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Panic of 1907

Stock Market Collapse and Call Money in 1907

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How Did the Banking Panic Freeze the Stock Market in 1907?

The banking panic of 1907 and the stock market crisis were not separate events—they were two aspects of the same financial seizure, connected through the call money market that linked commercial banks to the New York Stock Exchange. Call money loans—overnight borrowings by stock brokers collateralized by stock—were the financial instrument through which banking system stress immediately translated into stock market collapse. When banks facing depositor runs recalled their call loans to build cash reserves, brokers who could not refinance were forced to sell stocks, driving prices down and triggering further panic. The 1907 experience provided the clearest pre-Federal Reserve demonstration of how bank-to-capital-market connections transmit financial stress across the entire system.

Quick definition: Call money in 1907 refers to overnight loans made by banks and other lenders to stock brokers, collateralized by stock held in margin accounts—a crucial financial link between the banking system and the stock market that caused banking panics to immediately produce stock market collapses, as banks recalled loans to meet depositor withdrawals and brokers were forced to sell collateral.

Key takeaways​

  • Call money rates (the overnight interest rate for broker loans) spiked to extraordinary levels during the panic—rates of 100 percent or more per annum were reported on specific days.
  • The New York Stock Exchange nearly closed on October 24, 1907, when brokers could not renew their call loans and faced being unable to execute transactions.
  • Morgan's intervention in the stock market—personally delivering funds to the NYSE floor to relieve the call money crisis—was one of the most dramatic moments of the entire panic.
  • The stock market declined approximately 40-50 percent from early 1907 levels to the November trough.
  • The call money market was the direct transmission mechanism between banking stress and stock market collapse.
  • The 1907 experience contributed directly to the design of Federal Reserve mechanisms for supporting money market functioning.

Call money: the bridge between banks and markets​

Call money loans were the primary source of financing for stock market operations in 1907. Brokers who extended credit to their customers (margin accounts) funded those extensions by borrowing overnight from banks and other lenders, pledging the customers' stock holdings as collateral. The loans were "call" loans because they could be demanded (called) at any time by the lender without prior notice.

In normal conditions, this system provided flexible, cheap credit for stock market activity. The daily rate for call money reflected the supply and demand for short-term funds; in good times, rates were low and credit was abundant. The call money market was the liquid interface between the banking system's funding capacity and the stock market's capital needs.

The system's fragility was the "call" feature itself. When banks facing depositor runs needed to build their cash reserves, the most immediately liquid asset available was their call loan book—they could demand repayment overnight. Brokers who had their loans called faced either finding alternative lenders (difficult in a credit panic) or selling the pledged stock collateral to repay the loan. Mass selling of collateral drove stock prices down, reducing the value of collateral supporting other loans, triggering more calls, and producing the cascade dynamic.

The October 24 crisis on the Exchange floor​

The most acute moment of the stock market crisis came on October 24, 1907. The call money market had effectively frozen—banks were not renewing loans, alternative lenders were not available, and brokers facing calls could not refinance. The volume of forced selling was threatening to overwhelm the market; the NYSE itself might need to close early to prevent a complete breakdown of order.

NYSE president Ransom Thomas made a dramatic appeal to Morgan, reporting that the Exchange needed at least $25 million immediately to prevent a catastrophic closure. Morgan, in the middle of managing the broader crisis, arranged a lending commitment from a group of bankers within minutes—reportedly 15 minutes—and dispatched a representative to the Exchange floor to announce that credit was available.

The announcement's effect was immediate: the knowledge that credit was available stopped the forced-selling cascade even before the funds were actually disbursed. This dynamic—confidence effects from credible commitments rather than actual fund disbursement—is one of the central mechanisms of crisis management and was demonstrated clearly in this episode.

Call money rates: the thermometer of panic​

The call money interest rate during the crisis provides a precise quantitative record of the market's stress. In normal conditions, call money rates were typically 3-6 percent per annum. During the worst days of the October panic, rates spiked to levels that, when annualized, implied rates of 100 percent or more. On some days, no call money was available at any interest rate—the market had completely seized.

These extreme rates reflected the complete breakdown of normal credit market functioning: banks that had excess cash were not willing to lend to brokers at any rate because the uncertainty about broker solvency made the collateral's value uncertain. The freeze was not about price—it was about uncertainty that made any price inadequate to compensate for the perceived risk.

