If we get help overnight we shall reopen in the morning. If we don’t, we won’t. That’s all there is to it at present. We can’t tell now whether we are going to get help or not.

—G. L. Boissevain, Knickerbocker Trust Company¹

After the Bank of Commerce had announced on Monday, October 21, that it would no longer clear for the Knickerbocker Trust Company, all the other national banks also refused to cash the Knickerbocker’s checks, reflecting their growing unease about the Knickerbocker’s ability to honor the checks for payment. The banks would, however, accept checks for collection on behalf of the Knickerbocker’s depositors, even though those depositors would not be paid until the banks received payment directly from the Knickerbocker. It was in this way that large numbers of checks started arriving at the Knickerbocker late on Tuesday morning, October 22. Throughout the day many other banks were also sending messengers to the Knickerbocker on behalf of clients or customers who had deposits with the Knickerbocker and who sought to collect through other institutions. Ultimately, such exchanges accounted for nearly $5 million of the total disbursed that day, and they quickly overwhelmed the Knickerbocker’s ability to honor them.²

A Fateful Decision: No Rescue for the Knickerbocker

As depositors of the Knickerbocker clamored for their money, J. Pierpont Morgan’s diligence team hurried to review the trust company’s accounts. Later, Benjamin Strong, the leader of the review team, described the situation on Tuesday midday, October 22:

While sitting in the [Knickerbocker’s] rear office, we could hear those forming the long line of depositors waiting to draw out their balances clamoring for information as to what was going to happen … Harry [Davison] came into the room some time around noon and I spent possibly fifteen or twenty minutes in hurriedly giving him a picture of the situation, although by that time we had not completed much more than an examination of one‐half of the records of assets submitted to us. The question was whether, first the trust company was solvent, and second whether there were assets adequate to secure loans to see them through a serious crisis. In the short space allotted us it was absolutely impossible to give any assurances upon which any pledge of assistance could be based … I well remember the anxiety with which we discussed what should be said to Mr. Baker and Mr. Morgan who were awaiting our word. Most reluctantly, and with some appreciation of the possible consequences, we both agreed that honesty and fairness to everybody required us to say it was absolutely impossible in the length of time allowed us to answer those two questions or to make any reliable report.³

Davison and Strong reported back to Morgan and the committee: they were unable to establish Knickerbocker’s solvency in the time available. This did not mean that Knickerbocker was truly insolvent. Instead, Davison and Strong were unable to tell. Morgan and the committee faced a dilemma: Was Knickerbocker’s inability to give persuasive evidence of its solvency on short notice sufficient to deny it rescue funding?

Morgan chose not to intervene, as the New York Times explained, because he “did not care to assume the responsibilities of previous poor management.”⁴ This decision would prove to be one of the pivotal events of the panic.

History has been critical of Morgan’s decision: “a mistake,”⁵ an “error of judgment,”⁶ “Knickerbocker’s closure spread havoc among New York’s trust companies;”⁷ and Morgan closed “the Knickerbocker because he regarded it as threat to his control of finance.”⁸ However, the banking orthodoxy of the day—“Bagehot’s Rule”—could also explain Morgan’s choice as reflecting a complex trade‐off of concerns about liquidity, solvency, crisis dynamics, moral hazard, imperfect information, incentives, accountability, and effective resource allocation. Our examination of several archives yielded no evidence confirming one view over the others. Morgan’s decision remains a subject worthy of future research.

When the Knickerbocker’s tellers finally closed their windows, Strong, who was still inside the company’s offices, remembered, “The consternation on the faces of the people on that line, many of them men whom I knew, I shall never forget.”⁹ One of the clearing‐house bankers also confirmed that any attempts to uphold the Knickerbocker had, in fact, been abandoned early in the day:

The character of much of the Knickerbocker’s collateral is not readily marketable, and now that it has suspended payments temporarily, it is altogether likely that its credit has been so heavily impaired that a resumption would bring about another run. That might mean that support to the amount perhaps of $25,000,000 or more would be needed to carry the institution through. Under the circumstances it is better that the trust company be liquidated than that the reserves of other institutions be so heavily depleted.¹⁰

The directors of the Knickerbocker had remained in their boardroom all through the harrowing day on Tuesday. “Without exception they wore the looks of men who thought the world had used them hard,” the Wall Street Journal reported.¹¹ One of the Knickerbocker’s board members, G. L. Boissevain, said, “If we get help overnight we shall reopen in the morning. If we don’t, we won’t. That’s all there is to it at present. We can’t tell now whether we are going to get help or not.”¹² The superintendent of the state’s banking department confirmed this assessment of the situation.¹³

