In the summer of 1907, the American economy was showing signs of weakness as a number of business and Wall Street brokerages went bankrupt. In October, the respected Knickerbocker Trust in New York City and the ¹Westinghouse Electric Company both failed, touching off a series of events known as the Panic of 1907.
In the wake of the initial business collapses, stock market prices plummeted and depositors made a massive run on the nation’s banks. The U.S. Treasury pumped millions of dollars into weak banks in the hope of saving them, but the string of collapsed institutions lengthened.
In a reprise of his role during the second Cleveland administration when the gold standard was under assault, J.P. Morgan acted to restore order. He summoned the leading bankers and financial experts to his home where they set up shop in his library. Over the course of the next three weeks, Morgan and his associates labored to channel money from the strong institutions to the weaker ones in an effort to keep them afloat.
The joint effort of the government and the business leaders improved conditions markedly over the course of several weeks. While the crisis passed, the finger-pointing began. Reform elements of both political parties believed that the American banking system was fundamentally flawed and needed wholesale change. Business leaders, however, held that Roosevelt's progressive legislation had upset the natural order of the economy and the government should stop its meddling.
Following the Panic of 1907, the reform elements gradually gained the upper hand. An emerging consensus affirmed that thorough bank reform was necessary to provide badly needed currency elasticity (a major issue in the Panic) and the general soundness of the banking system. Congress responded by passing stop-gap legislation, the Aldrich-Vreeland Act (1908), until more thorough actions could be prepared.
With the passing of the Owen-Glass Federal Reserve Act of 1913, the Federal Reserve System was created. The "Fed" was designed to be flexible and responsive to the economy and independent of politics. The Fed has evolved through the years by implementing many strict checks and balances. New departments, the General Accounting Office, GAO, and the Office of Management & Budget, OMB, were created to audit the Fed and most other government departments. As a result, the American economy, and American society are more stable.
1: Westinghouse Electric was the victim of foul business practices by J.P. Morgan. Morgan controlled General Electric and Thomas Edison’s Direct Current, (DC) electrical patents. He contended with Westinghouse Electric, who controlled Nicola Tesla’s Alternating Current, (AC) electrical patents. Morgan and Edison strove for control of all electrical power in America. Edison used deceptive demonstrations of the supposed increased dangers of AC and Morgan had spread rumors in Wall Street that Westinghouse was insolvent, causing Westinghouse stock to collapse, along with the stock of the Westinghouse backers.