But the progressive movement does not consist of a few self‐constituted leaders. It consists of millions of thoughtful citizens drawn together by a common belief in certain principles. They will permit no combination of special interests and political expediency to secure control of the progressive cause, which is ultimately to redeem democracy and restore government to the people.

—Senator Robert La Follette, June 28, 1912¹

As the economic ripples spread across the country, the mood of the public and its elected representatives dimmed. By December 1907, congratulations for crisis fighters dissolved into demands for investigations. Democratic senators wanted to scrutinize the pattern of the Treasury Department’s deposits of gold in national banks and the government bond issues in November—they hinted darkly at favoritism in the distribution of government largesse. On December 12, the Senate adopted a resolution to investigate and called on Cortelyou to report. He responded in January 1908 with a 232‐page document. In February, Congress resolved to investigate further, though that effort led nowhere. Yet in March, Senator La Follette charged that banks and insurance companies allied with J. P. Morgan and John D. Rockefeller had created the Panic of 1907 to serve their own interests.² La Follette’s allegation resonated for years.

The turn of congressional dialogue played out against a larger canvas. President Roosevelt had announced that he would retire from the White House at the end of his term in March 1909—this made him a “lame duck” leader for the year following the Panic, hampered by declining influence and effectiveness. Democrats sensed political advantage in tarring the Republicans with the Panic of 1907. The jockeying among hopeful presidential successors to Roosevelt offered the Democrats an opportunity to drive a wedge through the Republican coalition of progressives and old‐line conservatives. Among the hopeful successors was George Cortelyou, who had allowed an underling to tout him as presidential or vice‐presidential timber. Thus, Cortelyou became a lightning rod for partisan and intraparty criticism. In every hearing from 1907 to 1913, Cortelyou remained a star witness.

However, more than political bickering, the congressional debates of early 1908 necessarily reflected the shocking impact of the Panic. What was to be done about it? What was the role of government in preventing or quelling financial crises? Anyway, what was the problem? Was it the insufficiency of currency in a time of crisis, or the instability of the financial system? More fundamentally, was the Panic of 1907 a child of Gilded Age capitalism’s elites and tendency toward monopoly?

Stopgap Banking Measures

New laws to guarantee bank deposits quickly sprouted in eight states, mainly in the West and South. Populists resurrected their earlier calls for the nationalization of banks, which would ultimately put the U.S. government behind a guarantee of bank deposits. Meanwhile, William Jennings Bryan—again, a presidential hopeful—darkly called U.S. Steel’s acquisition of Tennessee Coal & Iron “another link in the chain of monopoly.”³

To forestall radical reforms, Republican conservatives Senator Nelson W. Aldrich and Representative Edward B. Vreeland led the enactment of an amendment to the national banking laws that Roosevelt signed on May 30, 1908. The Aldrich–Vreeland Act created an emergency currency scheme to permit national banks to form associations to issue emergency currency, backed by government and mortgage bonds.

The Act also established a National Monetary Commission to study the adequacy of the financial system in the United States. Political wrangling ensued.⁴ The co‐chairs of the commission were Aldrich and Vreeland, who were identified with the Eastern financial community. Democrats and progressive Republicans scoffed at the co‐chairs and predicted that the Commission would design a system to the advantage of Wall Street. The National Monetary Commission did not report back until January 1911, by which time the political landscape had changed significantly. Nonetheless, the Commission fed the progressives’ zeal for technocratic analysis and gave Nelson Aldrich time to survey the many competing interests around central banking.

A Heightened Focus on Monopolies

The aftermath of the Panic of 1907 also featured a major sea change in public policy toward tougher enforcement of antitrust laws. Theodore Roosevelt’s activism in antitrust enforcement had reversed more than a decade of federal government lassitude in the face of monopolies growing on the business landscape.^a However, he sought not so much to end monopolies, as to regulate them.

