In early 1907 consumer goods prices were high and continuing to increase, a situation set in motion by too easy credit. Most glaringly, the money center banks of New York City owed their depositors more money than the whole country possessed, real money and ‘credit money’ combined. The system couldn’t sustain itself that way any longer. A stock market “panic” hit that threatened to topple the New York investment banks and reverberate through the economy, triggering a depression.
The ‘Panic of 1907’ caused nationwide bank failures, timber prices collapsed, mine operations ceased, railroads stopped running, a rash of bankruptcies occurred, and a dramatic loss of confidence and a nasty economic downturn sank in for the next year. Although not as severe as many in the past, the Panic made clear the need for national legislation to protect bank depositors.
The First National Bank, of White County, TN was one of the few banks in that state which was able to keep open through the Panic. The Tennessee Bankers Association (TBA) took notice of that fact. They sought to craft a proposal to the state’s legislature that would emulate many of that company’s best practices.
The TBA’s lobbying activities were in fact responsible for the state’s 1908 legislature passing banking bills of very minor importance. The TBA made every effort to prevent what it considered undesirable legislation until it could present a bill satisfactory to banks as well as offering sufficient protection to depositors.
At each succeeding annual association convention many bankers increasingly felt that depositor protection legislation was inevitable. However, the legislative committee of the association found it very difficult to prepare a bill that met the approval of all the bankers in the state.
In 1911 the association convention resolved: “supervision is desirable and examination made by and under the authority of the State of Tennessee would strengthen confidence in state banks and prevent failures.”
When the convention of 1912 was held the legislative committee was able to present a bill which had almost unanimous support of the association members, and this bill was presented to the legislature of 1913.
On February 13, 1913, five years after the Panic of 1907, the legislature finally passed the Banking Act of 1913, which greatly strengthened the state’s ability to oversee bank operations. It stated: [Section 1] “There is hereby created a Banking Department of the State of Tennessee, charged with the execution of all laws relating to corporations, firms and individuals doing or carrying on a banking business in the State of Tennessee. The chief officer of the Banking Department shall be known as the Superintendent of Banks, and he shall be appointed by the Governor upon the recommendations of the Tennessee Bankers Association, and his term of office shall be four years or until his successor is appointed in the manner aforesaid.”
The act required that every state bank within Tennessee should be examined by the superintendent or his examiners at least twice each year, or more often if he deemed it necessary.
The act established minimum capital requirements for banks: at least $7,500 in towns of less than 1,500 inhabitants on up to $50,000 in cities over 100,000 in population. It prohibited any bank from reducing cash on hand and due from banks or bankers below ten percent of demand deposits.
Loans could not be made to officers or employees except on approval of the directors or finance committee. Loans to one person or interest could not exceed fifteen percent of the capital, surplus and profits, except on approval of approval of a majority of the executive or finance committee.
Loans on or the purchase of the company’s own stock was prohibited, unless to prevent loss on previously contracted debts, in which case the stock had to be disposed of within six months.
On the national level, Congress was determined to create a central bank that provided a vigilant monetary policy, price stability, a more elastic currency and more careful supervision over the nation’s banks, and so the panic of 1907 led directly to the development of the Federal Reserve Act.
Sources: The Development of Banking in Tennessee, by Warren P. Gray, Capricorn House Publishers, 2007 (orig. publ. 1948)
Trust Companies, by Clay Herrick, Bankers Publishing Company, 1915
The Panic of 1907, by Robert F. Bruner, Sean D. Carr, John Wiley & Sons, Inc, 2007