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the late 19th century saw increasing troubles in the core European nations, and in the United States

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the economy of the Victorian boom began to falter

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1873-1896 global and near-global recessions

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had the capacity to skip from society to society

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the weaknesses of the model of interdependence began to show

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interdependence affected the ability of governments to stop the problems from spreading

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this was not new but became more rapid at the end of the 19th century

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John Maynard Keynes (1883-1946)

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British economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments

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August 1914, wrote essay in Economic Journal

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worried about the world's ability to survive a major crisis, a prescient article

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the world economy faced two kinds of problems:

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1. the gold standard that had served as a ballast for the system, restricted the ability of governments to deal with currency pressures, was very rigid

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2. private banks were so large in proportion to the amount of money in circulation, that a run on any bank could cascade into a full-blown financial crisis

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if one bank failed, it could bring down the entire system

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The Panic of 1907

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a United States financial crisis that took place over a three-week period starting in mid-October, when the New York Stock Exchange fell almost 50% from its peak the previous year

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panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies

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began with a few bond failures

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collapse in commodity prices

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started with the price of copper that was being traded internationally

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the United Copper Company tried to corner the copper market

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the loans that the banks issued to the company failed

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then the banks became unstable

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led to a run on stocks

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pressure on the American dollar

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led to the failure of the Knickerbocker Trust Company—New York City's third-largest trust

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there was no central authority to intervene to put an end to the panic

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it fell to the magnates of Wall Street to solve it

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J. P. Morgan (1837–1913)

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the panic might have deepened if he hadn't intervened

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pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system

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put together a major infusion of liquidity, became a "lender of last resort"

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pumped in 23 million dollars in the New York stock exchange

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bought up New York City bonds

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led to a series of discussions on ways to prevent these kinds of financial panic situations in the future

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1913 the approval of the Federal Reserve Act

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considered if free markets needed support to prevent them from ruining their own fortunes