The Financial Crisis Of 1907 And Its Contribution To The Establishment Of The Federal Reserve System

The crisis of 1907 was one of the severe financial crises that happened frequently at the turn of the 20th century in America due to the absence of a central bank. Though it displayed a less severe output contraction than other national banking era panics, it aroused the most furious social action and led to the establishment of Federal Reserve System. So what made the crisis of 1907 different from earlier National Banking Era crises? Why did the successful movement for creating a U.S. central bank follow the crisis of 1907 and not any earlier National Banking Era crisis? The author argued that the crisis of 1907 was substantially different from earlier National Banking Era panics.The thesis of this paper follows: Because the 1907 financial crisis focused on New York City trust companies, a relatively unregulated intermediary outside the control of the New York Clearinghouse, the New York Clearinghouse offered insufficient liquidity to the trust companies to quell the panic quickly due to the absence of timely information on trusts,. Subsequently, a specific mechanism had to be employed to stem panic, namely, depended on the private financial resources leaded by private banker J.P. Morgan. In the aftermath of the crisis, people who previously against the central banker changed their attitudes dramatically. On one hand, there was a dramatic change in leadership and attitudes in the New York banking community as New York bankers saw heightened danger to the financial system arising from "riskier" institutions outside their clearinghouse and beyond their direct influence. The creation of a central bank required the support of New York banking leaders; without their support there was little chance for congressional approval. On the other hand, the specific anti-crisis mechanism in 1907 eventually led the Americans realized that the financial security could not be ensured without a central bank , and it was unfair that the finance resources been centralized and controlled by the private bankers, because they would abuse that power according to the experience of the crisis of 1907. Most people then argued that the centralized supervise power should given to the federal government. Finally, the obstacles for the establishment of the central bank were basically brushed aside.