7. The Knickerbocker Crisis of 1907 was a recession within a recession
In October 1907 the American economy was already in a deep downturn when the New York Stock exchange entered a slide which saw its value decline by over 50% in a period of just three weeks. Major New York banks began tightening the availability of money – there was no Federal Reserve then to control cash flow – and as smaller banks in New York began to experience runs by frightened investors, the panic began to spread nationwide. The Knickerbocker Trust Company, then the third largest trust in New York, collapsed in October, and a nationwide panic ensued. Banks which had lent money to investors in the stock market were subjected to runs which forced them to close their doors. By November the entire banking system was in turmoil.
It took the direct intervention of J. P. Morgan, who promised to use his personal wealth to shore up crippled banks and convinced fellow New York banking moguls to do the same, to stem the crisis. Morgan also gained the approval of President Theodore Roosevelt to have US Steel take over the Tennessee Coal, Iron and Railroad Company, which another major banking house had used as collateral when making speculative loans, leading to a collapse of its stock. Roosevelt, though an avowed anti-monopolist, found Morgan’s acquisition to be in the nation’s best interest. By early 1908 the worst of the crisis was over, though the national economy continued to be in a recession. The Knickerbocker crisis led to the creation of a government commission to examine the causes of the near collapse of the banking system, which in turn led to recommendations to establish the Federal Reserve System.