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The Panic of 1907: Lessons Learned from the Market?s Perfect Storm

Author(s):Bruner, Robert F.
Carr, Sean D.
Reviewer(s):Moen, Jon R.

Published by EH.NET (October 2008)

Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market?s Perfect Storm. Hoboken, NJ: Wiley, 2007. xiii + 258 pp. $30 (hardback), ISBN: 978-0-470-15263-8.

Reviewed for EH.NET by Jon R. Moen, Department of Economics, University of Mississippi.

Financial crises have become fashionable lately. The Fed is providing lender of last resort services to investment banks and even insurance companies, hardly the intermediaries we would expect to be subjected to runs on deposits typical of crises past. So are we in uncharted financial waters, with nothing to guide current policy makers? Perhaps not, if we are to believe Robert Bruner and Sean Carr and the lessons contained in their recent book, The Panic of 1907: Lessons Learned from the Market?s Perfect Storm.

Bruner and Carr attempt to find guidance for dealing with modern financial crises by examining the events of the Panic of 1907, the panic that finally gave New York bankers the incentive to push for a central bank for the United States. They view the Panic as the outcome of a ?perfect storm,? a convergence of financial events that together set the stage ideally for crisis. Separately, the events would have been merely troublesome. Out of this they draw lessons to be learned from the storm, several of which I will discuss later.

The book is aimed at a general audience, which is a strength and a weakness. It is divided into twenty very short chapters, which adds a sense of urgency and speed to the story. This helps to recreate the pace with which the Panic unfolded. The narrative is filled with many quotations from and references to primary source material, which is truly the big contribution to the scholarly side of the story. The most exciting is in the Prologue, which contains a detailed recounting of the suicide of Charles Barney. He was the president of the famous and ill-fated Knickerbocker Trust Company, the flash point of the Panic. The narrative surrounding his death has almost a Hollywood screenplay air about it. Bruner and Carr also provide a detailed list of these primary sources, the feature I liked most about the book.

The carefully documented history is marred, unfortunately, by several factual errors. On page 25 they discuss the Progressive movement in the early twentieth century, referring to various activists and muckraking writers like Sinclair Lewis who apparently wrote about the unsanitary conditions in the meatpacking industry. If Wiley and Co. had employed a fact-checker, we would have been reminded about Upton Sinclair instead. On page 110 they suggest that the first issuance of clearing-house certificates on October 28 increased the supply of currency by over $100 million in one day! If only that could have been so, the panic would never have ignited. Actually, that amount is the total amount of certificates issued over the course of the panic, with just a ?few? million being issued on any one day.

After the fascinating and detailed recounting of the Panic and rescue efforts coordinated by J.P. Morgan and colleagues, Bruner and Carr present us with seven forces that collided in a perfect storm that resulted in the Panic. They include: 1) system-like architecture, 2) buoyant growth, 3) inadequate safety buffers, 4) adverse leadership, 5) real economic shock, 6) undue fear, greed, and other behavioral aberrations, and 7) failure of collective action. Some of these forces can be picked out in today?s financial crisis, some can?t. Certainly there has been excessive residential construction recently as a source of buoyant growth, and the collapse of housing prices in some markets count as a real shock. Whether or not investors have become unduly greedy recently is debatable, as people seem to be always greedy. I doubt that there has been adverse leadership, at least leadership adverse to real estate lending, as both Republicans and Democrats encouraged increased lending. J.P. Morgan and friends provided adequate safety buffers, although they realized that next time they might not be so adequate. Today the Fed seems to be doing its job, although I am less sure about Congress. In short, I am not sure how to use these seven points. Are they to be used to predict crises or just describe them clearly after the fact? These forces also are not linked particularly closely to more formal analyses of panics and financial crises as economists currently understand them. For example, the use of Clearing House Loan certificates being a mechanism for lender of last resort services could have been explained in more detail without losing the non-specialist. Likewise, the role of the call loan market could have been brought out in more detail, as it involved short term lending backed by long term collateral. This structure of lending keeps reappearing in the current crisis. Despite these analytical weaknesses, I still recommend the book for its marvelous and detailed recounting of the panic.

Jon R. Moen is Associate Professor of Economics and Chair of the Economics Department at the University of Mississippi. He has published several articles on the Panic of 1907 and is currently working on a detailed study of the Panic with Ellis Tallman of Oberlin College.

Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII