Financial Crises: 1907 & The Great Depression

Featuring Richard Sylla

In this first part of a two-part piece, Richard Sylla, professor emeritus of economics at New York University, shares the true history of the Panic of 1907 panic and of the Great Depression. He explains the role that John Pierpont Morgan played in bolstering the economic system, and discusses how the 1907 crisis led to the creation of the Federal Reserve. He also shares his theory that the impact of the 1929 stock market crash has been badly overstated. Filmed on March 12, 2018 in New York.

Published on
28 March, 2018
Topic
Financial System, History
Duration
33 minutes
Asset class
Equities
Rating
47

Comments

  • DS

    David S.

    13 4 2018 13:19

    0       0

    Could the 1907 panic have been caused by the copper speculators' indebtedness to the shadow banks regardless of the 1906 San Francisco earthquake? DLS

    • CM

      C M.

      2 5 2018 01:10

      0       0

      Book titled "The History of Business Depressions", written in 1922, gives several reasons including copper. Author says primary causes were the weak financial system and unrestrained speculation. Volume of money increased from $1.5 Billion in 1896 to $2.8 Billion in 2007. Money rates were "unreasonably" low. "Unfavorable developments were completed ignored and favorable features long seemed to count, yet this year was marked by some very severe breaks subject, however, to almost immediate recovery." Rumors of mergers drove railroad stocks higher, though nothing came from these rumors and railroads collapsed by the end of the year. New York was hoarding money. Insiders were selling and holding the cash to buy back stocks at a cheaper price. Called the "Conspiracy of 1907". The panic came suddenly at the end of the year as described by Sylla. The panic has been called the "rich man's panic". Though often blamed on Roosevelt, the author explains that Roosevelt's strong actions saved the day. The earthquake did drain the financial system of $350 million to cover losses, it was commodities and stock speculation, scandals in the life insurance businesses, and the collapse of railroad stocks that drove the market down. While this book can delve into the numbers of the day, it is an interesting read from a 1922 perspective looking back at US depressions since the nation's founding. The common theme is that over-speculation in one or more asset classes due to easy money, and then a sudden turn in prices, drive business depressions. Other interesting item to note is that US downturns, even in the late 1800s, could be seeded in shocks that happen overseas first then spread to the US.

    • CM

      C M.

      2 5 2018 01:12

      0       0

      In my reply, correction on the dates for money expansion. 2007 should be 1907.

  • BP

    Besar P.

    5 4 2018 13:22

    2       0

    Very interesting. Always good to get a dose of financial history to put things in perspective. But have to wonder what is his opinion of all those financial models (dynamic stochastic) that economists use these day versus what common sense from financial history would tell us.

  • JO

    JOHN O.

    2 4 2018 22:21

    2       0

    Thanks so much for the narrated questions in the MP3 download! Very customer responsive.

    Interesting presentation. Getting an informed view of history is always enlightening. I have heard him speak before, I think at CFA events and the like. Always worth the time.

  • DC

    Dave C.

    31 3 2018 15:05

    4       0

    I learned many new insights. Thanks for sharing this history

  • VP

    Vincent P.

    30 3 2018 15:25

    7       1

    Sylla sheds some light on some historical references which is great but we don't need the FED! Price discovery is the way to go not precision alchemy from Big Brother! It's not working. Ok, so we'll never get rid of the (crud) FED, so, at least let's get back to live video of the Chairman walking up DC steps with a briefcase without knowing the next move. How's that, hey??

  • KL

    Kathlyn L.

    30 3 2018 00:55

    4       10

    He's so confident in his narrative... No more academics please

  • RH

    Rick H.

    29 3 2018 21:21

    5       1

    Interesting. Certainly liquidity, fiscal, and monetary policy played a role, but surprised how easily he brushed off rampant speculation, over leverage, and he didn't even mention the role of investment trusts, a la "ETFs." Those couldn't have been too far down that list.

  • BC

    Bryan C.

    29 3 2018 20:54

    5       0

    It would have been nice to hear his analysis of the current economic situation and assessment of the current stock market.

  • VS

    Victor S.