The stock market's decline​

The New York Stock Exchange's performance in 1907 reflected both the banking crisis and the broader economic slowdown. The Dow Jones Industrial Average, which had been declining since early 1907 as credit tightened, fell from approximately 88 in January to approximately 53 in November—a decline of roughly 40 percent. The railroad stocks that dominated the market reflected both the credit tightening that affected their financing costs and the general economic pessimism about growth prospects.

Individual stocks connected to the copper speculation fell far more dramatically. United Copper Company collapsed to near zero following the Heinze corner's failure. Stocks associated with Heinze, Morse, and other implicated speculators fell sharply. The broader market declines reflected both the specific copper crisis and the general credit contraction.

Real-world examples​

The 2008 financial crisis produced a very similar dynamic in the commercial paper and repo markets—the twenty-first century equivalents of the call money market. When Lehman Brothers failed in September 2008 and the Reserve Primary Fund "broke the buck," the commercial paper and repo markets froze in ways directly parallel to the 1907 call money freeze. Banks and other institutions that had been routinely rolling over overnight funding refused to do so, forcing asset sales that drove prices down, which reduced collateral values, which triggered more funding withdrawals.

The Federal Reserve's response—establishing emergency commercial paper purchase facilities, backstopping money market mutual funds—was designed specifically to address this dynamic by providing the credible commitment to funding availability that Morgan had provided manually in 1907.

Common mistakes​

Treating the stock market decline as a separate cause from the banking crisis. The stock market collapse and the banking panic were parts of the same interconnected event; the call money market made them inseparable. Analyzing them as independent events misses the critical transmission mechanism.

Underestimating the role of confidence effects. Morgan's announcement of available credit on October 24 stabilized the Exchange before the funds were actually disbursed. The commitment's credibility was sufficient to stop the cascade. This illustrates why lender-of-last-resort commitments need to be credible and prompt, not merely eventual.

Assuming the call money freeze was primarily about capital. At the height of the crisis, the call money market froze not because there was no capital in the system but because uncertainty about counterparty solvency made lenders unwilling to lend at any price. Liquidity crises of this type require confidence restoration, not merely capital injection.

FAQ​

Did the NYSE ever close during the 1907 panic?​

The NYSE did not close during the acute crisis of October 1907, largely because Morgan's intervention on October 24 prevented the call money freeze from reaching the point where closure became necessary. Some reduced-hour operations were considered. The Exchange's continued operation was an important signal of systemic stability.

What replaced the call money market in modern finance?​

The functional equivalent of call money in modern markets is the repo market—overnight lending by financial institutions to each other, collateralized by securities. The 2008 crisis produced a repo market freeze with dynamics closely parallel to the 1907 call money crisis, and the Federal Reserve's response was designed in part to prevent a repeat of those dynamics.

Could individual investors protect themselves from the call money crisis?​

Margin investors—those who had borrowed to buy stocks—were directly exposed to the call money crisis through their brokers. When brokers' loans were called and brokers needed to raise cash, margin calls on customer accounts forced the same forced-selling dynamic one level down. Investors holding stocks outright (without margin) were exposed to price declines but not to forced selling.

How did the call money crisis affect securities regulation?​

The 1907 experience contributed to the development of stock exchange rules about margin requirements and call money practices. More substantially, the Federal Reserve Act of 1913 was designed in part to ensure that the central bank could provide the money market support that Morgan had provided manually in October 1907.

Summary​

The call money market—the overnight lending link between commercial banks and stock brokers—was the transmission mechanism that converted the 1907 banking panic into a simultaneous stock market crisis. When banks facing depositor runs recalled their call loans, brokers facing forced selling drove stock prices down, reducing collateral values, triggering more calls, and creating a cascade that nearly closed the New York Stock Exchange on October 24. Morgan's emergency intervention—committing $25 million in credit in minutes—stabilized the Exchange through the confidence effect of a credible commitment before funds were actually disbursed. The episode established the clearest pre-Federal Reserve demonstration of why money markets require a credible lender of last resort, and directly influenced the Federal Reserve's design of emergency market-support mechanisms.

Next​

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