Credit Crises Nothing New -- 1907 Tells Us So

Under the workings of the gold standard that then prevailed, the money supply, and hence credit, could only increase when more gold was available.

But because loads of bullion were leaving for the West Coast, by the spring of 1907 a so-called "credit anorexia" developed in London and New York City as the financial system was stretched beyond capacity, the authors say.

As if that wasn't enough, a failed attempt at manipulating shares of United Copper resulted in one brokerage firm, Gross & Kleeberg, closing shop in October 1907 after the scheme's perpetrators, the Heinze brothers, refused to pay for shares they'd ordered. That put further pressure on the financial system, and before long the Heinzes' own company went under, which in turn stressed a major New York bank.

Then things got really bad, but that's also where the similarities to the current situation start getting uncanny.

The Hedge Fund Hustle

A century ago, as now, lightly regulated financial entities had come to dominate the milieu. In 1907, it was the trust companies pushing out the traditional banks, while today it's hedge funds and private equity. Both benefited from skirting regulations to the advantage of their often well-heeled clients.

Specifically, the trusts of 1907 could keep lower cash reserves than traditional banks, and so could give their customers higher returns. But that, along with a lack of transparency about the firms' inner finances, also meant trusts were much more susceptible to bank runs, in which depositors attempt to withdraw their savings en masse.

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