley, which was $25 million in debt with stock in the Tennessee Coal and Iron Company as collateral against loans. If it collapsed, other houses would follow. Morgan's U.S. Steel proposed to buy the Tennessee Coal stock. Fearing restraint of trade charges, U.S. Steel chairman Elbert Gary met with President Theodore Roosevelt, who had derailed Morgan's Northern Securities railroad merger in 1904. Roosevelt knew the economic stakes involved and vowed not to interfere with the deal. The panic soon ended.
Morgan profited from both bailouts, which he probably viewed as a just reward for saving the economy. 1907 was the last time a sputtering economy was rescued by private initiative. Starting with the Federal Reserve System in 1913, the government would take a more active role in taming economic bears.
Sources
Brands, H.W., The Reckless Decade, St. Martin's Press: New York, 1995.
Chace, James, 1912, Simon and Schuster: New York, 2004.