Roosevelt distinguished between “good” monopolies that exploited economies of scale to bring products at better quality and lower price to consumers from “bad” monopolies that simply enriched their owners at the expense of the public. He thought that the public’s apprehension of trusts was “largely irrational.”⁵ In his 1902 State of the Union Address, Roosevelt declared that “we are not attacking the corporations but endeavoring to do away with any evil in them. We are not hostile to them; we are merely determined that they shall be so handled as to subserve the public good.”⁶ Accordingly, he decided not to dismember U.S. Steel, which had been formed through merger six months before McKinley was assassinated. Roosevelt viewed U.S. Steel and International Harvester (another J. P. Morgan creation) as benign trusts, receptive to focused interventions by regulators. To him, antitrust enforcement through lawsuits was a blunt weapon: slow‐moving, costly to the government, and uncertain in outcome.

In contrast, Roosevelt’s successor, William Howard Taft, who assumed the presidency in 1909, took the view that violations of the Sherman Act should be prosecuted, not regulated. A federal judge before joining the McKinley Administration in 1901, Taft had written the majority opinion in Addyston Pipe & Steel Co. v. United States (1899), a pillar in the antitrust legal literature.^b The opinion held that horizontal price‐fixing was per se illegal, a view that was later adopted by the Supreme Court as the orthodox interpretation of the Sherman Act. Taft brought into his administration George W. Wickersham, an attorney general of similar attitude, who subsequently earned the soubriquet “the scourge of Wall Street.”⁷ The team of Taft and Wickersham would emerge as the most active administration in antitrust history. More antitrust cases would be filed in Taft’s four‐year term than in Roosevelt’s seven years in the White House. In comparison to Roosevelt, Taft was an inflexible enforcer of the law, less prone to pragmatic resolution.

As the Taft administration got to work, Congress renewed a focus on monopolies in general and the acquisition of Tennessee Coal and Iron (TC&I) by United States Steel (USS) in particular. In January 1909, the Senate requested documents from the Bureau of Corporations regarding the deal. And in May, the House of Representatives asked the Department of Justice to inform it of any steps to annul the deal. In June 1910, the House asked the Department of Justice to opine on whether U.S. Steel had violated the Sherman Act. Then in a precedent‐setting decision in May 1911, the Supreme Court found that the Standard Oil and American Tobacco Companies violated the Sherman Act and ordered their dissolution—this juiced the antitrust sentiments of Congress.

TC&I Reexamined

When the Democratic Party gained control of the House of Representatives in the federal elections of 1910, the movement to investigate U.S. Steel and its acquisition of Tennessee Coal & Iron gained traction. That May, the House empaneled a special committee chaired by Kentucky progressive Augustus O. Stanley that would hold hearings from June 1911 to April 1912 and publish its eight‐volume report in August, just before the federal elections that year.

Representative Stanley was born in 1867, taught school, worked as a school principal, and began to practice law in 1894. Engaged in Democratic Party politics since 1900, he was elected to Congress in 1903 from a district in Kentucky’s tobacco country. He championed the interests of farmers and small businesspeople. Stanley was a flamboyant orator, a “demagogue,”⁸ whose leadership promised media attention for the hearings.

The mission of the Stanley Committee was to investigate two allegations: first, that the acquisition violated the Sherman Antitrust Act by virtue of a conspiracy in restraint of trade, and second, that the merger created a monopoly in steel production. Because the committee could not reach a consensus on findings, the Democratic majority on the committee issued a report separately from the Republican minority. The Majority Report concluded that U.S. Steel had: (1) absorbed a competitor that had challenged its share of market, (2) bolstered a monopoly position in its industry, and (3) had used the Panic to acquire a valuable asset at a discounted price.

The hearings alleged a host of errors of omission or commission by Frick and Gary in their presentation to Roosevelt on November 4, 1907.⁹ For instance, testimony revealed that Moore & Schley did not actually own a controlling interest in TC&I—some individuals affiliated with the brokerage firm did. The firm was, as it turned out, not in grave difficulty and needed a loan of only $5–6 million to calm creditors—other securities on hand could have been pledged to gain such a loan. The firm of Moore & Schley was not insolvent; it was merely illiquid.

