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06/06/2011

The Bank Panic of October 1907—A Spectator's View


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Bank Panic 1907, Harpers This is a story not an analysis: the “what happened” of this event is well-known. Several studies have focused on the economy, the money supply and systemic faults in the banking system, and the bank events have been well discussed. Behind them there was the stock market and the behavior of stock speculators in the month of October. This story explains more about the “why” of this event; it is the story of Charles W. Morse and his friend, Fritz Heinze.

To give some background on Morse and Heinze, we need to go back to 1900. A short man with penetrating blue eyes, Morse combined many ice companies to create the American Ice Company, which monopolized the natural ice business in New York (estimated to be two million pounds a year). Morse doubled the price of ice on May 1, during an early warm spell, and suddenly everyone in New York knew Charles W. Morse, including William Randolph Hearst and Governor Theodore Roosevelt. Under pressure in the press and through many law suits, the price was reduced, and in two years Morse was forced out of the company, taking at least $11 million with him.

Heinze went to the copper fields of Montana after graduating from college, where he began to buy potential copper properties. His Minnie Healey mine proved to be the most lucrative, and he eventually sold it to H.H. Rogers’ and William Vanderbilt’s Amalgamated Copper. He arrived in New York in 1906 as a young, handsome and single man with $10 million in his pocket.
Morse retained an interest in the stock of American Ice Securities, the company set up to force him out, and Consolidated Steamship, which he created by combining existing companies, largely controlling coastal traffic from St. Johns, New Brunswick to Galveston, Texas. When October began he was its president, and Heinze created United Copper Company to hold his interests after the mine was sold.

This is the key linkage: not content with creating companies, both Morse and Heinze bought into banks. The Morse archives at the Maine Maritime Museum provide a detailed view of Morse’s activities. He bought into 11 banks, becoming director of each. He was majority stock holder in five of them. He focused on the Bank of North America, where he was also a vice president. His checkbooks from 1906 show smaller investments in 13 more banks, and the archives show his family invested too, leaving control of their shares with him. He was the one who persuaded Heinze to invest in the Mercantile Bank and become its president.

Morse mostly, but Heinze as well, used their banks’ funds to buy their stocks and thus keep the stock prices up. Then they turned around and used the stock as collateral for the bank loans. Morse was prone to using stocks as collateral valued at 100 percent of the current market price. Some of these were “dummy” loans not made out to him at all. Nothing was done to control this activity because he was the majority shareholder in the “Morse banks,” as they were called.

Morse’s checkbooks from the first half of 1906 show his operations. Over $18 million in buying and washed through the account, leaving him with a modest profit by mid-year. Some $7 million of the checks were to stockbrokers. He did 100 transactions in American Ice Securities alone from January to August, three quarters of the total trading activity. He ran several stock pools — getting contributions from many of his friends and acquaintances like John W. Gates and Charles M. Schwab. He managed these pools in an interesting way — gathering money with the promise the investor would not lose (as Morse kept the price of the stock up). In addition, an investor did not have to put up cash; he could just sign a note — which Morse took to one of his banks and sold. He also bought on margin, and triggered many payments to brokers to cover his purchases. The whole shaky structure depended on the price of his and Heinze’s stocks.

At the beginning of October, American Ice Securities was not active in the stock market. Consolidated Steamship common traded small amounts, in the $2.13 to $2.75 range, and its bonds traded little. United Copper traded about 500 shares a day, beginning at $47.88 and drifting down. It is important to note that the trading and price were largely controlled by a pool run by Heinze’s brother, Otto, who had a brokerage firm. It is also important to note that a block of 16,400 shares was held by a pool headed by Morse.

By Saturday, October 12, news from Montana reported the price of copper at half of what it had been in the spring. Copper stocks hit new lows that week. That day United Copper trading was brisk, with 2,438 shares traded, making 6,485 for the week. The final price was $36.25. Otto Heinze came home from Europe the next day and realized his company had more orders to buy than there was stock to fulfill them. He thought there were short sellers to be gathered, but they would need more funds than the Mercantile Bank would provide. He and Fritz went to see Charles Barney, president of the Knickerbocker Trust Company. Barney had known Morse for years, putting him on the board of the Garfield Bank and then the Knickerbocker Trust Company. He personally owned and had the bank buy large amounts of American Ice on Morse’s recommendation. But likely to the Heinzes’ surprise, Barney refused to put his bank behind their plan.