    29 3 2018 18:32

    12       1

    With all due respect to the professor, the market did NOT almost return to the 1929 highs. The Dow industrials peaked at 381.17 in September 1929 and declined to 198.69 in November. It then rallied to 294.07 in April 1930 or minus 22.9% from the high. Other indexes rallied to minus 18% from the highs.Also the worst “YEAR “in US history was 1931,-(45%) NOT 1932 ? True from March to July 1932 the decline was 53.5%, but it rallied where the loss for the year was between (minus 8%- 20%) depending on the index. Lastly the reason for 1931 was the worst was Hoover raised max tax rates from 24% in 1929 to 63% or 162.5% ! You never mention this?
    But thanks for your info.

    • WM

      William M.

      31 3 2018 19:02

      1       0

      Yes Victor I checked the numbers as well. I think "dead cat bounce" is still a possible explanation for that comeback (or an Elliot wave 2 3/3/5 correction, but it was an interesting perspective I hadn't heard before.

    • ML

      Michael L.

      3 4 2018 02:34

      1       1

      he tried too hard to say the stock market doesnt matter and twisted the facts

    • DS

      David S.

      5 4 2018 20:32

      0       0

      The marginal tax rate increasing 39% points from 24% to 63% would certainly make a huge difference. (Mathematically the percentage change from one percent to another does not work. It is better, although less dramatic.)

    • DS

      David S.

      5 4 2018 20:38

      0       0

      I agree and looked up the information also. The DOW did not recover the bubble top of 1929. Dr. Sylla would certainly have known this also - on the way to recovery would be reasonable. DLS

  • DW

    David W.

    29 3 2018 15:07

    5       5

    Fascinating! As a retired professional, with parents who had lived through, and experienced much of this, I really enjoyed this piece and look forward to the second presentation, which I lived through and experienced!

  • pd

    peer d.

    29 3 2018 15:01

    10       0

    How about a cage match between Professor Sylla and JIm Grant?

  • LV

    Luís V.

    29 3 2018 14:01

    4       1

    - FDR was not a friend of JPMorgan?
    If not, sure they had a lot of political agreements done. And fast. To the advantage of Morgan interests.
    - Less crises since FED was erected?
    What about much bigger crises and aggravated business cycles.

    Would love to hear/read some words from James Grant about this interview.

    Let´s see the 2nd part..

    • GB

      Gary B.

      20 4 2018 17:44

      1       0

      JP Morgan died in 1913. His death occurred 16 years before the Great Depression, well before FDR come to power. Teddy Roosevelt was the President in 1907. He and Morgan were not friends. TR let Morgan manage the crisis because he knew Morgan had the best interest of the country at heart even though they disagreed about much politically. Morgan was a hero of the 1907 panic.

  • AH

    Andreas H.

    29 3 2018 12:39

    2       4

    Love it!

  • JM

    James M.

    29 3 2018 10:55

    8       0

    A lot of this sounds more like opinion than historical fact to me. I think the depiction of JPM as the knight in shining armour who solely saved the USA economy in 1907 was rather rosie to say the least. JPM and other powerful corrupt bankers (are there any other kind?) had been trying to establish a central bank in the USA for some time. It seems conceivable to me that he and others in power constructed the collapse in 1907 if not at least saw the opportunity to establish there much loved central bank from it. Maybe a retort from Noami Prinns reference her book All The Presidents Bankers or a look into JPMs involvement in the federal reserve act, not to mention Senator Aldrich and President Woodrow Wilson corruption via Edward Griffin's book the Creature From Jekyll Island may give some perspective. Add to this the comment on if the first, second or the third central bank of the USA are constitutional they are clearly not by any legal metric.

    • GB

      Gary B.

      20 4 2018 17:52

      0       0

      We can all disagree about the causes of financial crises, etc. but Morgan had nothing to do with the beginning of the Panic of 1907. He was a hero of the recovery from the panic.

  • HM

    Hot M.

    29 3 2018 03:47

    2       0

    Its a shame Richard did not include an analysis/comparison with the 1920-21 depression in the US.

    Also, the veracity of a repeal Glass-Stegal.

    Would also be interested to hear if he feels the days of 90% corrections in the US stock market are well behind us.

  • RM

    Russell M.

