When the chaos began to shake the confidence of New York's banks, the city's most famous banker J.P. Morgan was attending a church convention in Richmond, Virginia. Morgan was not only the city's wealthiest and most well-connected banker, but unlike most he had experience with crisis - in 1893 crisis he helped to rescue the United States Treasury.
He first managed to convince the heads of a number of banks to provide emergency assets to help one crippled trust, the Trust Company of America, survive a run. Morgan conferred with George F. Baker, the president of First National Bank, James Stillman of the National City Bank of New York and the United States Secretary of the Treasury, George B. Cortelyou about the problem at hand. Cortelyou said that he was ready to deposit government money in the banks to help shore up their deposits.
After an overnight audit of the Trust Company of America showed the institution to be sound, on Wednesday afternoon Morgan decided that was the place to stop the panic. The bankers also worked hard to convince clergy to reassure their congregations over the weekend and to counsel against further panic.
Seems strange, but in those days congregations were a great source of information and the clergy had much influence over the people. After all, there was no internet, thus people ultimately trusted a little information what they could hear in church.
Stopping the bank runs
As a run began on the Trust Company of America, Morgan worked with Stillman and Baker to liquidate the company's assets to allow the bank to pay depositors. The bank survived to the close of business, but bankers knew that additional money would be required to keep it solvent through the following day. That night Morgan assembled the presidents of the other trust companies and held them in a meeting until midnight. They all agreed to provide loans of $8.25 million to allow the Trust Company of America to stay open the next day.
On Thursday morning Secretary of Treasury Cortelyou deposited around $25 million into a number of New York banks. John D. Rockefeller, the wealthiest man in America, deposited a further $10 million in Stillman's National City Bank. Rockefeller's massive deposit left the National City Bank with the deepest reserves of any bank in the city. Keep in mind that all these events happened in just a few days. It's actually quite remarkable how one man pulled the entire system back, preventing the crisis from spreading nationwide.
It was J.P. Morgan persistence that saved the day. True example is the way he made the bankers come to an agreement, inviting them to his library and pocketing the key afterwards. There was no leaving the room until the solution was found. The final crisis was stopped by President Roosevelt, when he despite his anti-trust policies, decided to allow the merger of U.S. Steel to buy Tennessee Coal, Iron and Railroad Company, whose stocks were the main collateral for one of the exchange's largest brokerage firms, Moore & Schley. Saving the trust funds, meant saving the banks, and saving Moore & Schley meant saving the confidence in the stock market.
Creation of the Federal Reserve System
In 1908, Congress passed the Aldrich–Vreeland Act that established the National Monetary Commission to investigate the Bankers panic and to propose legislation to regulate banking sector. Senator Nelson Aldrich, the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems. The final report of the National Monetary Commission was published on January 11, 1911. For nearly two years legislators debated the proposal and it was not until December 23, 1913, that Congress passed the Federal Reserve Act.
President Woodrow Wilson signed the legislation immediately and the legislation was enacted on the same day, December 23, 1913, creating the Federal Reserve System. Charles Hamlin became the Fed's first chairman, and none other than Morgan's deputy Benjamin Strong became president of the Federal Reserve Bank of New York, the most important regional bank with a permanent seat on the Federal Open Market Committee.
J.P.Morgan was considered a hero among the people for his action in the crisis, but was eventually also subjected to questioning under the Pujo Committee about the most powerful banker's influence.