1907 Panic mirrors 2007 " sort of
November 23, 2007
Bank shares fall from faulty loans. Countrywide’s sub-prime loans fail. Brokerage firms use off-the-books accounting in an attempt to cover it up. The national economy is in jeopardy. Federal government covers cash crunch. Just change the names in today’s news and you hearken back to the Panic of 1907.
Aspen was never immune to national economic trends. In fact they were magnified for miners. Recessions meant low silver prices. Panics destroyed outside investment in mineral exploration. The economic downturns of 1893, 1907 and 1929 were the bleakest.
“We the undersigned banks have concluded it wise to protect our customers by adopting the same rule which is in use by the Denver Clearing House association, and will hereafter pay only one hundred dollars in currency to any one account, either certificates of or check accounts, in any one week, until further notice,” Aspen’s banks, The State Bank of Aspen and People’s National Bank, announced in November 1907.
That announcement occurred just one week after The State Bank had pledged that it would pay the $40,000 payroll of the Smuggler and Durant mines in cash. Miners in Nevada had gone on strike because they were being paid in script.
The Panic of 1907, also known as the Banker’s Panic, had its roots in the recession of 1906. The stock market lost half its value. J.P. Morgan, in an effort to take control of all electric power, started a rumor that Westinghouse Electric, the competition to his General Electric, was insolvent. Westinghouse stock tumbled.
Over speculation by banks and trusts, and exuberant attempts to buy out corporations, drained banks of their cash reserves. A loan from the Knickerbocker Trust Company to buy United Copper led to a failure of that trust and a precipitous drop in metal prices. The National Bank of North America failed and started runs on other New York banks. Across the nation, depositors rushed to their banks to retrieve what little they could.
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David Hyman (the eponym of Hyman Avenue in Aspen), major owner and developer of the Smuggler and Durant mines, did much at this time to support the survival of Aspen. He recalls in his autobiography, “suddenly values of all kinds on the N.Y. Stock Exchange began to decline; a great money panic took place. The prices of the metals declined just as much as securities with the result that ore and concentrates that we had shipped to the smelters and upon which we had received an advance measured by the value that existed at the time of the shipment, dropped so low that it brought me into a considerable indebtedness to the smelting company.”
In late December Hyman ceased production at the Smuggler. He kept the water pumps running to protect the lower levels of the mine from flooding, even though the electricity was a major expense. He also kept mine engineers on the payroll to maintain the mine in a condition to reopen, but miners were put out of work. Aspen’s newspaper, always the champion of optimism, pleaded, “And last, but not least, Mr. Miner, don’t leave Aspen. It is still the best camp in the West and what money you will spend in search of a new location, and in the end be worse off than ever, will keep you all winter here at home.”
Hyman was no stranger to recessions. He had already weathered the Panic of 1893, sustaining great debt to keep Aspen’s mines operating. The drop in the price of silver in 1893 took place at the same time the Smuggler tapped into the richest deposit of silver ore ever discovered in the world.
The Panic of 1907 for Hyman was a serious cash flow crisis. As he describes in his autobiography, “anyone who is familiar with the conditions that prevailed in the financial section of the U.S. during the summer and fall of 1907 will remember that it was impossible to obtain money at any rate of interest.” Fortunately, Hyman had a close relationship with the Lehman brothers, who loaned him enough money to send Aspen’s miners back to work.
Hyman’s mine in Idaho did not fare as well. He shut off the water pumps and the mine flooded, resulting in great losses that were balanced only by Aspen’s survival.
After the Panic of 1893, many Aspen mines had switched from a wage system to employing miners to do all work on a contract or lease system. Rather than drawing a daily wage, miners contracted to drive a certain distance of tunnel, or they would lease a section of a mine. Under a lease, miners paid royalties to the owners on the ore they removed. At mines such as the Argentum-Juniata, owners and miners weathered the Panic of 1907 by lowering the royalty percentage until metal prices improved.
Every Aspen cloud has a silver lining. In 1907 America was still on the gold standard, which was one cause of the shortage of currency. The federal government, in a move to avert further bank cash shortages, began minting $80,000 in silver coins daily at the Denver mint.
The federal government pumped money into the system to save the biggest banks. In addition, J.P. Morgan put together a coalition of investors who pooled their money along with foreign country investments to buy sinking stocks and shore up bank runs. They succeeded in stopping the downward cycle, but many investors and depositors lost money and faith.
The Panic of 1907 was the impetus for creating the Federal Reserve System. Although the economic excesses and foibles of 2007 mirror those of 1907, a century later the Federal Reserve System provides some shelter for banks and our savings. That’s something to think about this Thanksgiving.