October 2007: The 100 Year Anniversary of a 37% Market Crash

I’ve just finished reading The Panic of 1907: Lessons Learned from the Market’s Perfect Storm, a book by Robert F. Bruner and Sean D. Carr. As somebody who enjoys reading about history and the financial markets, this book was a good read. What really struck me about the book, however, were the similarities between 1907 and 2007. Allow me to explain.

The introduction of the book provides a brief summary of the situation in 1907. See if it sounds familiar to you:

To understand fully the crash and panic of 1907, one must consider its context. A Republican moralist was in the White House. Immigration was fueling dramatic changes in society. New technologies were changing people’s everyday lives. Business consolidators and their Wall Street advisers were creating large, new combinations through mergers and acquisitions, while the government was investigating and prosecuting prominent executives–leg by an aggressive young prosecutor from New York. The public’s attitude toward business leaders, fueled by a muckraking press, was largely negative. The government itself was becoming increasingly interventionist in society and, in some ways, more intrusive in individual life. Much of this was stimulated by a postwar economic expansion that, with brief interruptions, had lasted about 50 years.

The book goes on to describe how market speculation, fueled by massive amounts of leverage, led to a banking crisis and a 37% drop in the stock market. Although the United States did not have a central bank in 1907 (!), and although the banking system was vastly different than it is today, the resulting credit crunch is hauntingly familiar to what we’ve been experiencing over the last few months. Enter J. Pierpont Morgan.

J.P. Morgan was at the center of the financial storm in 1907. Like Warren Buffett today, Morgan was called on to battle the rising tide of bank failures. 1907 saw long lines of depositors trying to get their hard earned money out of trusts and banks. Police were called in to restore some semblance of order. And J.P. Morgan worked behind the scenes to bring financiers together in an effort to fight the loss of liquidity in the market. The U.S. was still on the gold standard then, so it was interesting to read about the shipments of gold crossing the Atlantic. It is amazing just how much comfort news of a fresh shipment of bullion provided the masses in 1907.

As with all financial storms to date, the panic of 1907 eventually subsided, followed by a boom, and then another bust, and then another boom. . . . All of which reminded me of Melville’s description of the sea: “Now small fowls flew screaming over the yet yawning gulf; a sullen white surf beat against its steep sides; then all collapsed, and the great shroud of the sea rolled on as it rolled five thousand years ago.”

Tagged as: bank, buffett, crisis, Investing, Morgan, panic, stock market