A Short History of Finance as a Business

In the first week of November 1907, J. Pierpont Morgan, then 70, gathered the presidents of New York's trust companies in his library and kept them there until they agreed to a joint loan fund to support the weaker trusts. The panic had begun in mid-October, when an attempt by F. Augustus Heinze and Charles W. Morse to corner the shares of United Copper failed. Depositors ran on banks connected to the two men and then on the Knickerbocker Trust, whose president, Charles Barney, was linked to Morse. Knickerbocker suspended payments on 22 October. The trust companies had grown faster than the national banks by paying higher rates on deposits, holding thinner cash reserves and staying outside the New York Clearing House, the banks' mutual-support club. There was no central bank to lend to them.

So Morgan acted as one. His team examined the books of the threatened trusts and decided which to save. The Treasury Secretary, George Cortelyou, deposited government funds in national banks for on-lending, and Morgan organised pools to lend to the stock exchange and to New York City. As part of the settlement, US Steel bought the Tennessee Coal, Iron and Railroad Company from a troubled brokerage, with President Theodore Roosevelt's tacit approval on antitrust. The panic ended, and the country drew the obvious conclusion: its financial stability should not depend on one private banker. Six years later Congress passed the Federal Reserve Act.

American finance was not designed. It grew in layers, and each layer answered a problem the previous one had left behind. This chapter traces those layers, because nearly every business model and rule in the rest of the book began as an answer to a crisis.