On Monday, the 14th, Otto Heinze issued instructions to Goss and Kleberg, brokers, to buy 6,000 shares of United Copper at escalating prices. When the market opened, the stock rose $22 in 15 minutes. The New York Times later called it a “sky rocket jump.” So much stock was offered that Otto quickly ran short of money, and Fritz wrote a loan to himself from the Mercantile Bank for $500,000, which he turned over to his brother, stabilizing the market for a while. Then someone dumped over 16,000 shares in one block, which triggered even more selling. By closing time, the price was headed inexorably downward with more and more stock being offered. Goss and Kleberg could not buy it all and closed its doors. The next day the headline read “Heinze’s Coppers dance up and down.” And Heinze used the stock bought with the loan money as collateral, as usual.

J.P. MorganAfter the noise and turmoil, it became known who had dumped the block — it was Charles W. Morse, in his capacity as head of the United Copper pool. The following day, Fritz and Otto Heinze went to Morse’s office at the Bank of North America and, through the closed door, people clearly heard Heinze excoriating Morse with all the colorful language he had learned in the copper mines. Morse offered to make good on the problem, but the president of the bank refused to lend them any money. So Morse wrote his own check for $126,000 (far more than he had in his account) to buy United Copper stock, which was delivered to Morse later that day. He sold it right away.

Morse’s Consolidated Steamship bonds had traded very small volume up to this time, but on Wednesday, October 16, someone dumped $1.7 million on the market, an amazing amount from the authorized total of $60 million. United Copper stock continued to trade heavily and was down to $15. Heinze resigned from the Mercantile Bank and turned his attention to his bank loans because the collateral, United Copper stock, was so reduced.

Consolidated Steamship bonds had been regarded as risky, based on an accountant’s analysis of revenues through September, which predicted that the company could not pay $2 million in interest due in January. However, the story was more personal. The next day, The New York Times ran a front page story, “Crash in Coppers, Heinze Quits Bank.” On page two there was a more analytical story, which stated:

"A feature of the declining market which gave acute concern until it was later explained was the heavy liquidation in the four percent bonds of the Consolidated Steamship Company … It was said that the selling came from the Heinze interests in revenge for unloading of United Copper stock by Charles W. Morse, who was credited with being one of the market pool."

On Thursday, the 17th, a run began at Barney’s Knickerbocker Trust Company, as his connection with Charles W. Morse was well-known. Otto Heinze & Co. was suspended from the New York Stock Exchange and Goss and Kleberg went bankrupt.

And the selling continued the following day, when an astounding $2.1 million in Consolidated Steamship bonds changed hands. Selling hit Consolidated common stock as well, as 3,800 shares were traded with a final price of $1.65. Also on Friday, another $2.1 million in Consolidated Steamship bonds changed hands and selling hit Consolidated common as well: 3,800 shares with a final price of $1.65.

On Saturday, trading again hit United Copper: 9,800 shares and the final price was $7.50, down from $47.88 at the beginning of the month. In total, some 80,000 shares had traded during the week. Trades in Consolidated Steamship common were over 6,000 shares for the week, compared with less than 2,000 the week before. For its bonds, trades during the week were over $5 million, against $562,000 the week before.

At this point, the damage was limited, but it was spreading. The run on Knickerbocker Trust continued, and Barney went to see J.P. Morgan for help. He had known Morgan for years and, in fact, visited the Jekyll Island Club where Morgan was a prominent member. Nonetheless, Morgan knew Barney had been closely associated with Morse for years, and Morgan had seen Morse in action in the steamboat business as well as banking. In a later law suit, one of Morgan’s associates said, “he loathed Morse.” It is well-known that he refused to see Barney.

