The worst and most dangerous feature in the view of Wall Street was the alarm among the public.

—Wall Street Journal, October 23, 1907

On Tuesday morning, October 22, the mid‐autumn weather in New York City was fair and mild.¹ That was fortunate, since there was already an eddying crowd outside the Knickerbocker Trust Company’s great bronze doors at Fifth Avenue and 34th Street by 9 a.m. Altogether about 100 people, mostly small shopkeepers, mechanics, and clerks, waited patiently on the sidewalk to reclaim their deposits. Even when the firm opened at its regular time an hour later, everything remained orderly and there were no violent scenes, tears, or frantic handwringing. Men stood in one primary line, while women stepped into a separate room to the left of the bank’s main entrance. Within 15 minutes, the line extended out the doors and down the steps to the sidewalk, as company officers and policemen marshaled the growing crowd into formation.²

Inside the building, clerks behind the Knickerbocker’s ornate bronze gratings were paying off depositors as fast as they could compute interest and stamp vouchers. “Stacks of green currency, bound into thousand dollar lots, were piled on the counters beside the tellers,” the Washington Post reported. “One by one these stacks were broached and they dwindled rapidly. Clerks went to the vaults from time to time with arms full of notes, piled up like bundles of kindling wood.”³ As the morning wore on, many more depositors arrived carrying satchels, showing they were ready to carry off large amounts. One young man, “with his hands trembling,” the Times reported, “stacked his trousers pockets full of one‐hundred‐dollar and twenty‐dollar bills.”⁴ Meanwhile, messengers from the downtown banks were bringing in bags of money, and one of them even came laden with three big wooden boxes of silver.⁵

The line of depositors inside the green‐marbled banking room turned in circles, such that every inch of the big lobby of the bank was covered. They crowded the center desk so closely that as they inched along, men and women could make out their checks without leaving the line, resting their blanks on their forearms, handbags, or bankbooks.⁶ As word of the run began to spread, a line of automobiles and finely appointed carriages formed in front of the Knickerbocker, and women in silks and men in frock coats and ties took their places in the queue. “Around the stock tickers in the offices of the officials women again and again gathered and read the tape, quoting aloud the prices and showing their interest in the values of stocks and bonds as well as in their cash holdings.”⁷ Meanwhile, the Knickerbocker’s vice president, William Trumbull, told depositors that the trust company would keep paying out until the end of official hours at 3 p.m., adding, “It will be a physical impossibility for them to count out and turn over the money they have during the time remaining.”⁸ For the most part, the depositors took their long wait stoically, but as the hours wore on some showed their impatience. One man complained bitterly at the slowness of those ahead of him counting their money. “Every half hour, he said, “is costing me five dollars. I have got to get cash for the Clearing House, and I am fined for each half hour’s delay.”⁹

At the Knickerbocker’s downtown office in the Metropolitan Life Building at 66 Broadway, the scenes were largely the same. At first, the line there extended only from the banking room out to Broadway, but as the day progressed it doubled upon itself in a great “S.”¹⁰ While the morning crowd was comprised of only about 50 people, “as fast as a depositor went out of the place ten people and more came asking for their money,” the Times reported, “and the police of the West 30th Street Station were asked to send some men to keep order.”¹¹ Despite the apparent orderliness of the proceedings, the Wall Street Journal opined on the underlying dread felt by many:

The worst and most dangerous feature in the view of Wall Street was the alarm among the public. The frightened depositor is a proposition New York has not had to handle in recent times and assurance which would satisfy the Street and its experienced leaders might be meaningless to the sort of crowd which gathered outside 66 Broadway at the opening of business in the morning.¹²

At 12:35 p.m., Joseph T. Brown, an officer of the Knickerbocker Trust Company, stepped onto a chair in the middle of the lines of depositors and read a statement from the state superintendent of banks, saying that the New York State banking department had examined the Knickerbocker on September 17, and had found that it had assets of $68,884,523 and liabilities of $63,701,531. When he finished, there was a weak‐hearted cheer, but nobody dropped out of line and payments continued.¹³  The New York Times described the scene that ensued:

About this time the crowd of depositors and messengers from brokerage houses, sent to report on the situation, filled the lobby to the doors. A small overflow on Broadway promised to draw an increasing crowd, and half a dozen policemen from the John Street Station were sent down to keep order. The sidewalks in front of the American Express offices across the street were crowded with a small mob.¹⁴

The bank officer then announced that no more payments would be made. “Payments of checks will be, probably, resumed in the morning,” Brown added weakly. “Louder,” came the calls from a number of men in the banking room who could not hear. “The company is solvent,” Brown shouted back as he sought refuge in his office. The tellers closed their windows as the remaining depositors and bank messengers within harried the other officials with questions.¹⁵ Meanwhile, uptown, at the Knickerbocker’s stately and reassuring building on Fifth Avenue, a telephone message arrived from 66 Broadway. It instructed the cessation of all payments there as well. William Trumbull, a Knickerbocker vice president, said, “Something must have happened downtown. It means that we have the assets, but that we can’t realize on them just now to pay off our liabilities.” Someone in the crowd shouted, “Will payment be resumed in the morning?” Trumbull said, “I can’t tell.”¹⁶