    28 3 2018 22:36

    9       0

    Interesting history as far as it goes which is to explain how creating additional fiat money can be used to rescue banks who have made improvident loans. But it begs the question of causes these wild economic gyrations. In my view, it is fractional reserve banking that allows banks to take in short term deposits and lend them out long terms.

    Fractional reserve banking allows banks in effect to create 9x as much money as they have on deposit because depositors expect that the bank will allow them to withdraw every dollar on deposit on demand but the banks are not in a position to do that because they have lent out for a longer term up to 90 cents of every dollar on deposit relying on the fact that depositors in aggregate do not normally seek to withdraw more than 10 cents of every dollar on deposit.

    Bank capital is no more than 10% of deposits so banks are in effect provided with 70 cents of free money, 7 times their capital at risk, to loan out. It like having one player in poker game having the ability to create for himself 7x the number of chips as everyone else who has to buy in with cash. My numbers may be off but the principle is not, banks are allowed to create money out of thin air. Its patently unfair.

    But more importantly, it distorts the money driven supply and demand signals in the market economy which is supposed to efficiently distribute limited resources. It makes it appear that those who have acquired money by contributing to the mutual economic pie are demanding products when in fact the banks simply created the money out of thin air. This leads to falsification of prices in the market and exacerbates speculation and feeds bubbles. This exacerbates booms and bust. Central banks cannot fix this problem. They support it.

    • DT

      Douglas T.

      28 3 2018 23:59

      2       7

      Not quite right. The money the bank loans out is created as a new deposit, so the banks deposits remain greater than the assets. They do create the money (credit) they loan, but it secured with the "promise to pay" loan contract, and real collateral. So they are more properly monetizing illquid assets: you can't use the deed to your house to buy quart of milk, but you can get mortgage, then spend the resulting deposit to get that or anything else.
      Banks do us favor by making credit (money) readily avialble. They only get into trouble when they loan too speculatively to people who can't pay them back.

    • WG

      Wade G.

      26 4 2018 21:47

      0       0

      Banks quite literally loan money into existence, at interest. Nice work if you can get it. Its worse than a borrow short (take on demand deposits)/lend long risk backstopped by infinite pocketed central banks. The BOE publicly acknowledged lending can and does precede deposits; there's not even a fractional reserve requirement.

  • TJ

    Tay J.

    28 3 2018 21:48

    5       1

    i love history. Thanks.

  • JM

    Jay M.

    28 3 2018 21:12

    4       1

    Thank you very much for this very educational piece! How anyone can vote it thumbs down is beyond me. Very much looking forward to part II.

    • DT

      Douglas T.

      28 3 2018 23:12

      4       5

      Didn't vote it down, but it seemed awfully elementary, approiate for college underclassmen.

  • JV

    James V.

    28 3 2018 19:20

    3       1

    Fascinating history lesson! I learned a lot in 30 minutes. Can't wait for Part II. Question for Mr. Sylla: Would you consider (or do you already have) an online course of the history of money and banking in the United States (like "The Great Courses" :https://www.thegreatcourses.com/)? I would love to learn more.
    Thank you.

    • sa

      stephen a.

      29 3 2018 20:59

      9       1

      This is a good place to start: "The Creature from Jekyll Island: A Second Look at the Federal Reserve"

  • SF

    Stephen F.

    28 3 2018 15:57

    11       0

    Curious that the "next" major financial crisis was the 1929 crash and following depression of 1930-1932, not the depression of 1920-1921. Jim Grant wrote an excellent book on the topic called "The Forgotten Depression".

    • IF

      Ian F.

      28 3 2018 17:36

      3       31

      Jim Grant is a self-righteous, self-interested, academic. He explains the facts to his liking rather than letting the facts explain reality.

    • DS

      David S.

      13 4 2018 13:41

      0       0

      It is impossible for "facts" to explain themselves. They are fodder for interpretations a la Nietzsche. DLS

  • DS

    David S.

    28 3 2018 14:40

    3       0

    It is interesting that the Fed may have caused the depression vis-a-vis a normal recession by rapidly raising interest rates to defend the gold standard.. I hope that Professor Sylla speaks to the gold standard in part 2. DLS

  • ag

    anthony g.

    28 3 2018 13:29

    6       0

    He says very little about confidence. Once that goes ..... most everything else follows. History does not repeat itself exactly, but it often rhymes. Mark Twain said that . Makes sense to me.

