There wasn’t going to be any mistake that night. [  J. P. Morgan] intended that all should stay until the end of the party.¹

—Recollection of Benjamin Strong Jr., Bankers Trust Company

On Saturday morning November 2, conditions on the Exchange in New York remained generally quiet; the market closed as usual at noon with no extraordinary activity. Earlier in the day, the State Banking Examiner had released the weekly bank statement, but the report was so bad that it was suppressed and kept from the press. The biggest troubles were occurring at the trust companies.

The situation at the Trust Company of America and the Lincoln Trust Company continued very poorly—these were the 5th‐ and 16th‐largest trust companies in New York by total deposits at the start of 1907²—and there was talk that one or both would fail to open again on Monday because of continuing runs. Following the failure of the Knickerbocker on October 22, any failure would sharply set back a recovery and might return the financial community to full panic. The funds loaned to trust companies so far had not been sufficient to meet depositors’ withdrawals. And depositors were still unconvinced that their money was safe. Again, the trust company crisis was coming to a head; this time, J. P. Morgan would not provide the solution. He decided it was time for others to come forward.

Resolving the Information Problem

For days, J. P. Morgan’s partner, George W. Perkins, had been trying to get a complete statement from the trust companies regarding their financial condition, but he “had obtained nothing that was satisfactory.”³ The trusts would have a brief respite the next day because it would be Sunday, and Tuesday, November 5, would be Election Day, also a banking holiday. But Perkins felt it was critical to solve the problems with the banks and trust companies by then, or else “there was no use in making any further fight for them and that they would have to close.”⁴ He assigned two separate committees of examiners to ascertain the financial status of both the Trust Company of America and the Lincoln Trust.

Among the investigators he assigned to inspect the trust companies was Benjamin Strong Jr. from Bankers Trust who, along with Henry Davison, had tried to assess the health of the Knickerbocker and now faced the assessment of the other two big trust companies over a long weekend. He later described working “without sleep nor leaving the building”⁵ to carry out his assignment. By 9 p.m. on Saturday, November 2, Strong reported to Morgan’s library to offer his final assessment of the ailing trusts.

When he arrived at the building, about 40 or 50 men were already discussing both the brewing crisis and the troubles that lay in store for Monday. He noted that the presidents of the clearing house banks were assembled in the library’s East Room, while representatives from the trust companies were gathered in the West Room. Morgan, Judge Gary, Henry Frick, Lewis Cass Ledyard, and others had retired to “neutral ground”⁶ in the office of Morgan’s librarian at the rear of the building.

Strong said, “I felt satisfied that something had gone wrong.”⁷ Henry P. “Harry” Davison, who had established Bankers Trust, told Strong that Morgan was already convinced that $25 million would be required to deal with the trust companies in addition to an estimated $25 million to address an emerging problem at Moore & Schley, a brokerage firm. “[I]n those days $50 million^a looked very large indeed in contrast with the figures to which we are accustomed now,” Strong later wrote in 1924.⁸ After all the earlier loans and commitments during the Panic, such a large commitment would seriously strain the capabilities of Morgan and his circle.

Morgan finally announced to his counselors in the librarian’s office that he would agree to undertake the difficulties with Moore & Schley only if the trust company officials themselves would insure the needs of their weaker peers.

The Problem of Collective Action in a Diverse Group

Since 1903, when the trust companies had split from the NYCH, they had tended to go their own various ways. The years 1903–1906 had been good to the trust companies and may have inflated their confidence into overconfidence. Furthermore, as discussed in Chapter 9, the trust companies formed a heterogeneous lot, varying by age of institution, by extent of affiliation with the established financial institutions, by clientele (wholesale vs. retail), by ethnic focus, and by distance from Wall Street.

Since returning to New York on October 21, Morgan had met with many trust company presidents individually. And he had organized gatherings of trust company presidents to form an association for the pooling of risk—not unlike the NYCH. Newspapers and the Morgan archives show that Pierpont had met with some or all of the trust company presidents virtually daily. None of his meetings up to that point had successfully mobilized collective action. By November 2, the need for trust companies to rescue their own had become crucial.