In their presentation to Roosevelt, Frick and Gary also did not disclose that TC&I was not distressed and that it held vast undeveloped reserves of coal and iron (second only to U.S. Steel) and that its recent capital investments might allow TC&I to underprice U.S. Steel. Also, it appeared that U.S. Steel had a strategic interest in acquiring TC&I, both to eliminate a price competitor and to enter the South, where U.S. Steel had no production capacity. The Stanley Committee’s revelations about U.S. Steel’s acquisition of TC&I mainly suggested that it was motivated by monopoly power rather than public‐spirited rescue of an endangered financial firm.

However, data embedded in the Majority Report challenged its own conclusions. First, TC&I was a small fish in the sea and was unlikely to steal much business from USS. Second, TC&I and USS were players in different regions of the country: U.S. Steel in the North and Northeast, TC&I in the South. Although TC&I enjoyed a cost advantage from its use of more advanced open‐hearth furnaces, the advantage would largely vanish when the cost of transporting goods to the North was considered.¹⁰

Third, the Majority Report did not try to prove the existence of a monopoly position. And if it had, would have confronted the questions of the size of the relevant market and what share of market would be deemed to constitute a monopoly. Gary and Frick wanted to go no higher than a 60 percent share, implying that it was a threshold into monopoly. In 1906, William Jennings Bryan had suggested a monopoly threshold of 50 percent. Furthermore, the Stanley Committee relied on figures provided by U.S. Steel and TC&I, rather than independently producing their own figures. Figure 20.1 compares the output of U.S. Steel and TC&I as percentages of the entire industry and shows that across five major product segments TC&I would not have been a significant threat to U.S. Steel nor would its absorption materially change the market shares of U.S. Steel.

To sustain its finding that U.S. Steel had exploited the Panic to acquire a valuable asset at an advantageous price, the Stanley Committee provided no original independent evidence. A year after the acquisition, the railroad bond analyst John Moody had opined that TC&I was worth much more than its acquisition price, owing to the firm’s vast reserves of coal and iron ore that had yet to be developed. Moody estimated these reserves to be worth $1 billion and concluded, “the acquisition of this property for $45,000,000, added an almost unheard‐of value to the equity back of the steel corporation stocks.”¹¹ This implies that TC&I shares were worth much more than investors in the stock market thought. Moody also testified that the value of the TC&I ore deposits was “well known.”¹²

That neither Gary nor Frick had disclosed to Roosevelt the potential value of the reserves augmented the Stanley Committee’s argument of a conspiracy in restraint of trade. However, drawing on U.S. Geological Survey data, McLaughlin (1971) shows that the iron ore reserves obtained in the acquisition added only 9 percent to the already sizable reserves of USS, and that they increased its control of total U.S. iron ore reserves from 32 percent to 34 percent. McLaughlin concluded that the acquisition “did nothing to enhance the Corporation’s monopoly position.”¹³

Of more interest to an understanding about the Panic of 1907 are the Stanley Committee Majority Report’s revelations about the origins of the U.S. Steel/TC&I deal. The committee sought to prove that the sellers were coerced and that the resistance of Gary and Frick was a sham. The accumulated testimony suggested the opposite.

TC&I was acquired in 1905 by a syndicate of investors led by John “Bet‐a‐Million” Gates. He had been the president of American Steel and Wire, a monopoly in the production of barbed wire that was protected by various patents. As his nickname suggested, he had the reputation as a Gilded Age buccaneer, who gambled prodigiously, sold short the shares in his own company, and exploited corporate resources for his personal use.

When J. P. Morgan organized U.S. Steel in 1901, Gates eventually decided to join. But upon consummation of the merger, Gates found that his services were no longer required. Bitter and vengeful, he eventually resolved to build a competitor to U.S. Steel through acquisition. His strategy was to cobble together marginal steel producers and railroads, with each new acquisition pledged as collateral for loans to finance more acquisitions. This was a strategy that depended on rising asset prices. TC&I was the keystone in this plan. Gates helped to organize an investor syndicate that bought the controlling interest in TC&I and manipulated its share prices to a high level to maximize its collateral value for loans. If stock prices remained buoyant, Gates’s buy‐borrow‐buy strategy would work. But the market slump in 1907, along with banks’ reduction in call loans, ruined the plan.