For an hour after the doors were closed most of the waiting depositors stayed in formation, while others clamored at the locked doors for more news about the situation. “Up to that time the crowd had been calm, and, in fact, somewhat sheepish,” the New York Times reported. “The words from the doorway had been imperfectly understood, and when the banking office was shut against them those waiting in the lobby gathered in excited groups, demanding of each other what it meant.”¹⁷ Many of them simply persevered and waited outside until the close of banking hours.¹⁸ “Idlers stood and stared at the windows in which the shades had been pulled down,” Satterlee remarked, “and the police had to be summoned to clear the streets.”¹⁹

Within two and a half hours on Tuesday, October 22, the Knickerbocker Trust Company had returned more than $8 million to depositors at its offices on Fifth Avenue, Broadway, and its two smaller branches in Harlem and the Bronx.²⁰ Around noon, the new president of the Knickerbocker, A. Foster Higgins, entered the building at 34th Street, where he held a series of consultations in the officers’ rooms.²¹ Despite the assurances of the financiers at Sherry’s the day before, the officers of Knickerbocker said that no money was forthcoming when needed.²² Of the total paid to depositors, $4 million was paid directly in cash, and another $4 million was paid through the clearing house.²³

The proximate cause for the suspension of the Knickerbocker on Tuesday was the flood of very large checks presented for payment by other banking institutions. Just before the order to suspend, a messenger, reportedly from the Hanover National Bank, appeared at the Knickerbocker’s window downtown with a check for $1.5 million, which the Knickerbocker cashed; shortly thereafter, another messenger from a different bank arrived with a check for $1 million, which was also cashed. “The paying teller handed out this money,” the Times reported, “and immediately closed down his window. There was still some cash left in the paying teller’s cage, but the officers had realized by that time that needed help was not forthcoming, and suspension was the only recourse.”²⁴ Large numbers of messengers from brokerages and banks remained in line, holding large batches of several hundred checks, but these messengers were turned away as the tellers closed their windows.

What Prompted the Run?

The Knickerbocker’s final day is emblematic of thousands of episodes before and since called bank runs. A “run,” according to economist Gary Gorton, is an “unexpectedly large withdrawal of deposits” in which uninformed depositors spontaneously test whether the bank’s assets have been impaired by some actual or rumored calamity.²⁵ A “panic” is systemic, the simultaneous occurrence of many individual runs. Gorton argues that panics are sparked by changing perceptions of deposit risk caused, for instance, by variations in the business cycle, as opposed to idiosyncratic causes such as the weather that day or what a depositor ate for breakfast.

Virtually all banks are exposed to the risk of runs because they make investments in assets that are less liquid than cash, while offering depositors the right to withdraw upon demand. The problem in 1907 was that depositors could not ascertain the quality of the bank’s assets—this was an information asymmetry (insiders knew more than outsiders) for which depositors had few remedies other than to withdraw funds. A run, then, could be viewed as a test by which depositors essentially audited the quality of the bank’s assets.²⁶ Gorton emphasized that a run could be a rational response to the threat of capital losses.²⁷

Because depositors would be served sequentially, according to where they stood in line, they were motivated to act sooner rather than later. How soon to act would depend not based on one’s own assessment of the bank, but upon what one believed others’ assessment was. This led the eminent sociologist Robert K. Merton to suggest that bank runs could be generated by a “self‐fulfilling prophecy,” by which the mere suspicion of bank failure leads to its fulfillment.²⁸ As economics relentlessly emphasizes, expectations matter—whether they are well‐founded or not.

Nobel Laureates in Economics Douglas Diamond and Philip Dybvig modeled bank runs as potentially triggered by a range of possible variables, even just random patterns of withdrawals.²⁹ A colleague once described to us a run on a small bank in China that began when a line into a coffee shop extended across the front of a bank next door and caused the public to assume that the bank was in trouble.³⁰ Other theorists have suggested changes in investor sentiment³¹ and sunspots³² as possible causes. The indeterminacy of causes appeals to explanations based on the idiosyncrasy of financial crises.

However, the facts surrounding the run on the Knickerbocker on October 22 seem consistent with Gorton’s idea that runs start because of shocking news that raises the risk of a bank’s suspension. Information problems make it impossible to know exactly what is going on. In turn, the information problems spark adverse selection: depositors run.

What the general mass of Knickerbocker depositors knew on October 22 was as follows. Business conditions turned sour starting in June 1907. Credit market conditions were tight owing to the restrictive policies of the Bank of England and other central banks; firms and municipalities found it increasingly difficult to refinance their debts. Large losses in a busted copper speculation led depositors in banks both directly and distantly affiliated with the Heinze‐Morse circle to exercise their deposit contracts and withdraw their funds. Morse and Barney had had some business dealings together.^a Barney restricted the release of information about the financial condition of the Knickerbocker, even to his own staff and directors. In short, for depositors aware of worsening macroeconomic conditions and imperfectly informed about an association between Morse and Barney, the runs at Morse‐controlled banks plausibly shocked the well‐informed to commence a run on the Knickerbocker.

A way to discourage bank runs is to guarantee deposits through some form of insurance. Unfortunately, in 1907 deposit guarantees were anathema to orthodox bankers on the grounds that they would foster moral hazard. The Panic of 1907 would begin a serious shift in orthodox thinking that would ultimately culminate in the creation of federal deposit insurance in 1933.