Reassurance to Depositors

In an attempt to reassure all depositors, the New York Clearing House (NYCH) announced that all association member banks were strong and that they would be protected; however, the NYCH refused to provide any relief for the Knickerbocker.¹⁴ One of the chief conferees, an NYCH committee member, tried to sound a note of optimism, saying, “I think it is safe to say that no other financial institution of the least importance will have to undergo the experiences of the Knickerbocker Trust Company. I feel optimistic for the first time since these troubles began.”¹⁵ A. Barton Hepburn, president of Chase National Bank, added, “I believe the general banking conditions will continue to improve from now on. The trouble at its origin was due to peculiar methods of certain parties [i.e., Barney, Heinze, and Morse] who have now been forced out of the situation and the clearing house will continue to render such assistance as may be necessary.”¹⁶

Despite the reassurances from the NYCH, news of the run on the Knickerbocker and its subsequent suspension was wreaking havoc on the markets. All loanable funds became hard to find as almost all the banks and trust companies hoarded their cash throughout the day. Trust companies, the largest lenders into the call money market, called in loans. At the market’s opening on Tuesday, the call money rate was quoted at a nominal 10 percent, but by noon there were no offers for money at all on the floor of the exchange. During the afternoon the money rates then advanced to 60 percent, declined to 40 percent, and surged up again to 70 percent a half hour before the market closed.¹⁷ As the call money dried up, stock prices slumped to their lowest level since December 1900. There were also reports of the failure of another prominent stock exchange house, Marcus & Mayer. And vague rumors surfaced about the condition of other institutions, “which shook Wall Street to its foundations.”¹⁸

Back at 23 Wall Street, J. P. Morgan and his associates conferred with an oncoming flood of bankers and trust company presidents. It appeared that the runs on the trust companies were not limited to the Knickerbocker. In particular, the president of the Trust Company of America (TCA) told them he was “desperately anxious” because the withdrawals from his company on Tuesday had been exceptionally heavy.¹⁹ TCA, also located on Wall Street, was presided over by Oakleigh Thorne, a popular member of a prominent New York family. Like Charles Barney at the Knickerbocker, Thorne had also opened several branch offices for his trust company and had grown its deposit base very rapidly;²⁰ TCA had about $50 million in deposits and about $100 million in assets.²¹ The precise cause for the run there was unknown, but one of TCA’s board members was none other than Charles T. Barney.²²

Assistance from the U.S. Treasury

On Tuesday afternoon, J. P. Morgan decided that the Secretary of the U.S. Treasury, George B. Cortelyou, should be summoned to New York immediately for a conference. Since the cascade of financial crises in the 1890s, the U.S. Treasury Department had engaged more actively in the financial system in an effort to forestall liquidity droughts that seeded banking panics. Cortelyou’s predecessor, Secretary Leslie Shaw, had pursued a policy of depositing Treasury Department gold reserves with national banks in anticipation of peak credit demands during the annual harvest cycle. Shaw had also encouraged importation of gold from Europe to boost the liquidity of the financial system.

George Cortelyou had been appointed Secretary of the Treasury on March 4, 1907, just as the U.S. equity markets were sliding into the “rich man’s panic” that spring—a portent, perhaps, of the role he would play in the coming crisis.^a As he now took the afternoon train from Washington, DC, to Manhattan, banks around the country were rapidly pulling their reserves out of New York, resulting in further pressures on available liquidity.²³ Upon leaving the conference at his offices at 6 p.m., Morgan, still suffering from his cold, said to a reporter, “We are doing everything we can as fast as we can, but nothing has yet crystallized.”²⁴

After Cortelyou arrived in New York at 9 p.m. on October 22, Morgan, Stillman (president of the National City Bank), Baker (president of the First National Bank), and Perkins (partner at J.P. Morgan & Company) went to see him at the Manhattan Hotel. At the meeting the Secretary said he was ready to deposit government money in the banks to help support the situation. The next day, Cortelyou directed $25 million in government gold to be deposited among large New York City banks, on the expectation that they would relend the funds to places of the greatest need. National City Bank received $8 million; First National Bank, led by Morgan’s friend George F. Baker, received $4 million; and the National Bank of Commerce got $2.5 million. The balance of $10.5 million went to 11 other New York national banks. Notably, J.P. Morgan & Co. was not a recipient of Treasury funds, but the bulk of the funds flowed to institutions in which Morgan had influence.

Cortelyou’s policy of directing rescue funds to national banks in New York City would prove controversial. Why New York? Why only large banks? His policies sharpened the divides in the country between the eastern coastal elites and the interior; between big banks and small; between banks and shadow banks; and between the circle of J.P. Morgan and everyone else.

Another problem with Cortelyou’s injection of funds was that even the federal government did not have a limitless supply of cash. As the funds went into New York banks, they went out again. Country bankers clamored for more liquidity and criticized Cortelyou for dispersing Treasury cash over the past summer, in advance of the harvest season’s demands. As a result of all its injections before and during the Panic, Cortelyou ran the Treasury’s balance of surplus currency down to about $5 million by mid‐November.²⁵ Cortelyou subsequently reported that about $296 million²⁶ vanished from the money supply of the country, through hoarding.²⁷ As people and companies stuffed their savings under the mattress, the credit crunch turned into a liquidity crunch.

