Economic Conditions
When U.S. President Andrew Jackson allowed the charter of the Second Bank of the United States to expire in 1836, the U.S. was without any sort of central bank, and the money supply in New York City fluctuated with the country's annual agricultural cycle. Each autumn money flowed out of the city as harvests were purchased and—in an effort to attract money back—interest rates were raised. Foreign investors then sent their money to New York to take advantage of the higher rates. From the January 1906 Dow Jones Industrial Average high of 103, the market began a modest correction that would continue throughout the year. The April 1906 earthquake that devastated San Francisco contributed to the market instability, prompting an even greater flood of money from New York to San Francisco to aid reconstruction. A further stress on the money supply occurred in late 1906, when the Bank of England raised its interest rates, partly in response to UK insurance companies paying out so much to US policyholders, and more funds remained in London than expected. From their peak in January, stock prices declined 18% by July 1906. By late September, stocks had recovered about half of their losses.
The Hepburn Act, which gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates, became law in July 1906. This depreciated the value of railroad securities. Between September 1906 and March 1907, the stock market slid, losing 7.7% of its capitalization. Between March 9 and 26, stocks fell a further 9.8%. (This March collapse is sometimes referred to as a "rich man's panic".) The economy remained volatile through the summer. A number of shocks hit the system: the stock of Union Pacific—among the most common stocks used as collateral—fell 50 points; that June an offering of New York City bonds failed; in July the copper market collapsed; in August the Standard Oil Company was fined $29 million for antitrust violations. In the first nine months of 1907, stocks were lower by 24.4%.
On July 27, The Commercial & Financial Chronicle noted that "the market keeps unstable ... no sooner are these signs of new life in evidence than something like a suggestion of a new outflow of gold to Paris sends a tremble all through the list, and the gain in values and hope is gone". Several bank runs occurred outside the US in 1907: in Egypt in April and May; in Japan in May and June; in Hamburg and Chile in early October. The fall season was always a vulnerable time for the banking system—combined with the roiled stock market, even a small shock could have grave repercussions.
Read more about this topic: Panic Of 1907
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