Grant Schley, managing partner of Moore & Schley, felt the credit crunch as his lenders called for more collateral than afforded by the value of TC&I shares. Starting in the spring of 1907, a member of the syndicate told J.P. Morgan that the syndicate was willing to sell out—but Gary and Frick declined. By the fall, the distress of the syndicate members had turned desperate. The syndicate sent a lawyer, Lewis Cass Ledyard, to Gary with another proposal to sell. Gary again demurred—instead, he offered a loan to Schley of $1.2 million on October 23, against collateral of $2 million in TC&I stock. On November 1, Ledyard approached Morgan with news that the stability of Moore & Schley was threatened. Schley later testified that “Moore & Schley never owned any stock of the Tennessee Coal & Iron Co.”¹⁴ Yet the financial distress of the syndicate members—and especially Grant Schley—had spilled over to Moore & Schley. Schley said:

We were oppressed by rumors, some of them untrue, but Moore & Schley were the subject of attack, serious attack, and their credit, which is the life of the business was being destroyed. It was a matter of serious import… . The rumors were flying tremendously about, and nobody can escape those, you know. They may be true or untrue, and they affect the credit of this institution or that.¹⁵

To compound the emergency, rumors about Schley and TC&I threatened the stability of Trust Company of America (TCA). It appeared that TCA had made call loans of about $480,000 collateralized by TC&I shares¹⁶—a small amount relative to TCA’s assets of almost $50 million. Yet the rumors about TC&I and Moore & Schley threatened to refuel the runs on TCA. Thus commenced the intense meetings of early November, recounted in Chapter 17.

In short, TC&I was an instance of a leveraged industry roll‐up strategy, whose syndicate investors nearly failed during a financial maelstrom. Schley had to find a buyer for TC&I or declare bankruptcy.¹⁷ In contrast to assertions of the Stanley Committee, Gates and Schley were not coerced to sell by Gary and Frick.

However, the Majority Report of the Stanley Committee raised other troubling insights. First, “[n]either the solvency of the Trust Co. of America nor of any other bank in New York was in any way affected by the presence of Tennessee Coal & Iron stock… . the Trust Co. of America … [was] in no danger or trouble whatever.”¹⁸ But this contradicted Schley’s own testimony that rumors fed a reluctance to extend credit to Moore & Schley—a silent run of a different sort. Second, contrary to what President Roosevelt said, TC&I was not purchased at a loss to USS.¹⁹ Key to this were assertions about the value of TC&I ore reserves. The absence of scrutiny into the value of the reserves was a shortcoming in the Stanley Committee’s Majority Report. The fact that call loan creditors had deeply discounted the collateral value of TC&I shares to 50 percent of market price²⁰ suggests that claims of hidden value may have been optimistic. Third, the report asserted that the “panic was over prior to the interview” between TR, Gary, and Frick.²¹ Yet as demonstrated elsewhere in this narrative, by November 4 the Panic had not been quelled. Nevertheless, the committee concluded:

If the merger was in violation of the law it is equally clear that the President had no right to condone or encourage its violation, or to prevent the Attorney General from performing his duty, even though the prosperity of a dozen bankers in New York had depended upon it, much less the fate of a single stock broker, whose reckless transactions had involved him in financial disaster.²²

The Stanley Committee report raises a final reflection: Did J. P. Morgan truthfully communicate the emergency to the trust company presidents in the early morning of November 3? Morgan asserted that the instability of another firm threatened to refuel the panic, and that he would be unable to stump up another rescue fund for the trust companies because his resources were demanded for the other urgent rescue. Yet the facts as summarized here yield a different situation. First, Morgan knew by then that the deal in development would require the resources of U.S. Steel, not J.P. Morgan & Co. Second, owing to his connections, he probably knew that the individual, Grant B. Schley, was in financial distress, not the firm—however, he also could appreciate that continuation of the silent run by creditors (presaging similar runs a century later) would eventually kill the firm. Third, as organizer, investor, and director in U.S. Steel, he probably had intimate knowledge of the industry and TC&I’s financial condition. It seems likely that he saw a healthy bargain rather than a messy cleanup. Perhaps future archival research will clarify the extent to which Morgan was bluffing with the trust company presidents on November 3. Either way, his communication to them succeeded in compelling their collective action.

Attention Turns to Roosevelt

A highlight of the Stanley Committee’s investigation was Theodore Roosevelt’s testimony on August 5, 1911. He was adamant in asserting the correctness of his action, his belief that approving the USS/TC&I deal would help to quell the Panic, and his certainty that he had the facts necessary to justify the approval. Yet in the several thousand pages of testimony and financial data the Stanley Committee argues the opposite. The deal had uncertain impact on rescuing Moore & Schley and the Trust Company of America or on sustaining Tennessee Coal & Iron. Frick and Gary failed to tell TR several material facts. And alternative courses of action could have achieved the same outcome on the Panic.

Before the conclusion of the Stanley Committee hearings, Taft’s Justice Department sued U.S. Steel on October 26 for violation of the Sherman Antitrust Act when it acquired Tennessee Coal & Iron. The petition contained information that appeared to question Roosevelt’s diligence and judgment. Consistent with evidence that surfaced in the Stanley hearings, the suit alleged that Gary and Frick had not disclosed several important pieces of information that would have invalidated both the urgency and rationale for permitting the deal. In this move, Taft appeared to rebuke Roosevelt for his earlier approval.

In response to the news, Democratic‐leaning publications convulsed with opprobrium and mockery: “Mr. Roosevelt Fooled” ran a headline in the Fergus County Democrat of Lewistown, Montana.²³ The Urbana Courier‐Herald declared that Roosevelt was an “unwitting tool” of financiers and U.S. Steel executives.²⁴

Roosevelt went ballistic. Unable to admit an error, he dug himself in more deeply despite contrary factual evidence and testimony during the Stanley investigation:

I was not misled. The representatives of the Steel Corporation told me the truth as to what the effect of the action at that time would be, and any statement that I was misled or that the representatives of the Steel Corporation did not thus tell me the truth as to the facts of the case is itself not in accordance with the truth … I reaffirm everything … not only as to what occurred, but also as to my belief in the wisdom and propriety of my action—indeed, the action not merely was wise and proper, but it would have been a calamity from every standpoint had I failed to take it.²⁵

Bitterly, TR also denounced his former protégé:

Taft was a member of my cabinet when I took that action. We went over it in full and in detail, not only at once but at two or three meetings. He was enthusiastic in his praise of what was done. It ill becomes him either by himself or through another afterwards to act as he is now acting. I am sorry to say that … both he and Wickersham are playing small, mean and foolish politics in the matter.²⁶

In an article in the Republican‐leaning magazine The Outlook, Roosevelt argued that it was not necessary for him “to search the hidden domain of motive.… My concern was that the action should be taken and the situation saved in the interests of the people of the United States.” Roosevelt’s narrative placed him at the crux of the effort to stop the panic. “I dealt with facts as they were, not with facts as they might or might not afterwards become.”²⁷

Roosevelt Breaks with Taft

The antitrust lawsuit against U.S. Steel was the turning point for Roosevelt, who thereafter opposed Taft for the Republican renomination for president in the 1912 election. Failing to win the party’s nod, Roosevelt broke with the Republicans to form a third party. This split the Republican coalition of conservatives and progressives and helped to deliver the White House to the Democratic Party. The irony is that all three presidential candidates in November 1912 regarded themselves as progressives. The intensity of that campaign reflected a bitter contest to define the true faith of progressivism.

Unfortunately, the politically timed revelations about the TC&I acquisition damaged Roosevelt’s reputation. Yet he refused to relent. A year later, Roosevelt published his Autobiography, garnished with the same defenses about the TC&I acquisition that he had offered earlier—and this time, wrapped in a higher calling:

I would have been derelict in my duty, I would have shown myself a timid and unworthy public servant, if in that extraordinary crisis I had not acted precisely as I did act. In every such crisis the temptation to indecision, to nonaction, is great, for excuses can always be found for non‐action, and action means risk and the certainty of blame to the man who acts. But if the man is worth his salt he will do his duty, he will give the people the benefits of the doubt, and act in any way which their interests demand and which is not affirmatively prohibited by law, unheeding the likelihood that he himself, when the crisis is over and the danger past, will be assailed for what he had done.²⁸