The Panic of 1910–1911: Its Causes, Consequences and Even a Legacy

The Panic of 1910–1911, a short-lived yet momentous event in American economic history, took place in the closing years of the first decade of the twentieth century, then an era of unprecedented industrial expansion and financial speculation. Although the panic was not nearly as impactful as the better-known financial panics like those of 1907 or the Great Depression in 1929, it is significant for being one of the first display of weaknesses within the American banking industry and paved the way for several important steps that would lead to creating a Federal Reserve System less than a decade after.

This episode was characterized by a combination of speculative excess, a number of banking and market accidents, as well as simmering tensions within the financial sector which manifested itself in a swift decline in stock prices and general malaise. It didn't create widespread bank failures or a drawn out recession like some past panics and later American panics, but it did provoke an awareness of instability in the financial system that would eventually cocreate the demand for reform that resulted in the Federal Reserve delaying until 1913.

Background: Financial Conditions in the Early 1900s

The early 1900s was a time of economic growth but also fragility for the United States. With the rapid growth of steel, oil and railroads, the country had reached an industrial peak. The stock market was also growing: hedge-fund investment was pouring in and so were the erstwhile-matter-of-fact new middle-class investors eager to get a piece of that economic nirvana pie.

But during this stage of growth, there were also speculative bubbles in a number of sectors, supported largely by frivolous domestic and global elements. Speculative interest in individual stocks, railroad securities or commodities drove financial markets up and down, with most assets demanding far more than their real worth. Making it worse, this was a period of very little regulation of U.S. banking and financial institutions: there was no central authority overseeing the stability of the overall financial system.

The Panic of 1910–1911 was thus in part a manifestation of systemic or financial fragility, and in part, the product of broader global macroeconomic forces at work.

Elucidation of Elements Behind the Panic of 1910–1911

The panic of 1910–1911 was the result of a number of interrelated factors. Among them: Diversions in stock speculation, strife among major financial institutions and economic frictions.

Susceptibility of Speculation to Stock Market

Similar to the earlier Panic of 1907, speculative activity — especially in stock exchange — underpinned the Panic of 1910–1911. Meanwhile, it was becoming fashionable to lever up in order to buy stocks. Specifically, the overuse of margin loans — where investors borrowed money to buy more stock than they could afford — led to potential mass sell-offs with even a small fall in security values.

Furthermore, high-profile commodities were fluctuating in key sectors such as railroads and industrial stocks which fueled instability in financial economics. Railroads were highly sensitive to market forces - the industry was over-leveraged and stock prices often priced higher than justified from speculation.

The Conflict of Interest Between Financial Elites — The “Money Trust”

One of the primary reasons for the panic was increasing competition among financial elites in the U.S., especially members of something called the “Money Trust.” The Money Trust was the term applied to a handful of financiers such as J.P. Morgan, John D. Rockefeller and James Stillman who dominated much of banking and industry. This dominance developed into the friction with independent and regional banks as they sought for control over financial resources and their channels out into investments.

By 1909, the House of Morgan was trying to get bigger by taking over little banks and squeezing for even more control over the country’s financial plumbing. Morgan's power garnered the ire of many smaller banks and financiers with this fierce consolidation strategy. As a reaction there began attempts to establish a parallel financial system, which would mount better protection against the independent banks, while also providing a counterbalancing force against the power of the banking elite.

This struggle came to a head in 1910 when a number of moves of the Money Trust rippled out through the financial system, purchasing panic.

The Trust Company of America Collapses

One major event that triggered the panic was the bankruptcy of the Trust Company of America in 1910 fall. One of the big financial institutions, the Trust Company of America had gotten tangled up in speculation mostly on Wall Street and lost considerable money. This caused a confidence crisis, particularly in the short-term money market after its collapse. This frightened bankers and investors, that other financial institutions might be just as exposed which triggered a stocks and bonds sell-off.

The disorienting jolt that hit the banking system: If bulge-bracket banks like this one could be shaken by market shocks, what about lesser mortals? It's the fall of Trust Company America that would trigger the panic to come, and a certain failure of faith in our financial system.

Global State Of The Union: Tough European Economic Conditions

While those factors were domestic in nature, international events also contributed to the panic. At this time in Europe, the early 20th Century was a politically economically unstable period full of political upheaval leading up to what became WWI where the economic uncertainty in EU led to global capitalism being a lot less liberal with investors running away from any kind of risky project out there which eventually led to the retraction of most capital markets around the globe. The onset of this slowdown exerted further pressure upon U.S. financial markets, which was key in the panic.

The Panic Itself

What was maybe worse is that the Panic of 1910–1911 saw a steep tumble in stock costs, especially railway shares and various other unproven wagers. With the collapse of the Trust Company of America rippling through financial markets in October 1910, stocks lost value. This drop in stock prices led to greater margin calls (demands for extra collateral backing loans) and a panic became more entrenched. This caused a chain reaction of liquidation for many investors, resulting in further drops.

It has amplified the panic on the backdrop of an already thin liquidity market. The speculative bets taken by major banks and financial institutions meant that, inclination or ability aside, there was no credit to be extended to other faltering banks facing liquidity problems. This left the financial system with almost no capital available to sustain the market travailing at that moment.

But this time, as opposed to the Panic of 1907, there was no immediate government intervention in market conditions. Rather, their response was mainly left to the lords of finance who organized to try and stabilize the markets if they could, often by lending out money to institutions in distress.

Impact of the Panic

The Panic of 1910–1911, although not a full-blown economic depression in its own right did have several significant ramifications:

Calls For Central Banking and Reform Movements: The panic revealed the underlying deficiencies in the U.S. financial system, most notably a central bank to deal with such crises. When the panic was over, many policymakers and reformers—including President William Howard Taft—came to espouse the need for a new kind of institution that could take control of U.S. monetary policy and keep the banking system stable.

The Aldrich Vreeland Act — Congress adopted theAldrich-Vreeland Act into 1913, and it was designed as a response to the panic by creatingal National Monetary Commission to study the problems ofAmerican monetary system. The Federal Reserve System, a central authority for banking and monetary policy, would not be created until 1913.

Public Awareness and Financial Regulation: The panic increased public awareness of the need for greater financial market regulation and oversight. This was one of many causes that ultimately created progressive era reforms to halt financial speculation and establish better baseline conditions for the economy.

Conclusion

Although brief, the Panic of 1910–1911 represented a formative episode in the development of the U.S. financial system. The panic revealed the fragilities of an interconnected global financial system and inspired calls for greater supervision and regulation. The panic's aftermath, and precedents set by the Panic of 1907, paved the way for a Federal Reserve System which would come to dominate U.S. economic policy throughout most of the 20th century.

While the Panic of 1910–1911 was not as spectacular nor as wide reaching in effect on American financial history, it did represent a milestone that catalyzed important changes to the foundation and framework of American finance.