An Overlooked Central Bank Rescue: How the Bank of France Ended the American Panic of 1907

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Recent American and European financial crises prompt the questions: under what conditions do crises end, when does a rescue plan crystallize, and how does a rescue happen? I examine a successful rescue operation in the worst pre-Federal Reserve financial crisis, the Panic of 1907, with these questions in mind. Received tradition ascribes the resolution of that crisis to a series of efforts to expand domestic liquidity. In this event study, however, I find that it was direct intervention by France in American money markets that ultimately relieved the stringency by providing a new source of international liquidity. I challenge the notion that J. Pierpont Morgan saved the American markets by devising a series of ad hoc domestic liquidity measures during the crisis. While Morgan’s actions may have averted a settlement crisis at the New York Stock Exchange and provided temporary relief for equity prices, I find that it was the announcement by the Bank of France to accelerate its gold payments directly for American crops that ultimately reversed the downtrend in equity prices. I find evidence that signs of spill-over to the French banking and financial systems accompanied the French decision to rescue the United States. Furthermore, discussions among French bank regents reveal how the rescue operation met their competing mandates to provide liquidity while preserving rigorous quality standards for assets the Bank purchased in exchange for its liquidity provision. Implications are that rescues occur when a surplus-reserve central bank experiences signs of domestic stress, that central banks cooperate when it serves their self-interest, and that a collateralized rescue operation can provide systemic liquidity and maintain central bank portfolio quality.