J.P. Morgan is one of the most fascinating and important characters in all financial history. Yet, every time I see him, I can think only one thing: he looks like a walrus.
It's that big bushy mustache. (See the photo below.) And when I think of walruses, I think of the Beatles' trippy tune, "I am the Walrus." Legend has it the walrus in question references Lewis Carroll's "The Walrus and the Carpenter" in Through the Looking-Glass. Lennon later said he had Allen Ginsburg in mind after a series of acid trips, but he ultimately regretted choosing the walrus at all because Carroll's allegory is about capitalism, and the Walrus is the villain. Go figure.[i]
That strange loop of interconnection takes my mind to Sean D. Carr's The Panic of 1907—an account of a truly mind-blowing era in capital markets history, where Mr. Morgan, the Walrus himself, was the hero. Morgan was in essence the first Fed chair—at a time without a Fed. He was the dominant banker of the era and a legendary dealmaker, which made him the de facto financial leader folks looked to when trouble hit. He was not only the first sort-of Fed chair, but the most famous one by far until we get to Volcker and Greenspan in the early 80s. (He even mentored the first real Fed chair, Benjamin Strong, a prominent Morgan banker and one of his right-hand men in the panic.)
1907 features scintillating stories of daring do! J.P. himself can be seen hastily making his way on foot through the streets of New York—to the cheers and hisses of those who recognized him—to meetings in dark, smoky rooms where the fate of US banking hung in the balance! Even a midnight train was commandeered for the US Treasury Secretary (at the behest of Teddy Roosevelt himself!) to consult Morgan first thing in the morning and save the system![ii]
Indeed, the Panic of 1907 is high financial drama of the first caliber, which makes it all the more amazing there isn't a whole lot written about it for the general public. That's probably because it's before what many consider the "modern era" of investing (somewhere in the mid- to late-20s), and thus such events feel too archaic and don't get as much attention. The "Middle Ages" of finance if you will.
This is a shame and also mostly false. Capital markets at the turn of the twentieth century were burgeoning, dynamic, and free-wheeling. Juggernauts like the Rockefellers, Carnegies, and others are fighting the trustbusters, the industrial revolution is taking the western world by storm, and the US is getting set to emerge as a world superpower. While it is true that data is shakier and less available so far back, the basic mechanisms of banking as a social function—to allocate capital efficiently, that is, to take in deposits and lend longer term—are very much the same as today and worth our study.
Carr's concise and accessible book— you can knock it out on a longish plane ride and all the financial bits are in laypersons terms—gives us a sense of that. He tells a good story in the first half; above and beyond what's normally reserved for analyst/academic fodder. Then he offers economic analysis in the second, featuring a smattering of appendixes on various topics for the econo-phile in you. (There's even a quirky little appendix in which Carr investigates the many definitions of what a "panic" actually is.)
The concluding chapters offer an analysis of common features of market panics. In this, Carr is sometimes spot on, other times less so. One highlight is Carr's adept use of the "prisoner's dilemma," a common theoretical problem of game theory, to see the real world choices a banker and/or trader must face when liquidity evaporates, often creating a vicious cycle. But he is right to put himself through such paces. The real value of this book is its clear depiction of human behavior—that is, the most repeatable element in market cycles. Times change, and at an accelerating rate—tomorrow will never be the same as yesterday. Yet comparing a hundred years ago to now, we see how consistent human behavior is. Greed/fear; love/hate: Carr's storytelling shows those things don't change no matter how much capital markets evolve.
1907 lacked today's sophisticated financial and economic theory, today's hardcore mathematics, all the investing products we have at our fingertips now, the information readily available to us. But when it came right down to it, a crisis in confidence and banking woes sparked a liquidity squeeze and panic that shook the whole system. That's more or less the story of 2008. Such eras of turbulence are often catalysts for regulatory change. 1907's events were the impetus for creating the Fed, and called very much into question the notion of the gold standard. Again, today's regulators vie to overhaul the financial system—a key political issue of 2010—and some are even questioning our dollar-centric exchange rate system of fiat currencies.
To some, the world is as psychedelic, chaotic, and disassociated as the Magical Mystery Tour. But if you study the lyrics enough, an undercurrent of repeating patterns and meanings emerges. 1907, like 2008, was market vertigo, but the human response was archetypal. Goo goo g' joob.
[i] Of course, when it comes to Beatles lore, there are a thousand different tales and explanations about how and why lyrics were as they were. This is one tale. I'm sure there are many others.
[ii] These, too, are events shrouded in legend and apocrypha by now.