Monetary Policy and the Copper Price Bust: A Reassessment of the Causes of the Panic of 1907

Abstract

We find evidence that the runs on banks and trust companies in the Panic of 1907 were linked to the Bank of England’s contractionary monetary policy actions taken in 1906 and 1907 through the medium of copper prices. Results from our VAR models and copper stockpile data support our argument that a copper commodity price channel may have been active in transmitting the Bank’s policy to the New York markets. Archival evidence suggests that the plunge in copper prices may have partially triggered both the initiation and the failure of an attempt to corner the shares of United Copper, and in turn, the bank and trust company runs related to that transaction’s failure. We suggest that the substantial short-term uncertainties accompanying the development of the copper-intensive electrical and telecommunications industries may have also played a role in the sharp drop in copper prices. Additionally, we find evidence that the copper price transmission mechanism was also likely active in five other financial systems that year. While we do not argue that copper caused the 1907 crisis, we suggest that it was an active policy transmission channel amplifying the classic effect that was already spreading through the money market channel. If, as we argue, the bust in copper prices partially provided a trigger to that bank panic, then it provides additional evidence that contractionary monetary policy may have had an unintended, adverse consequence of contributing to a bank panic and, therefore, supports other recent findings that monetary policy deliberations might benefit from considering the policy impact on asset prices.