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Then, too, in New York the excess funds usually ended up in the stock market in the form of "call loans,"" which meant technically they could be gotten back by the banks on a moment's notice. The trouble was that often the borrower was speculating and in the process had all his own money, plus the borrowed money, in stock. When "calls- had to be made in large volume and the borrowers tried to get cash by selling stock, then prices dipped "or plunged "in a snowballing wave of forced selling. In this way, "runs- on banks in the vicinity were sometimes translated into stock market crashes in New York.
There was another problem. More often than not, a bank that had been closed by a "run- of withdrawals was basically in sound shape; at least it held a portfolio of perfectly good assets, even though it had no place to turn to get temporary cash for them. Or, if the assets were "callable- loans or "marketable- securities, any attempt by the bank to turn them into cash under crisis conditions only increased chaos in the banking system.
These were but a few of the recognized problems of the extant system. Congressional study during this period found seventeen such defects, many of which played a part in the Panic of 1907. This crisis started, somewhat differently from most of its predecessors, by rumors of bankruptcy followed by panicky withdrawals from a few big banks in the New York money market. But the anxiety spread quickly, and runs were soon made on banks in distant farming areas. The effects of these runs, in turn, converged back on New York. The result: complete collapse of the nation's banking system and the forced bankruptcy of many businesses. Although major panics had occurred before, the Panic of 1907 turned out to be the one that initiated reform efforts. Something needed to be done.
There is no better way to understand the creation of the Federal Reserve than through the life and work of Carter Glass.
