The stunning collapse of three high-profile banks in recent months—Silicon Valley Bank, Signature Bank, and First Republic Bank—churned up a host of headlines and fears: Are these signs of major instability? The first dominos to fall?

In the second edition of their book, The Panic of 1907: Heralding a New Era of Finance, Capitalism, and Democracy, Robert Bruner (MBA 1974/DBA 1982) and Sean Carr make the case that looking into financial crises of the past can help clarify current conditions—and inform one’s outlook on the future.

In May, Bruner retired from 41 years of teaching at the University of Virginia’s Darden School of Business, where he remains university professor emeritus and dean emeritus. Recently he spoke with the Bulletin about teachable moments from the previous century and why the events of 1907 remain relevant today.

What are some of the most important lessons for us today from the Panic of 1907?

It demonstrates at least six regularities of financial crises. First, crises tend to afflict vulnerable financial systems. Vulnerability often follows an economic boom, a period of real growth that morphs into excessive optimism and credit creation and misallocation of capital. Such conditions stress a financial system, leaving it vulnerable to a shock. The decade before the Panic of 1907 was a stressful whopper of growth.

Second, it takes quite a shock to trigger a crisis. The shock must be big, costly, unambiguous, surprising, and a hit to the real economy. The San Francisco earthquake of 1906 qualifies as the major disruptor leading to the Panic of 1907. Wars, bad harvests, other natural disasters, and, yes, pandemics, would also deliver crisis-triggering shocks.

Third, crises tend to break out in the periphery of the financial system, not at its center. A chain is as strong as its most vulnerable link. In 1907, runs began among trust companies, the “shadow banks” of the day. Fourth, financial crises can be quite damaging. Carr and I show that US economic growth fell well below trend for many years after the Panic of 1907.

Fifth, the impact of a crisis extends to politics and society as well: more electoral regime shifts, more suicides, less family formation. Sixth, human agency (leadership, knavery, and foolishness) figures importantly in the path of most crises.

Why was human agency so important in the unfolding of events in 1907?

Leadership is a big lesson of this crisis: Several leaders in the New York financial sector stepped forward to rally a response. They included John Pierpont Morgan; James J. Stillman, who led City National Bank; and George F. Baker of the First National Bank of New York City. They met almost daily for weeks to coordinate the effort. They raised funds to rescue financial institutions, the New York Stock Exchange, and the City of New York. They worked with US treasury secretary George Cortelyou to move gold reserves to the places of greatest need. They actively shaped public opinion by working with journalists to convey the accurate condition of the financial system, and with priests, ministers, and rabbis, to urge calm. In essence, Morgan, Stillman, Baker, and Cortelyou worked to resolve the classic challenge of quelling financial crises, which economists call the problem of mobilizing collective action. It takes collective action to stop a stampede of depositors.

There was knavery and foolishness in this story as well: an audacious “bear-squeeze” speculation that failed dramatically, the abandonment of business partners at the moment of great risk, and claims of score-settling in the way that some bankers treated others.

The point is that you cannot understand crises simply by looking at macro data such as funds flows, interest rates, bank reserves, or deposit balances. The character of key players at pivotal moments in a crisis will also affect the path it takes. In Washington, DC, they say that people are policy; that is, the predispositions of people in various places will drive the policy choices they make. Thus also it is in financial crises.

How does a longer view help shape our understanding of the causes of these events?

Sean Carr and I argue that you cannot fully understand a financial crisis by looking only at its epicenter, such as the collapse of Lehman Brothers in September 2008. To understand the causes, you must go back earlier in time. To understand the consequences, you must follow the trail onward in time. Our coverage of the crisis progression, from 1896 to 1913 and beyond, displays the six regularities that I mentioned earlier and connects the Panic of 1907 to the founding of the US Federal Reserve System. To take such a long view means connecting dots of history in a more useful way, rather than just marveling at the terrible moments at the nadir of the crisis.

Why does the history of financial crises matter?

It matters because crises are recurrent, very costly, and highly disruptive economically, politically, and socially. Memories are short; crises tend to fade into the mists of time. People forget about past lessons learned. There is a natural tendency of each generation to believe that the conditions it faces are unprecedented and that the world must be constructed anew. Yet history shows that today’s problems often have deep roots in the past. If you understand the roots, you may gain greater insight into present remedies. Finally, financial crises leave an indelible mark on our culture. As William Faulkner wrote, “The past is never dead. It’s not even past.”

Much like the victims of crime or veterans of combat, we are imprinted with the strains of crisis that will endure for years. To understand who we are, where we are, and how we got here, we need to understand the past.

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