Some insight into Morgan’s challenge is afforded by modern research into the problems of collective action. The work of Mancur Olson,⁹ Nobel laureate Elinor Ostrom,¹⁰ and others suggest the important role of incentives to motivate individual players to commit to joint effort at some individual cost. Some benefit must override that cost, as well as any incentive to free‐ride by some members of the collective. Benefits could accrue in the form of improved economic welfare, the avoidance of losses, reduction of injustices, and/or strengthened identity. Olson pointed out that as the group grows larger, collective action becomes more difficult. And participants tend to commit resources relative to their own capabilities; one size of contribution does not fit all contributors. Therefore, collectives tend to expect the resource‐rich participants to contribute more on an absolute basis. This was the rub for Morgan and the trust company executives: some of the largest trust companies were distressed and couldn’t contribute to a rescue pool—the smaller trust companies were being asked to rescue two of the larger players in the market.

Attempting to marshal a risk‐pooling agreement among the trust companies must have felt to Morgan like herding cats. Estimates of the number of trust companies in New York varied from some 38¹¹ in Manhattan alone to 59¹² in what was then the entire city.¹³ Representatives from individual trust companies came and went and varied from one day to the next. Figure 16.1 shows that the volume of deposits among the field of Manhattan trust companies was distributed asymmetrically: the five largest firms accounted for 37 percent of all deposits; the 10 largest held 61 percent.

Thus, the field of trust companies consisted of a minority of large firms and a majority of relatively small ones—and some of the larger firms (Knickerbocker, Trust Company of America, and Lincoln) were the subject of intense runs. This asymmetry may have engendered schadenfreude by the smaller firms toward their large and ailing peers. Competition among trust companies remained quite active, as judged from their behavior (offering interest payments on deposits and retail marketing efforts) and measures of industry concentration.¹⁴

Some competitors may have hungrily eyed the possibility of picking up deposits from failures of distressed peer firms. Indeed, a redistribution of deposit accounts was already underway and would benefit smaller trust companies. Figure 16.2 shows the percent change in deposit accounts for each of the trust companies as ranked in Figure 16.1—visibly, smaller trusts tended to gain accounts, while larger ones lost. The correlation coefficient between volume of deposits and change in deposit accounts is –0.16 and is suggested by the downward‐sloping trendline in Figure 16.2.

Small trust companies may have benefited from local proximity to their retail clientele and from ethnic and religious networks during the Panic. And the loss in deposits at Trust Company of America, Lincoln, and Knickerbocker^b would have weighed down the results at the large end of the distribution. The distribution of gains and losses in deposits for these firms during the Panic is a worthy subject for future research.

The point is that the community of trust companies was wracked by divisions that obstructed J. P. Morgan’s efforts to bring the trust company presidents toward a risk‐pooling agreement. An ultimatum (a final offer backed up by a threat) is one strategy for compelling a group toward collective decision. The threat must appear to make everyone worse off. Ultimatums are plainly risky, as they are coercive and may embolden resistance. Morgan did not need to extend a threat of his own, but merely could relate the disastrous consequences of a failure to form a collective. Would an ultimatum work in the wee hours of Sunday, November 3?

A Meeting with a Locked Door

For the next several hours, Strong reported that nothing but “desultory conversation”¹⁵ took place among the bank officials. Thomas W. Lamont, another Morgan associate, was also summoned to this plenary session of bankers, and he provided an evocative description of what he saw that night at the now‐famous meeting at the library:

A more incongruous meeting place for anxious bankers could hardly be imagined: in one room—lofty, magnificent—tapestries hanging on the walls, rare Bibles and illuminated manuscripts of the Middle Ages filling the cases; in another, that collection of the Early Renaissance masters—Castagno, Ghirlandaio, Perugino, to mention only a few—the huge open fire, the door just ajar to the holy of holies where the original manuscripts were safeguarded. And, as I say, an anxious throng of bankers, too uneasy to sit down or converse at ease, pacing through the long marble hall and up and down the high‐ceilinged rooms, with their cinquecento background, waiting for the momentous decisions of the modern Medici.¹⁶

