Jekyll Island and the Ghost of Knickerbocker Trust (Part 1)

The U.S. central banking system was borne out of a 1907 panic involving a copper mining fortune. This is the first in a series of articles exploring the history.

Rob Hajduch, Principal Credit Analyst

The copper fortune at the center of the story belonged to a man named Frederick Augustus Heinze. Known as F. Augustus (F.A.), Heinze had been born into a well-to-do family in Brooklyn in 1869 and, after studying at Columbia University's School of Mines, he set out for the western mining fields. He experienced meteoric success after developing a smelting process that could produce copper from low-grade ore. By 1895, he had accumulated sufficient resources to purchase the Rarus Mine in Butte that became the anchor operation for what he incorporated as United Copper Company in 1902. A talented engineer, F.A.'s true genius appears to have been his recognition and exploitation of a peculiar provision in Montana's mining statutes called the Apex Law. The provision allowed the owners of a mining claim to mine an ore vein protruding from the ground wherever it led underground, regardless of whether it trespassed beneath neighboring claims owned by other concerns.

Retaining dozens of lawyers at a time, Heinze tied up his more established competitors in waves of lawsuits. By 1906, his competitors had had enough of Heinze and his relentless litigation and settled his outstanding lawsuits. When Heinze arrived back in New York in early 1907, he was flush with confidence, ambition and $25 million in settlement money (roughly $672 million adjusted for inflation). He transferred United Copper's headquarters to 42 Broadway in New York's financial district, down the hall from where his brothers Otto and Arthur had set up a brokerage firm.

Despite his lack of experience in finance, F.A. invested in local banks and trust companies and cultivated a web of associations and relationships with the city's bankers. Among them was Charles W. Morse, who owned controlling stakes in several banks that included a significant interest in the Mercantile National Bank. With Morse as his mentor, Heinze came to serve on the boards of at least a dozen banks, trust companies and insurance companies.

In October 1907, the Heinze brothers' brokerage firm attempted to gain outright control of United Copper Company. Sources differ as to the extent of F.A.'s involvement - he was later exonerated - though his brothers were central figures in the plot and brought F.A.'s mentor, Charles Morse, with them when they approached the Knickerbocker Trust Company for financing. The trio was rebuffed by Knickerbocker's president, as he believed the plan would require far more funding than he was willing to lend. The brothers were undeterred, and their aggressive buying drove United Copper's share price to a peak of $52 on Monday, October 14, 1907. The Heinze brothers' success had a short shelf-life though, as the share price spike attracted hordes of sellers, driving the stock to $10 in a matter of two days. F.A.'s brothers were ruined; their trading privileges were suspended and their brokerage firm was bankrupted.

Bank runs were common in the pre-deposit insurance era and outcomes typically deteriorated the further a person was from the front of the line. The precipitous change in the Heinze fortunes rendered even loose association with the brothers toxic in the public perception and nervous depositors flocked to the lobby of Mercantile National to withdraw their funds. After forcing out F.A. Heinze and Charles Morse, a syndicate of local banks saved Mercantile National, but by then the panic was engulfing the Knickerbocker Trust Company. Its depositors showed up en masse on October 21, 1907 to demand their funds and over the course of three hours the company paid out $8 million ($211 million in 2019). Insolvent, it closed its doors early that afternoon. 

Knickerbocker Trust's failure whipped the crisis into a full-blown panic. Into the maelstrom stepped J. Pierpont Morgan, who over the following days cajoled local banks to contribute to a $25 million rescue pool. His efforts were supported by announcements on October 24th that the U.S. Treasury would be depositing $25 million across several New York City banks and that John D. Rockefeller was committing $10 million of his personal wealth to stabilize the financial sector.

By early November, the Panic of 1907 was largely over but the trauma of the experience finally galvanized support in Congress to establish a permanent central bank. In November 1910, a group of men convened at Jekyll Island off the coast of Georgia to formulate a plan a reform of the U.S. financial system. But that is a story for another day.

Sources:

Federal Reserve Bank of Boston, Panic of 1907, publications archive

Federal Reserve Bank of Minneapolis, F. Augustus Heinze of Montana and the Panic of 1907, August 1, 1989

FINRA, Born of Panic: The Federal Reserve and the Panic of 1907, Part 1, April 1, 2016

Smithsonian, The Copper King's Precipitous Fall, September 20, 2012

 

 

 

Frederick Augustus Heinze