By Trafalgar Day, a Monday, the Clearing House Committee had forced Heinze to resign from all his other banks, and they turned to Morse. As a news story reported the meeting in the Bank of North America:

"The Bank of North America was in trouble, and the Clearing House Committee, as a first condition of aiding it, was stipulating that Mr. Morse should get out. Moreover, its members didn’t like the character of some of the collateral that he pledged for the loans to himself and his companions."

Mr. Morse became very angry and pounded on the table at which he stood:

"‘Gentlemen,’ said he, ‘I have got $11,000,000 of negotiable securities in the vault below this very room where we are.’ One of the bankers present remarked to Mr. Morse that he had never made it a practice of calling people untruthful, but Mr. Morse would have to ‘show him’ before the statement was accepted. Mr. Morse did not show the securities."

Meanwhile, the run on the Knickerbocker Trust continued. In the stock market, selling continued for Consolidated Steamship common stock. On increased trading volume of 5,800 shares, it slid below $2 while another $2.3 million of the bonds sold to close at $15. This huge amount of trading now seemed normal. The price of United Copper stock seemed to have stopped dropping because it traded a small volume and recovered 50 cents to $8. The trading in American Ice Securities common stock was almost three times the volume of the entire previous week—over 2,000 shares—and the price dropped another $4 to $16.


Museum of American Finance


That evening, accosted by a reporter, Morse was asked if he was forced out of the banks. He said with a smile, “That’s absolutely untrue, nothing in it I assure you … I quit banking because there was nothing in it for me and, to tell you the truth, I’m damn glad I’m out if it. I’m out for good … now I have time for other activities.”

Barney resigned from the Knickerbocker Trust Company and the board of directors issued this statement:

"In view of the fact that the position of Mr. Barney, president of the company, has become greatly extended and although he had no loans with the Knickerbocker Trust Company and because of his connection with Mr. Morse and the Morse companies, the directors decided that the best interests of the company would be served by his withdrawal; he has resigned as president and will resign as director of the National Bank of Commerce."

The Knickerbocker Trust failed the next week and was found to have loaned millions backed by American Ice Securities stock. Barney himself had $2 million in American Ice stock at the beginning of the month, worth perhaps $780,000 at the end. The trust company never reopened, and several weeks later Charles Tracy Barney killed himself. His friends blamed Morse. Morse denied it.

By Saturday, October 26, the selling of Morse and Heinze’s stocks and bonds had been severe. For the month the price decreases were huge:

United Copper common: down 84%
Consolidated Steamship common: down 75%
Consolidated Steamship bonds: down 57%
American Ice Securities common: down 61%

All of these securities had been used as collateral for many bank loans — to keep the stock prices up. Their decline and fall played into the banking system’s other problems: a long list of bank failures, 13 in New York, including the Knickerbocker Trust, Mercantile and Bank of North America, as well as other “Morse” banks — New Amsterdam, Garfield, 14th Street and Produce Exchange. The damage extended to a few banks far removed from New York: Butte Savings Bank (one of Heinze’s) and Bath Savings Bank and Bath Trust Company (in Bath, Maine, Morse’s home town).

At the end of the month, Morse’s fortune was in ruins. He was forced out of Consolidated Steamship and, as predicted, it could not pay the $2 million in interest due on the bonds in January 1908. It passed into bankruptcy and emerged under control of the steamboat men who ran the operating companies and, as Atlantic, Gulf and West Indies Company, it lasted for decades.

For Morse and Heinze, the aftermath was seemingly endless court appearances. Morse spent the next year trying to stay out of jail and failed. He was sent to federal prison for 15 years and got out after two years on President Taft’s pardon — obtained under very dubious circumstances. Heinze was prosecuted separately, but he was harder to convict because he seldom used bank money, and the $500,000 loan did not benefit him but went to his brother’s brokerage firm. Nonetheless, many years later, when he was convicted, he died before serving any time.

Beyond the economic and systemic forces at play, there are always people.

Philip Woods is a graduate of Princeton and has an MBA and MA from Stanford University. He was drawn to this subject because his wife is Charlie Morse’s second cousin, three generations back, and the Maine Maritime Museum has such an extensive archive of Morse materials.

This article originally appeared in the Winter 2011 issue of Financial History a publication of the Museum of American Finance.

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