Panic of 1907: How Far Stocks Fell, How Long Recovery Took

In the Panic of 1907 the Dow fell 48.5% from its record close to its low, over 22 months. At the time, the Dow was an average of the prices of 12 large industrial stocks, and its level is counted in points, not dollars: a fall from 103 points to 53 means those stocks' average price roughly halved. In money terms, $1,000 that followed the Dow from the January 1906 record was worth $515 at the November 1907 low, not counting dividends.

Measured over calendar 1907 alone, the fall is smaller, because the Dow ended 1906 already 8% below its January record. From 94.35 on December 31, 1906 it fell 43.8% to the low, and it ended 1907 at 58.75, down 37.7% for the year. Robert Shiller's reconstructed broad-market series, the S&P composite, fell 37.7% on monthly averages from its September 1906 peak to November 1907, the same figure by coincidence. The table shows the main days for the Dow. All Dow figures on this page are price only, from the daily closes of the 12-stock average as printed at the time; the dividend figures come from Shiller's series, a reconstruction rather than a fund anyone could buy in 1907.

The trigger for the Panic of 1907 was a failed attempt to corner United Copper stock. The deeper problem was a banking system in which New York's trust companies held little cash and had no central bank behind them, so when runs reached them they could not pay their depositors. It hit a market already weakened by more than a year of tight money after the 1906 San Francisco earthquake, and an economy in recession since May 1907.

On October 16, 1907, two speculators, F. Augustus Heinze and Charles W. Morse, lost heavily trying to corner the stock of United Copper. Cornering means buying up so much of a stock that traders who have bet on its fall, by selling shares they borrowed, are forced to buy back from you at your price. When the corner failed, depositors pulled money from banks tied to the two men. The New York Clearing House, a private association of the city's big banks, examined those banks, declared them solvent (able to pay what they owed) and lent to them, and those runs eased.

The runs moved to the trust companies. On Friday, October 18, news broke that Charles T. Barney, president of the Knickerbocker Trust, was an associate of Morse. Depositors lined up. Trust companies took deposits like banks but were less regulated, and they kept about 5% of deposits as cash, against 25% at national banks, the federally chartered banks of the day. Most trusts were not Clearing House members, so on Monday, October 21, the Clearing House turned down Knickerbocker's request for help. Benjamin Strong, a banker leading a team J.P. Morgan put together to examine its books, could not tell in the time he had whether it was sound, and Morgan declined to lend. On October 22, after depositors had withdrawn nearly $8 million, Knickerbocker suspended payments. It reopened in March 1908, after $2.4 million of new capital was put in, according to Federal Reserve History.

That turned a run into a panic. People tried to hold cash instead of deposits wherever they could. Deposits at New York's trust companies fell by more than 36% between August 22 and December 19, 1907, while deposits at national banks rose. The trusts had also been lending to stockbrokers, so the runs drained cash from the stock market at the same moment. That is what a liquidity crunch looks like: people want cash, and stocks are one of the few things they can sell quickly. Federal Reserve History cites two studies, one by Carola Frydman, Eric Hilt and Lily Zhou and one by Caroline Fohlin, Thomas Gehrig and Marlene Haas, that point to rumor. In their view it played a large part in spreading the runs, because depositors could not easily tell which trusts were sound.

J.P. Morgan led the private rescue in the Panic of 1907. Having refused Knickerbocker, he raised cash from banks and companies and lent to trust companies his team judged sound, and Federal Reserve History says the stock exchange stayed open "largely because of" his actions.

There was no central bank to lend in an emergency. Stockbrokers borrowed every day to carry stocks their customers had bought with borrowed money, on margin, through overnight loans called call money. When Knickerbocker closed, the call money rate jumped from 9.5% to 70% a year, and two days later, on Thursday, October 24, it reached 100%. At 100% a year, borrowing $1,000 for one night cost about $2.74, against about 26 cents at 9.5%, and at times nobody would lend even at 100%. Shortly before the close that day, the New-York Tribune reported the next morning, "J. P. Morgan & Co. lent $25,000,000 on the Stock Exchange floor." The Treasury Secretary, George Cortelyou, also deposited government money in New York banks.

