The Fruits of Civilization (26-7) Early 20th Century

Early 20th Century

The decade leading up to the Panic of 1907 was marked by extraordinary liquidity growth. The Klondike and Alaskan gold rushes brought a bounty of hard money into the American economy. Even more gold flowed in from Europe. The US governmental response was the Gold Standard Act of 1900, which officially set gold as the only standard for redeeming paper money, ending the bimetallism of the previous era.

Instead of a steadying hand, the US Treasury needlessly injected liquidity into the banking system, and lowered reserve requirements to virtually zero. These reckless acts fed debt accumulation and speculation.

The Interstate Commerce Commission came into existence in July 1906, with the power to set maximum railroad rates. This prospect softened the stock market, as railroad stocks slid.

In August 1906, Standard Oil was fined $29 million for antitrust violations: a prelude to its breakup. This governmental crimping of unfree enterprise unnerved stock markets further.

These setbacks were slights to what happened next. The financial markets came a cropper from copper.

In 1907, the Heinze brothers – Augustus and Otto – aimed at cornering the market in copper. (Augustus Heinze had been consolidating the copper supply since 1902 through his United Copper company. His brother Otto simply took the idea to its speculative conclusion.) (Cornering the market consists of obtaining sufficient control of a specific commodity, stock, or other asset, to manipulate the market price. There have been many such attempts, in everything from tin to cattle. Very few succeeded.) The Heinzes were abetted by Wall Street banker Charles Morse, who had once successfully cornered the ice market for New York City. Financing was furthered by the Knickerbocker Trust Company, run by Charles Barney.

The problem with the copper cornering scheme was that the Heinze’s lacked sufficient financial backing. Morse cautioned Otto, but Otto made the play anyway. Having misread the market, the share price of United Copper collapsed. Otto Heinze’s failed copper cornering cast a contagion among his financial associates which cascaded, creating widespread panic. Lending quickly dried up, and the economy collapsed. A drawn-out economic malaise ensued, with revival only in 1914, as the Great War got underway.