Today I want to talk about the Panic of 1907 and how this event was used to create the Federal Reserve, that ultimately led to our current fiat money system.
Now, a lot has been said about the Panic of 1907 and, most often it is said that a lack of liquidity caused and exasperated the crisis. But one thing that is often left out is how it started and that was like many of our current day recessions was greed.
In 1907, Sugustus Heinze, the president of United Copper, and his brother, Otto, began planning a scheme to corner United Copper, as they believed that they already controlled a majority of the company.
Otto proposed a short squeeze, in which the Heinzes would aggressively purchase as many remaining shares as possible, and then force the short sellers to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then decide their price.
On Monday, October 14, Otto began aggressively purchasing shares of United Copper, which rose from $39 to $52 per share. The next day, he issued the call for short sellers to return the borrowed stock. The share price rose to nearly $60, but the short sellers were able to find plenty of United Copper shares from people other than the Heinzes. Otto had misread the market, and the share price of United Copper began to collapse.
As a result, Otto’s brokerage firm went bankrupt and then the panic began to set in. Regional banks began pulling money from the NY banks and people believing their regional banks would fail began pulling their money. The stock market tanked, and industrial output fell.
In 1908 the Aldrich-Vreeland act established the national monetary commission to study what had happened exactly and why? What did this commission due? They went to Europe and learned about central banking and what those banks did. Upon returning the commission recommended the creation of a central bank, even though the public was adamantly against it. In fact, in the 1912 presidential election both candidates opposed it. Of course, when Woodrow Wilson was elected, that would change, and the Federal Reserve would be created.
As Thomas Jefferson once wrote
“And I sincerely believe with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”
Thomas Jefferson to John Taylor, 1816
In conclusion, our fiat money really came about because of the Panic of 1907, which was started by greed, which is just like 2007 and the dot.com bubble (read here about what could cause the next panic). Up until that time, fiat was regarded as essentially worthless really beginning with the continental currency which was printed relentlessly during 1775 and 1776 and by 1779 was pretty much worthless. But as someone once said, “Never let a crisis go to waste”.
Thanks for your time