The exhaustion of the Treasury’s cash left the New York bankers with a stark choice. They could serve the demands of country bankers by (1) reducing their own reserves below the legal limit, (2) calling in loans of their own customers, which would trigger a sharp economic contraction, or (3) suspending the withdrawal of deposits, a venerable response to panics in prior years.

A Press Release on Wednesday Morning

“We adjourned at two o’clock [a.m. on Wednesday, October 23] feeling that, without much of any doubt, there would be runs on other institutions,” George Perkins said.²⁸ Among the issues discussed that night was the situation concerning Oakleigh Thorne’s Trust Company of America, and the group of bankers was considering how to aid that firm. In a statement to the New York Times, George Perkins said:

The chief sore point is the Trust Company of America. The conferees feel that the situation there is such that the company is sound. Provision has been made to supply all the cash needed this morning. The conferees feel sure the company will be able to pull through. The company has twelve million dollars cash and as much more as needed has been pledged for the purpose. It is safe to assume that J. P. Morgan & Co. will be leaders in this movement to furnish funds.²⁹

Later, in government hearings, critics would allege that the first sentence of this statement triggered runs at Trust Company of America and reflected part of a coordinated effort to bring the trust companies down.³⁰

Strong’s Evaluation of Trust Company of America

Around 2 a.m. on Wednesday, October 23, Benjamin Strong was contacted at his home in Greenwich, Connecticut, and was told to assemble a team at once to begin an examination of the Trust Company of America. Morgan wanted a full report on TCA in his office by noon that day.³¹ Strong headed directly for Manhattan, and he and his colleagues worked through the night to ascertain the strength of the Trust Company of America.

Strong’s task—like the one he executed at the Knickerbocker—was to determine whether TCA was merely illiquid, as opposed to insolvent. The straightforward test of insolvency would be to value the assets of TCA and compare that value to the liabilities outstanding. If the assets exceeded the liabilities, then TCA’s problem was illiquidity, the inability to convert loans into cash fast enough to meet the demands of depositors. In that case, a bridge loan to TCA could be warranted. This must have been a challenging analysis for Benjamin Strong. According to a report submitted to the New York State Superintendent of Banks at the end of 1907, TCA’s assets included $27 million in secured loans, $3.8 million in unsecured loans, and a portfolio of bonds and stocks consisting of 84 different securities.³²

As the day began, Morgan’s health had worsened, and his family could scarcely rouse him from bed. “He seemed to be in a stupor,” remembered Herbert Satterlee.³³ After his personal physician was summoned, giving Pierpont sprays and gargles, the financier finally came down to breakfast, where he conferred at the library with George Perkins and reviewed the estimates of the cash that would be needed for the day’s withdrawals from the banks and trusts. After a few meetings, he drove downtown to the Corner, where E. H. Harriman of the Union Pacific Railroad and Henry Clay Frick of U.S. Steel Corporation, among others, were waiting to see him about the prevailing conditions.

Morgan was acutely concerned about the situations at the trust companies. “The Knickerbocker had gone over the dam and the Trust Company of America was nearing the brink,” Satterlee observed.³⁴ By 1 p.m. on Wednesday when he arrived at the Corner, Benjamin Strong had a reached a verdict about the Trust Company. Many of the trust company presidents were already meeting in one room, while Davison, Perkins, Baker, Stillman, and Morgan were in another. When Strong entered, Morgan remarked at once, “Have you anyone with you who can make a report to the gentlemen in the next room? They are the presidents of the trust companies, and when they came into the office they had to be introduced to each other,^b and I don’t think much can be expected of them. Sit down with Mr. Baker, Mr. Stillman, and me, and tell us about it.”³⁵

While an associate of Strong’s met in the next room with the trust company presidents, Strong himself offered Morgan, Stillman, and Baker a picture of the situation at the Trust Company of America. Strong described the next few moments as follows:

I remember Mr. Morgan repeatedly saying, “Are they solvent?” He wanted no details, but the general facts and results, and seemed satisfied with the opinions I expressed. There were two or three large loans in the Trust Company which I had to ask Mr. Morgan, Mr. Baker, and Mr. Stillman for their own opinion, and with what I remember telling Mr. Morgan that I was satisfied that the company was solvent; that I thought their surplus had been pretty much wiped out; but that the capital was not greatly impaired, if at all, although were the company to be liquidated there were many assets which it would take some years to convert into cash.³⁶

The entire meeting with Strong lasted about 45 minutes, during which J. Pierpont Morgan spoke no more than five or six times. Morgan asked Strong if he thought the bankers would be justified in seeing the company through its troubles. Strong answered in the affirmative.

Morgan turned to Baker and Stillman: “This is the place to stop the trouble, then.”³⁷

Morgan’s determined reply marked a pivotal moment in the panic episode. From this stage onward, Morgan (and his circle of major bankers and industrialists) assumed the role of a lender of last resort, implementing the advice of Walter Bagehot 34 years earlier that in a financial crisis, the rescuer should lend freely, upon good collateral, and at a penalty rate.³⁸