… the ramifications of the failure and the possible consequences of the utter collapse of United Copper had a disastrous effect on Stock Exchange sentiment . . .

—New York Times, October 17, 1907

The First Domino

The first casualty of the failed corner attempt was Gross & Kleeberg, the brokerage house Otto Heinze had asked to initiate the corner. On Wednesday afternoon, October 16, Gross & Kleeberg closed its doors and suspended all trading after executing a major sell‐off of all its United Copper shares. Having been instructed by Otto C. Heinze & Company to purchase 6,000 shares of United Copper, Gross & Kleeberg later found the Heinzes unwilling or unable to pay for them. The brokerage had, in fact, been the most active buyer in United Copper on the rise that began on Monday when the stock went from $39 to $60 per share. When the Heinzes refused to pay for the shares, Gross & Kleeberg was forced to sell its United Copper holdings at a large loss on Wednesday, driving the price momentarily to $10 a share.¹

Gross & Kleeberg explained their situation in a letter to the Governors of the Stock Exchange:

Dear Sir: On Monday, the 14th, by direction of the firm of Otto Heinze & Co., members of the Exchange, we purchased and received for the account of said firm 3,202 shares of United Copper common and preferred, which we tendered them on Tuesday, Oct. 15, 1907, and demanded payment therefore, which payment was refused by them. Inasmuch, therefore, as they failed to comply with their contract, we were obliged to announce our suspension to the Exchange yesterday.²

“While the failed firm [Gross & Kleeberg] has not been for many months active on the Stock Exchange,” the New York Times later reported, “the ramifications of the failure and the possible consequences of the utter collapse of United Copper had a disastrous effect on Stock Exchange sentiment, which had begun the day with a hopeful attitude toward the market generally.”³

It was estimated that the United Copper purchases had cost Gross & Kleeberg alone some $300,000. “Our principals laid down on us,” said Philip Gross in explaining the failure, “that is all there is to it. Everybody knows who those principals are.”⁴ Another representative of the brokerage, putting it more bluntly, said that Gross & Kleeberg failed because “the firm bought United Copper for the Heinze people, who refused to receive it.”⁵ The brokerage house, established in December 1904, was immediately placed in the hands of an assignee, and a claim was filed against Otto Heinze & Company.⁶ These actions quelled some fears in financial circles, but there was a sense of foreboding that the commitments in United Copper that had brought disaster to one house might extend elsewhere.⁷

The Second Domino

As news of the failed corner spread, attention on Wall Street turned to Otto Heinze’s more famous brother, Augustus. Not only was Augustus well known and flamboyant, but he also held a controlling interest in United Copper Company and thus stood to gain personally from any attempted squeeze. Moreover, although it was not widely known at the time, Augustus had personally guaranteed the loans for Otto Heinze & Company through the Mercantile National Bank, of which he was both president and a director. Nonetheless, Augustus Heinze and his associates publicly maintained that he had had nothing to do with the ill‐fated corner in United Copper stock. They further insisted that Otto Heinze had managed the attempted corner without consultation with his brother Augustus.⁸ “Augustus Heinze,” the Wall Street Journal reported, “is in the dark regarding the affairs of his brother’s firm, and in order to ascertain the exact condition he has retained special counsel and auditors.”⁹

Throughout the day on Wednesday, October 16, as United Copper came crashing down, Augustus Heinze was seen going about the financial district in consultation with various banking interests. “Mr. Heinze was in conference with Mr. Morse at the latter’s office in the National Bank of North America early in the afternoon. Talk of a breach between Morse and Heinze was freely heard yesterday,” the New York Times reported. “Friends of Mr. Morse, however, made it plain yesterday, as they have in the past, that Mr. Morse had not been interested in the Heinze ventures.”¹⁰ Augustus convened a conference on Wednesday with his brother and several associates in the offices of Otto Heinze & Company that lasted until late in the day.¹¹

At 1 p.m. on Thursday, October 17, the next domino fell. The Exchange announced the official suspension of Otto Heinze & Company for failure to meet its financial obligations. Until Wednesday afternoon the firm had given assurances that they would pay their debts, especially those to Gross & Kleeberg.¹² Then, Heinze offered to pay Gross & Kleeberg $100,000, representing a third of its total indebtedness, but such an offer had come too late.¹³ For other creditors, the firm made a tentative offer of a 10 percent cash settlement, and the balance in three‐, six‐, and nine‐month notes. However, when Gross & Kleeberg announced its suspension, all settlement attempts were abandoned, and several brokers sold off their Heinze accounts.¹⁴ Announcing the news, a lawyer for the Heinze firm issued the following statement:

The firm of Otto C. Heinze & Co. feels itself perfectly solvent and will meet and pay all its just and legal obligations in full. It, however, refuses to pay obligations that it does not consider legal or just until a proper adjudication of the matter has been made. Rather than submit to such unjust demands it prefers to permit itself to temporarily be suspended from the privileges of the Stock Exchange.¹⁵

Upon hearing news of the latest suspension, brokers literally lined up outside the firm’s offices waiting impatiently for their checks. “Some of the brokers,” the Wall Street Journal reported, “after waiting several hours shoved their accounts with certificates over the transom of the Heinze offices, while others kicked at the doors and sought for recognition which was not forthcoming.”¹⁶ That same day, the firm announced that Arthur P. Heinze, the youngest of the three Heinze brothers, had been dismissed from the firm because he had incurred individual liabilities of nearly $1 million.¹⁷ Although Arthur Heinze had been in France during the wild gyrations in United Copper of the preceding days, it was reported that there were cable messages from him ordering purchases of the stock.¹⁸

