The first to suffer was the brokerage firm of Otto Heinze & Company, well-known speculators, particularly in copper stocks. The next to fall were Charles W. Morse and E.R. Thomas, also speculators and directors of the Mercantile National Bank, and others. All banks controlled by these men at once showed weakness. But the panic did not reach its climax until the Knickerbocker Trust Company became involved. To understand the situation of the Knickerbocker Trust Company, a word must be said regarding trust companies and their relations to banks.
Banks in the city of New York are required by law to keep a reserve of 15 per cent of their deposits in coin. Trust companies, not being subject to the banking law in this respect, are not called upon to maintain this reserve. They have, therefore, an advantage over banks because they can invest the whole of their deposits instead of keeping a part of them uninvested in coin. The natural hostility that would arise between trust companies and banks owing to this difference was eliminated in almost every case because trust companies were controlled by the banks. The Knickerbocker Trust Company, however, formed a notable exception to this rule.
Owing to the genius of its President, Charles T. Barney, the Knickerbocker Trust Company had increased its deposits to over eighty millions in 1907. Mr. Barney did not belong to the Wall Street Group in the sense of the word that he acted independently of it, and his extraordinary enterprise and ability aroused the jealousy of the Group. In 1907, the institution having 8,000 depositors with total deposits of $80,000,000, became an independent power which was not to be tolerated by the Group. Under these conditions, it could not be expected that the Group would make any extraordinary effort to save the Knickerbocker Trust Company. It was to the interest of the Group that the Knickerbocker Trust Company should cease to remain an independent financial power.
Everybody knew that the Knickerbocker Trust Company, though temporarily embarrassed, was perfectly sound. The receivers, appointed when its doors closed, so stated and subsequent events have proved that the receivers were right. No one doubts the ability of the Group to save the Knickerbocker Trust Company if it had chosen to do so. But the Group had in its hands an instrument by means of which the ruin of Mr. Barney could be effected: The clearing house has never admitted trust companies to membership, because trust companies were not under the obligation to maintain the 15 per cent reserve above referred to. This matter had come up frequently for discussion and the clearing house had insisted that all trust companies applying for membership to the clearing house should keep a reserve at of least 10 per cent. This the trust companies declined to do; but they nevertheless profited by the clearing-house system by employing banks that were members of the Clearing House Association to do their clearing for them—a dangerous situation that proved the ruin of Mr. Barney. The Bank of Commerce was the clearing-house agent of the Knickerbocker Trust Company; and the Bank of Commerce was controlled by the Wall Street Group. Under these conditions, the Knickerbocker Trust Company was at the mercy of the Wall Street Group.
The Bank of Commerce publicly announced its refusal to clear any longer for the Knickerbocker Trust Company on the 21st of October.[122] Mr. Charles T. Barney was told that no help would be given to the Knickerbocker Trust Company unless he resigned. Understanding this to mean that help would be given if he did resign, he resigned; but help was withheld; the Knickerbocker Trust Company was allowed to go into the hands of receivers, and Mr. Barney committed suicide.
Mr. Barney's corporation was not the only one upon which the Group had its eye. The Group is interested in the General Electric Company, the largest electrical company in America. The only serious rival of the General Electric Company in the country is the Westinghouse Company. Westinghouse was doing a larger business than he had capital for. "He was overwhelmed by his own prosperity." All Westinghouse needed at that time was money in order to protect his business. This money was refused to him.
The Group is also interested in the railroads of the country and indeed controls them. It is one of the bad features of our railroad system that it almost everywhere controls steamship lines and thus prevents the public from having the benefit of cheaper water rates by exacting the same rates on steamboats as upon land. Morse with the supposed backing of the Knickerbocker Trust had organized a system of steamship companies which were running independently of the railroads and threatening their monopoly of freight rates. It was necessary that these steamship lines should be controlled by the various railroad systems with which these lines competed, and Morse's steamship company was forced into the hands of a receiver.
But there was another corporation of still more importance to the Group—the Tennessee Coal and Iron Company.
The Steel Trust had never been able to purchase this company, and this company was in a measure indispensable to them. The Tennessee Coal and Iron Company had the extraordinary advantage of owning inter-bedded coal and iron; that is to say, coal and iron in the same spot. It was thus relieved of the necessity of transporting coal several hundred miles to iron ore or iron ore several hundred miles to coal. This enabled the Tennessee Coal and Iron Company to fix a price for steel independently of the Steel Trust.
As has been explained, although trusts seek to have weak independent concerns in existence if only to prevent strong independent concerns from being organized, they cannot afford to have an independent concern competing with them which is able to fix prices lower than their own. For this reason, the Wall Street Group availed itself of the panic to get control of the Tennessee Coal and Iron Company.