Finally, around midnight, Edwin S. Marston, the president of the Farmers Loan and Trust Company (the largest trust company), was summoned away from the trust company executives in the West Room to see J. P. Morgan. After meeting with Morgan for an hour, Marston—“looking very grave”¹⁷ —returned to the room and explained to the trust presidents that Morgan had informed him of another serious situation, about which he was not at liberty to say more. Morgan told him that the problem would call for another $25 million, and he was working toward a solution. But Morgan was very concerned about the problems with the trusts and the risks they posed to this other situation. “Mr. Morgan was naturally unwilling to proceed with the other matter,” Strong said, “with the possibility of a complete banking collapse which would render his efforts futile.”¹⁸ Clearly, this statement was an indication that Morgan was leaving the trust company problem to the trust company presidents. This time, he refused to be their rescuer, and this thrust the assembled executives into an utter state of consternation.

During the debates that ensued, Strong dozed off on a lounge chair next to James Stillman, the president of National City Bank. “I recall his asking me when I had last been in bed,” Strong said, “and when I told him the previous Thursday night, he said the country wasn’t going to smash if I went home to bed.”¹⁹ Finally, at 3 a.m., the assembled bank and trust company officials were ready to hear Benjamin Strong’s full report on the faltering trust companies; by this time, there were approximately 120 men participating in the conference. Outside, a throng of reporters awaited news from the meeting, but secrecy was maintained through the night and into the morning.

Inside, Strong assured the trust presidents that the Trust Company of America was solvent and, with equity that amounted to $2 million, the firm had sufficient assets to pay off its depositors in time. Another committee organized by George Perkins reported that the Lincoln Trust was probably short of its ability to pay its depositors by at least $1 million. After concluding his report, Strong headed to leave the building; when he reached the door, he found that the library had been locked. “It was indeed true that Mr. Morgan, having assembled the men to deal with a perilous situation, had had the door to the library locked, and the key was in his own pocket,” Strong wrote.²⁰ Even though Morgan was often not directly involved in the negotiations among the trust company presidents, clearly, he exerted powerful influence. “Mr. Morgan took no chances,” Satterlee wrote. “He meant to have the situation cleared up before a single man left the building.”²¹

By this time, Morgan himself had entered the discussion. He pointed to Edward King, the president of the Union Trust Company, who had been the unofficial leader of his fellow trust company presidents. Morgan told him that they must act now, and that they must provide a loan of $25 million to support the Trust Company of America, or else “the walls of their own edifices might come crumbling about their ears.”²² He told them again that the equity in the Trust Company would secure their loans and that the clearing house banks were looking after the situation elsewhere.

Even though Morgan had just told them that it was incumbent upon the trust presidents “to look after their own,”²³ they were still hesitant to take any action. They contended that in the absence of their boards of directors they lacked the authority to burden their institutions with such a heavy commitment. They were also convinced that it was their primary responsibility to conserve their assets to weather the financial storm swirling around them. Morgan understood their position and he sympathized with them—but he also understood that the failure of the Trust Company of America could have far‐reaching implications; unless it were saved that day, they risked a complete collapse of the entire banking system. “The situation must not get further out of hand,” Lamont said. “It had to be saved.”²⁴

Several of the lawyers present had drafted a simple subscription for a loan of $25 million. As for any possible objections from the trust companies’ boards of directors, Morgan told the assembled presidents that he was confident their boards would ratify whatever decision was made there that day; Morgan clearly understood the power his personal endorsement would carry. One of the lawyers read the subscription form aloud to the bankers, and he laid it on the table. Morgan waved his hand “invitingly” toward the document.

“There you are, gentlemen,” Morgan said.

He waited for a few moments, and then he put his hand on the shoulder of his friend Edward King, encouraging him to come forward.

“There’s the place, King, and here’s the pen,” Morgan said as he placed a gold pen in the hand of the Union Trust president.

King signed, followed by every other trust company president in the room.²⁵