On Saturday, October 26, the Clearing House moved to issue loan certificates, IOUs its banks could use to settle with each other instead of cash, and its member banks limited how much cash depositors could take out. A dollar in cash became worth more than a dollar in a bank account, so it paid to ship gold to New York and turn it into cash. Those gold imports, in Federal Reserve History's words, "appear to have been instrumental" in the recovery of New York's markets. In early November, U.S. Steel's Elbert Gary and Henry Clay Frick asked President Theodore Roosevelt whether he would object to their buying the Tennessee Coal, Iron and Railroad Company; he wrote that he felt it "no public duty of mine to interpose any objections." The deal was meant to save Moore & Schley, a brokerage firm that Roosevelt was told would "undoubtedly fail this week if help is not given." Its assets included "a majority of the securities" of the company, shares that New York banks held as collateral for its loans.

On Monday, November 4, the Dow rose 1.9%. It still fell another 9% over the next 11 days, to its low on November 15. The rescue kept the exchange trading. It did not set a bottom for prices: the Dow kept falling until November 15, 1907.

The recovery from the Panic of 1907 depends on the index. Using a broad-market index with dividends reinvested, recovery took 27 months from peak to peak. Using the original 12-stock Dow by price alone, it took 9 years and 8 months. With dividends reinvested, the broad market peaked in September 1906, bottomed 14 months later and was back in December 1908, 13 months after the low. By price, the Dow peaked in January 1906, got within 2.4% of its record in November 1909, fell back, and was above it by September 1915 on NBER's monthly figures, almost 8 years after the November 1907 low.

A drawdown of 48.5% needs a rise of 94% to get back to even, because the climb starts from the lower level. In the two years after its low, the Dow rose 90%: on November 19, 1909 it closed at 100.53, 2.4% below its record. Then it fell back. On July 31, 1914, at the start of the First World War, the New York Stock Exchange shut; the Dow's last close, on July 30, was 71.42. When trading resumed on December 12, 1914, the same 12-stock average picked up again and climbed in the wartime boom. NBER's monthly figure for September 1915, the midpoint of that month's highest and lowest close, is 107.10, so the Dow was back above its 1906 record by then.

Some Dow histories say 1916 instead, because the index changed. In October 1916 Dow Jones launched a 20-stock average and traced it back to December 12, 1914, where it starts at 54.62, much lower than the 12-stock average. Most modern Dow tables use that newer series, and in it the first close above 103 is September 28, 1916. Comparing 103 from the old index with the new one mixes two different sets of stocks on two different scales. MeasuringWorth's long-run series joins the two at one constant ratio and puts the first close above the 1906 level on July 28, 1915, about two months before NBER's September figure. Either way it is 1915, and we use the September 1915 monthly figure, about 9 years and 8 months after the peak.

Dividends, the cash companies paid out to shareholders, change the answer. Yale economist Robert Shiller's monthly data cover the S&P composite, a reconstructed series of many more stocks than the Dow, which peaked in September 1906. That index, with dividends reinvested, was back above its peak in December 1908 and stayed above it from March 1909. Counting price alone, it got back in August 1909, stayed until January 1910 and then fell below again. Those are monthly averages, and no index fund existed in 1907, so they describe the market, not any one investor's account.

The economy recovered on a similar clock. The recession lasted from May 1907 to June 1908. Industrial output fell 17% in 1908, according to Federal Reserve History, which notes that unlike the Great Depression, "the real sector recovered rapidly, in little over a year."

After the 1929 crash, when the Dow fell 89%, getting back to the old record by price took 25 years. After the dot-com bubble burst in 2000, the Nasdaq took 15 years. After Black Monday 1987, the S&P 500 was back above its pre-crash record by price in July 1989.

You can replay the Panic of 1907 in our market-history game and decide how much to keep in stocks or cash as the news unfolds.

About 70% of the Dow's 1906 to 1907 fall came before the October panic: 35 of the 50 points it lost were gone by September 30, 1907. The runs in October and November took it down the last 15 points, from 67.72 to 53.00.

The slide had begun more than a year earlier. The New York Fed's history of the panic traces part of it to the San Francisco earthquake of April 18, 1906. British insurers paid huge claims, gold flowed from London to the United States, and the Bank of England raised its lending rate to stop the outflow. Money got tighter on both sides of the Atlantic. The same history calls what followed a "silent crash", and the US economy slipped into recession in May 1907.

The sharpest selling came in March 1907, when railroad stocks such as Union Pacific and Reading led a two-day fall, the New-York Tribune reported, though no firm failed. On Thursday, March 14, the Dow lost 8.3%, the Dow's worst day of the whole decline, then rose 6.7% the next day. On August 3, Judge Kenesaw Mountain Landis fined Standard Oil of Indiana $29.24 million for taking illegal railroad rebates; an appeals court threw out the conviction in July 1908. From August 2 to August 16 the Dow fell 12%, from 78.87 to 69.29.

