All I knew about the Panic of 1907 was the year it occurred and that people were a little anxious.
I did not know that one man’s vindictive hubris touched off the crisis that ran through New York and across the nation, radiated through the world and shivered up the spines of the country’s financial and political leaders.
It scared those leaders enough to make them realize that the decentralized treasury system could not sustain bank runs. The closest thing to a central bank sat in his private library on Madison Avenue and went by the name J.P. Morgan.
Morgan used his considerable clout, dollars and wits to control the panic, as he had during previous crises. The financial fire sparked an investigation that helped create the Federal Reserve System.
People were bankrupted and jailed afterward but the man who helped start it all walked away, in a rare admission of defeat. He was F. Augustus Heinze, a copper king from Montana who had come back home to New York to play with the big boys of finance.
He was indirectly responsible for the panic because his brother Otto wanted to get back at the people he was certain were short-selling the family’s company, United Copper, betting that it would lose value. So, he tried to corner the market in the company’s stock and squeeze the short-sellers.
Augustus Heinze had little to do with the scheme, but his string of successes brought the brothers to the point where they could bet with perhaps excessive confidence. Augustus was a crafty, charismatic character born in Brooklyn to wealthy parents and trained as an engineer. He went off to Montana to make his fortune against brutal mine owners.
Augustus fought and won all along the way, underground and in the courts. When a bunch of thugs came in from out of state to take care of him, he and his buddy mopped the sidewalk with those punks until the police came.
Augustus decided to go back to New York, but this time to Wall Street. Pretty soon, he and a partner were controlling several banks and a couple of insurance companies. He wasn’t all business. His partying was the stuff that filled gossip columns.
So, when his detractors were betting that his company’s stock was going to drop precipitously, his brother Otto took offense and plotted retribution.
Otto thought that the family owned enough of the stock that it would be possible to buy up a majority of the rest, running up the price in the process. When Otto called for the short-sellers to return the stock, they would have to turn to the Heinze family to buy the replacement. Otto would be able to name his price.
He took the idea to his usual financier, who declined to back it because he thought that Otto underestimated the amount of stock he would need to be successful.
Here’s the thing about schemes to corner the market: They often spring from a dark motivation such as revenge or greed and almost always end in rubble.
The financier was right. The short-sellers could buy replacement stock. When the market saw that the corner had failed, the company’s stock plummeted from its great height. Depositors ran to withdraw their money from banks associated with Heinze, spreading the contagion through Wall Street and up Manhattan to Morgan’s library, where the master manipulator was able to negotiate deals to save the banks and even the city government from collapse. But F. Augustus Heinze left his hometown a broken man.
Why are we talking about a panic in 1907? Because it led to the Fed, which was supposed to be the regulator to corral the animal spirits when they ran wild.
But doesn’t all this sound familiar? Didn’t that panic replay in some form in 1929, 1987, 2000 and 2008? All these machinations seem to protect bankers and the system but leave average Americans taking the hit.
At least that’s the way it seemed to some disruptors who wanted to return control to the people. That meant creating a dependable, accessible system where currency could be traded from person to person but the system could not be manipulated by one operator.
Eventually, blockchain was created by Satoshi Nakamoto, which is a shadowy pseudonym for one or more people. It is an encrypted system built and verified by cooperation. The first application was of course, bitcoin.
In this month’s InFront, we talk about LIMRA’s effort to help develop a blockchain for the life insurance industry, or perhaps to participate in a greater insurance blockchain. It is certainly encouraging to see the industry looking at promising ways to propel its underwriting and administration into the information age.
Much like the Heinze family more than 100 years earlier, bitcoin is facing its own Wall Street test. Markets are allowing the sale of bitcoin futures, which is unleashing highly motivated market manipulators. They will have big bucks on credit riding on the price.
But that might be a conceited gamble that bitcoin is like any other currency, stock or commodity. Well-ensconced masterminds might be thinking that they control the playpen and that all comers are mere suckers spilling money they deserve to lose.
As Whitney Johnson explains in this month’s interview with Publisher Paul Feldman, disruptors start small, build momentum and blow right by you.
They don’t play by the same rules. They see a different future. They are guided by other stars.
Yesterday’s miners pulled treasure out of the ground. Today’s miners solve mathematical equations to build a vast, solid-
yet-ethereal network. The technology changes but the story is the same — people with sheer willpower move mountains.
If 2017 was the year when we sat on the wayside in rapt astonishment, this is the year to get back on our feet and out there.
As we scan the landscape of 2018, where are our mountains? Where shall we go? What shall we conquer?