    • AL

      Andrew L.

      28 3 2018 15:11

      10       0

      Indeed the financial system, backed by oil reserves or full faith and credit or the biggest military in the world all boils down to a confidence (con) game. Even the gold standard is not safe as he points out the 1930s bank failures and global contagion of gold runs, leading to interest rate rises and gold standard suspensions. This he says is what caused the great depression. In the face of this Sylla says the federal reserve was focused on protecting the gold standard, "using the wrong model" and should have been more proactive about bolstering the wider economic climate. Simply defending the gold standard did not sufficiently bolster confidence.

      This all begs the question "but is this confidence game a con?" A con as-in a scam where the mark is convinced to trust a person or thing long enough to become heavily invested, at which point the con is complete and the grifter/s cash out leaving you holding the bag (mostly empty). There are two major answers as far as I can tell.

      Looking from the historical perspective that Prof Sylla brings it is a given that the actors in the system though self-interested are better off collaborating (there is much game theory one could bring up here) and so the stability brought by a strong hand (J. P. Morgan / Central Bank) is essentially that of a beneficent overlord. In other words it's not a con if it's in everyone's interest for the con to work out, or another way to look at it, if there is no way out. This is the prevailing / accepted view.

      There is another widely held perspective that academics look down on and the mainstream will call a conspiracy theory. But it has been and is today a very large contingent that sees that strong hand not as a beneficent one alibet still self interested. No, it is the view that this is in-fact a very old game that few see being played out over the centuries. That of the old banking families projecting their influence around the world by, for example, funding both sides of wars, getting governments deep into debt thus gaining influence on them to then take on private central banks with secret board members who will have exclusive right to print the money. This is the crowd that will rightly point out that the Federal Reserve is neight Federal nor a Reserve.

    • WM

      William M.

      31 3 2018 18:56

      0       0

      Well said Andrew. I agree that our financial system is more than ever a Confidence Game and the implications of losing confidence today versus even back in 2001/2002 are just plain terrifying. The interconnectedness and instant information sharing are going to magnify what happened in 2008 by several times.......if not an order of magnitude.

  • MN

    Marcus N.

    28 3 2018 12:59

    7       0

    The summary takeaways at the end of each piece require some time to review and digest.

    Many times I want to pause them to work through each concept step by step. If I do that - pause the video - the 'remaining run time' graphic obscures the very thing that I paused the video to review...

    Is there any workaround where I can hold the image in clear long enough to absorb it?

    • BB

      Brooks B.

      28 3 2018 13:14

      6       0

      I do the same thing and the runtime graphic goes away if I move my mouse off of the page. Or if you're on mobile you could take a screenshot?

    • MN

      Marcus N.

      28 3 2018 14:13

      0       0

      @Brooks, you're a genius, thanks. I revisited this page and as you explain, moving the mouse off the page does what I need.

      Thanks.

    • TD

      Tom D.

      28 3 2018 17:26

      0       2

      How do you pause the video?

    • RS

      Roger S.

      28 3 2018 19:42

      0       0

      hover your mouse over the video and the countdown time appears. mouse click on the = iand the video stops. Click again on the > and it starts playing again

    • MN

      Marcus N.

      30 3 2018 08:17

      0       0

      Tap the space bar to toggle pause/play (also no run time graphic).

    • TD

      Tom D.

      30 3 2018 14:58

      0       0

      Many thanks.

  • TS

    Timothy S.

    28 3 2018 12:26

    9       0

    I imagine JP Morgan would have some clout seeing that he, and the Rothchilds, loaned $65 million in gold to the US treasury after the panic of 1893.

    It was Otto Heinz and his brothers, with the help of "The Ice King" Charles Morse who tried to corner the copper market. Oddly 89 years later Yasuo Hamanaka tried to do the same thing and failed. This year is 89 years from 1929 crash and the markets look the same.

    The key takeaway for me is that the Great Depression was a global event.

  • PN

    Philip N.

    28 3 2018 12:02

    31       0

    I seem to be left thinking that everyone, or everyone who isn't a banker, would be better off if we went back to what was there in 07. It seems like after the Fed was formed society bails out the reckless bankers and everyone else is left to fend for themselves.