Wednesday, 22 August 2012

7 Biggest Crashes of All Time, I.

Probably everybody has heard about the 2008 market crash and the fall of Lehman Brothers among others – but other economic crises are generally unknown to readers. Do you how a single financier saved the US economy from total collapse in 1907? Have you heard about Black Monday and Black Friday? If not, then join us in our series to learn about 7 of the biggest stock market crashes of all time from the beginning of the 20th century until now.


The Panic of 1907

Date: October 14th 1907 - November 6th 1907
Location: USA

Causes: collapse of Knickerbocker Trust Company due to failed speculation
Duration of panic: 22 days
Biggest percentage change of market index: -29% (DJIA)
Length of recession: 1 year, 1 month
Results: establishment of the Federal Reserve System


The economy of the United States of America during the 19th century has seen tremendous, but very volatile growth – the latter mainly due to the lack of acentral reserve, causing the inability of the state to conduct viablemonetary policy. The country hence experienced a long series of short economic crises – quick, sudden decreases of exchange prices usually due to failed price manipulation attempts on an unregulated market, accompanied by bank runs and bankruptcies.

Immediate causes

The case was similar in 1907 as well – however, this time the economy of the US has been already in a recession since March, and prices of stocks steadily decreasing.
The main crash came on October 14th however, when longtime speculator Otto Heinze tried to 'corner the market' in his brother's United Copper Company – which meant trying to acquire enough stocks in the company to gain a majority, and hence set prices.
The plot failed. Soon Otto, along his brother Augustus and their associate Charles W. Morse and Charles T.Barney (head of Knickerbocker) were forced to declare bankruptcy – and given the fact that their alliance had control of six national banks, ten state banks, five trust companies and four insurance companies, people began to rush these banks to safely obtain their deposits, causing a massive panic and a huge fall of the stock market index.

The crash

The markets were in despair until October 23rd, when John Pierpont Morgan, a longtime millionaire pledged to give up huge amounts of his personal wealth, and persuaded other influential bank leaders in order to provide liquidity to one of the several failing companies, the Trust Company of America.
Despite the inflow of money, prices almost crashed on 24th , but in the end market confidence was restored. On November the 2nd however, it turned out that Moore & Schley, a major brokerage risked collapse due to it's loans being backed by a bankrupt company. Morgan raised yet another round of contemporary quantitative easing (QE)*, which finally soothed markets – prices began to rise after November the 6th, with the economy fully recovering by May 1908.


The particular ferocity of the 1907 crash made the financial community realise what has been already advocated by several businessmen throughout the 19th century – the need for a central monetary authority, capable of serving as a lender of last resort and conducting monetary policy, setting interest rates and curbing excessive speculation and subsequent damage. Even though J.P.Morgan stepped in this time, the US economy could not rely on wealthy financial philantropists on the long run.
 In May 1908, the US Congress passed the so-called Aldrich–Vreeland Act, establishing a commission dedicated to creating such an authority – and five years later, under the presidency of Woodrow Wilson came the Federal Reserve Act, establishing the new monetary authority for the United States of America.

Our next post in the series will cover a biggie, the crash of 1929 - stay tuned for additional reading material.

*Quantitative easing: an unconventional monetary tool used by central banks, buying private assets with the aim of directly injecting money to the private sector.

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