Before October this was a bear market, a long, uneven slide with sharp rallies mixed in, and no depositors lining up outside banks. The bank panic came later, and it landed on a market that was already weak.

Both figures for the 1907 stock market drop are right. They start from different dates, and one uses monthly averages instead of daily closes.

40.9% comes from economists Frederic Mishkin and Eugene White, in a 2002 working paper for the National Bureau of Economic Research (NBER): "Hitting bottom in November 1907, the Dow Jones fell 40.9 percent." They measure from December 1906, not the January 1906 record, and they use NBER's monthly Dow series, where each month is the average of that month's highest and lowest close. December 1906 averaged 94.40 and November 1907 averaged 55.75. The fall between those two averages is 40.9%.

Almost 50%, the often-quoted figure, matches the close-to-close fall from the record: 103.00 on January 19, 1906 to 53.00 on November 15, 1907, or 48.5%.

We checked NBER's monthly figures against the daily closes before using either, and they agree month by month.

The Panic of 1907 convinced Congress that the banking system needed a lasting fix, and six years later it created the Federal Reserve.

In 1908, Congress passed the Aldrich-Vreeland Act. It let groups of national banks obtain emergency currency in a future crisis and set up the National Monetary Commission, chaired by Senator Nelson Aldrich, to study the banking system. The commission's work led, after years of argument about how much control bankers should have, to the Federal Reserve Act, signed by President Woodrow Wilson on December 23, 1913. Federal Reserve History describes the Clearing House loan certificates of 1907 as the forerunner of the Fed's discount window, the emergency lending it still offers banks.

The Fed's historians also point to how much 1907 looks like 2008. Both crises began at New York firms that borrowed and lent like banks without being regular banks: trust companies then, investment banks and other "shadow banks" in 2008. Knickerbocker's suspension and Lehman Brothers' failure each marked the start of the worst of the crisis. In 1907 there was no central bank to lend in a panic and no FDIC deposit insurance; both exist now. For how the Fed works today, see what the Federal Reserve is.

• Dow Jones Industrial Average, daily closes 1905 to 1914: MeasuringWorth (Samuel H. Williamson), with its source note on the splice. MeasuringWorth multiplies the first 12-stock Dow, from October 7, 1896 through July 30, 1914, by the splice ratio 54.62 / 74.56 (0.73256) to join it to the later 20-stock index. Dividing by that ratio restores the two-decimal levels printed at the time for all 2,873 closes we use, from December 31, 1904 to July 30, 1914. This series includes Saturday sessions.
• Check on the levels: NBER Macrohistory series m11009a, Dow Jones & Co.'s own monthly figures. The midpoint of each month's highest and lowest daily close matches it for every month from 1905 to 1909. It also covers the same 12-stock average after the exchange reopened, from December 1914 to September 1916; MeasuringWorth's history of the index describes the reopening and the October 1916 switch to 20 stocks.
• The 40.9% figure: Mishkin and White, "U.S. Stock Market Crashes and Their Aftermath," NBER Working Paper 8992 (2002), page 8.
• Recession dates: NBER, US Business Cycle Expansions and Contractions.
• The Standard Oil appeal: Standard Oil Co. of Indiana v. United States, 164 F. 376 (7th Cir. 1908).
• Dividends and the broad market: Robert Shiller's monthly S&P composite data.
• History: Federal Reserve History, "The Panic of 1907" (Jon Moen and Ellis Tallman); Federal Reserve Bank of New York, Liberty Street Economics, "The Final Crisis Chronicle"; Federal Reserve History, "Before the Fed"; New-York Tribune front pages for March 15, October 25 and November 5, 1907 (Library of Congress); Federal Reserve Bank of Boston, "Panic of 1907"; Theodore Roosevelt's November 4, 1907 letter to Attorney General Charles Bonaparte, reprinted in his Autobiography (1913); H. L. Wilgus, "The Standard Oil Fine," Michigan Law Review (1907).

Method. "Below the record" compares each close with 103.00, the January 19, 1906 close and the highest in the 1905 to 1914 data. Dow figures are price only; dividends were paid but are not in this index. The dividends-reinvested S&P composite figures add one twelfth of Shiller's annual dividend rate each month to the monthly price change and compound it, assuming no cost and no tax; they are accurate to about a month. The two indexes peaked at different times because they held different stocks: the Dow 12 industrial companies, the composite a much wider index of all common stocks, railroads included.

Historical data shown; past performance does not indicate future results. StockCram is an educational platform, not a broker-dealer or investment adviser, and nothing on this page is investment advice.

Every post in this series measures crashes the same way; our market-history method explains how.