ON MONDAY, October 21, 1907, the National Bank of Commerce of New York City announced its refusal to clear for the Knickerbocker Trust Company of the same city. The trust company had deposits amounting to $62,000,000. The next day, following a run of three hours, the Knickerbocker Trust Company paid out $8,000,000 and then suspended.
One immediate result was that banks, acting independently, held on tight to the cash they had in their vaults, and money went to a premium. According to the experts who investigated the situation, this panic was purely a bankers' panic and due entirely to our system of banking, which bases the protection of the financial solidity of the country upon the individual reserves of banks. In the case of a stress, such as in 1907, the banks fail to act as a whole, their first consideration being the protection of their own reserves.
The conditions surrounding previous panics were entirely different. In 1873 the currency was inconvertible and depreciated, and the banks could not increase their available cash reserve by the acquisition of gold. About twenty years later silver purchases weakened the monetary structure and caused distrust of American securities at home and abroad. The panic of 1907 was not preceded by any legislative disturbances or monetary unsoundness.
This panic was preceded by a season of greatest prosperity. It was followed by a widespread demand for currency reform. What economic students had been urging for a long time at last, as a result of this panic, culminated in the appointment of a National Monetary Commission by Congress and ultimately in the Federal Reserve Act of 1913. A study of monetary conditions was authorized by a Republican administration, and remedial legislation was enacted by a Democratic administration.
The immediate result of this panic was the enactment of a temporary measure known as the Aldrich-Vreeland emergency currency act, which was to expire by limitation on June 30, 1914. This act permitted the incorporation of national banks into associations similar to clearing houses and the issuance of "emergency" currency in times of stress upon certain securities approved by the authority of these associations and the government, which securities could be other than government bonds.
