The Panic of 1907 triggered a three-week U.S. banking crisis that ultimately led to the creation of the Federal Reserve System in 1913.
Key Facts
- Duration
- Three weeks, starting mid-October 1907
- NYSE peak-to-trough decline
- Nearly 50% from prior year peak
- Stock market decline rank
- 8th-largest in U.S. history at the time
- Key institution failed
- Knickerbocker Trust Company, NYC's 3rd-largest trust
- Crisis trigger
- Failed corner on United Copper Company stock
- Legislative outcome
- Led to establishment of Federal Reserve System
By the Numbers
Location
Cause → Event → Consequence
A retraction of market liquidity by New York City banks and eroding depositor confidence, aggravated by unregulated bucket-shop speculation, set the stage for crisis. The immediate trigger was a failed October 1907 attempt to corner the market on United Copper Company stock, which caused runs on the banks that had financed the scheme and quickly spread to affiliated institutions.
Over three weeks beginning mid-October 1907, the New York Stock Exchange fell nearly 50% from its prior-year peak. The collapse of the Knickerbocker Trust Company sparked widespread bank runs across New York City and then the nation. Financier J. P. Morgan intervened, pledging his own funds and organizing other bankers to stabilize the system, while an emergency takeover of Tennessee Coal, Iron and Railroad Company by U.S. Steel averted a secondary collapse.
The panic exposed critical weaknesses in the U.S. Independent Treasury system, which lacked the capacity to inject liquidity during a crisis. Senator Nelson W. Aldrich subsequently chaired a commission to investigate and recommend reforms. Its findings directly shaped the Federal Reserve Act of 1913, creating the Federal Reserve System to serve as a lender of last resort and stabilize the nation's money supply.