A Third Domino

The next domino fell far from the canyons of Wall Street. On the very day the Governors of the Exchange shuttered Otto Heinze & Company, the State Savings Bank of Butte, Montana, announced its insolvency.¹⁹ The incident would hardly have attracted notice, but Augustus Heinze owned this small savings institution, which served as a correspondent bank for the Mercantile National in New York. The bank, which had 6,000 depositors and was the largest savings bank in the state of Montana, had funds on deposit with the Mercantile and loans outstanding to Heinze interests amounting to nearly $1 million; the bank was also holding United Copper Company stock as collateral for some of its loans.²⁰ Most of the bank’s depositors were small wage earners and, according to the bank’s officers, its closure had been prompted by fears of a major run. The bank, which Augustus Heinze had purchased in 1905, issued a notice on Thursday, October 17:

Because of unsolid conditions and rumors that cannot be verified, that may cause unusual demands by depositors, and owing to the shortage of currency and inability to secure additional currency immediately to pay demands which may be made, the management has deemed it advisable in the interest of all depositors to suspend for the time being. The bank is insolvent.²¹

The Fourth Domino

Apparently, the failed corner on United Copper, the suspensions of Gross & Kleeberg and Otto Heinze & Co., and the insolvency of the Butte State Savings Bank—all connected with Augustus Heinze—were too much for the directors of the Mercantile National Bank to bear. “It was generally understood that, owing to the close connections between President Heinze and the failed brokerage house,” the Times said, “the situation would be extremely unpleasant for the Mercantile Bank.”²²

After a meeting of the bank’s directors on Wednesday that lasted until after midnight, the controlling interests of the Mercantile assembled at 11 a.m. on Thursday, October 17, to announce the resignation of Augustus Heinze as president of the bank.²³ In a further attempt to allay concerns about the bank’s management, an offer for the presidency of the Mercantile was extended to William Ridgely, the Comptroller of the Currency of the U.S. Treasury.²⁴ On Thursday afternoon, Augustus made the following statement regarding his “voluntary” resignation:

In view of the difficulties in which my brother’s firm finds itself, I have determined that it is proper that I should give liberally of my time in assisting them to straighten out their affairs. In aid of this I have, after consulting with my fellow‐Directors of the bank and my personal friends, and consulting as well my own personal interests as a large stockholder of the bank, this day resigned as its President, remaining, however, as a Director, and have joined with my fellow‐Directors in a request that Mr. Ridgely accept the place made vacant by my resignation.²⁵

Friends of Heinze continued to support the Copper King, saying, “He did not pretend to have knowledge of the banking business,” and he “meant rather to learn the business as president of the Mercantile than personally to direct its operations.”²⁶ According to the bank’s quarterly report in April, the bank showed gross deposits of $19,884,000; by Saturday, October 12, prior to the failed corner in United Copper, the bank’s deposits had declined 42 percent to $11,569,000.²⁷ In the next few days the situation would grow much worse, and the interconnected nature of the relationships among the nation’s financial institutions would only enable the contagion to spread.

Propagation of Shocks

The failure of two brokerage firms and a small bank in Butte, Montana, would hardly seem to presage a serious financial crisis. Yet the important question was how these small shocks might spread. Augustus Heinze was the nexus of relationships among some seven national banks, up to 12 state‐chartered banks, seven trust companies, and up to six insurance companies.²⁸ His confederate, Charles Morse, had yet more relationships in the financial and business communities of New York. Might the crisis spread through these relationships?

The initial fallen dominoes highlighted two vulnerabilities in all financial systems that undermined confidence of depositors and investors in 1907, and later. The first was the complexity of the financial system. The rapid growth in financial markets and the number of firms made it difficult to apprehend the current state of things. The financial press was still in its infancy, as were bond rating agencies. There were no Generally Accepted Accounting Principles, Certified Public Accountants, or Chartered Financial Analysts. Nor was there a national regulator to mandate public disclosure of the financial condition and material events related to brokers, dealers, and issuers of public‐traded securities. Weak institutions (laws, norms, and conventional practices) obscured the players and their transactions in the markets. True, some financial firms were required to make regular reports to federal or state regulators, but it took expertise to derive meaning from these complicated reports. In short, complexity bred information asymmetries that fueled distrust of markets and financial firms. It was hard to know what was going on, a condition that spawned rumors and conspiracy theories.

The second vulnerability was the economic linkage among financial institutions and the markets in which they dealt. Financial contracts (for instance, loan agreements, investment commitments, or deposit contracts) formed the spine of such linkage. And reputation and relationships added muscle: upon the fulfillment of a verbal commitment might hang the prospect of gaining new business from an acquaintance, loans, equity, an invitation to join an investment pool, or support for one’s admission to a private club. Later, in 1912–1913, Congressional hearings would assert that the Wall Street business community was tightly linked into a money trust (more about that later). As the early falling dominoes revealed, economic linkage meant that trouble could travel. The contagion of the Panic of 1907 spread through the relational nerves that bound together the financial community.

Modern‐day research²⁹ into system dynamics reveals that complexity and tight linkage make it difficult to detect and fight crises. Adversity can feed back through complex systems in unanticipated ways, reinforcing and accelerating the initial shock, stimulating problems of adverse selection, and resulting in a “doom loop.”