What If Everyone Withdrew Their Bank Deposits at Once: Lessons from 1907 Crisis

Imagine if everyone decided to withdraw their savings tomorrow morning. Would banks survive?

The answer is almost certainly no. That’s because banks don’t keep all our money locked up in a vault. They operate on what economists call the money multiplier. For every ₹100 deposited, only a fraction is held as cash or reserves, while the rest is lent out. This makes credit creation possible and fuels growth, but it also means no bank can pay back all depositors at once. If panic spreads, even a healthy bank can collapse.

That’s not just a theory. In 1907, New York’s trust companies faced exactly this problem. After a failed stock speculation, depositors rushed to pull out funds. Because trusts had thinner reserves than banks, they quickly ran out of cash. Long lines formed outside Knickerbocker Trust and others, and within days, runs spread across the system.

The Spark That Lit the Panic

The trouble began in October 1907 when F. Augustus Heinze, a copper magnate, tried to corner United Copper Company stock. The plan collapsed almost immediately. United Copper fell by over 70%, wiping out the Heinze fortune.

On its own, this might have been just another failed gamble. But Heinze sat on the boards of banks and was connected to several trust companies. When his scheme unravelled, suspicion spread. If Heinze could blow up on copper, were his institutions safe? Depositors weren’t willing to wait for the answer.

The first big casualty was the Knickerbocker Trust Company. Once rumours spread and the New York Clearing House refused to support it, depositors lined up in the streets. Within 48 hours, Knickerbocker collapsed. Runs then spread to the Trust Company of America and others, threatening the entire system.

One reckless bet in copper had cascaded into a nationwide banking panic.

Why Trusts Were the Weak Link

At the time, trust companies were like the shadow banks of their era. They were less regulated than commercial banks, held smaller cash reserves, and yet had grown rapidly by offering higher interest rates. By 1907, trusts controlled billions in deposits, but without the backstops of banks.

So when fear spread, depositors naturally rushed to withdraw cash from trusts first. With limited liquidity, even rumours could be fatal. Runs soon spread to the Trust Company of America and others, threatening the stability of the entire financial system.

How the Panic Was Contained

The U.S. had no Federal Reserve in 1907. There was no central bank to pump liquidity into the system. Instead, the burden fell on J.P. Morgan, the most powerful financier of the time.

Morgan famously locked bankers in his library and forced them to triage institutions: some would be saved, others allowed to fail. He organized lifelines for solvent trusts, brokered mergers, and rallied cash from stronger banks.

Meanwhile, the New York Clearing House began issuing loan certificates, essentially IOUs that banks could use to settle payments instead of cash. This move freed up precious currency to meet depositor withdrawals. It was a clever workaround, not unlike how central banks today inject liquidity during crises.

These measures slowly calmed markets. Within three weeks, the panic had subsided.

A Crisis Without Backstops

In today’s markets, two tools help contain crises: margin calls and clearing corporations.

• Margin calls force speculators to either top up collateral or liquidate positions quickly. In 1907, margin calls existed, but they were poorly managed. When Heinze’s copper scheme collapsed, brokers demanded cash, and when borrowers failed to pay, the shockwaves hit banks directly.
• Clearing corporations today act as firewalls, guaranteeing that trades settle even if one party defaults. In 1907, that role didn’t exist. Instead, the New York Clearing House improvised by issuing loan certificates, IOUs between banks,  so that scarce cash could be redirected to meet depositor withdrawals.

But the trusts were outside this network. Without access to loan certificates, they had no backstop. That was what made 1907 so different. There was no central bank to provide emergency liquidity, no deposit insurance to reassure savers, and no clearing corporation to guarantee settlements. Trust companies sat outside the safety net altogether. The result was predictable: once confidence cracked, the run spread faster than any one institution could handle.

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Fallout and Lessons

The damage, however, was real. Industrial output slumped, bankruptcies spiked, and the U.S. economy entered recession. The stock market fell by almost 50% from its peak.

But the bigger consequence was institutional. The Panic of 1907 made it clear that relying on private financiers like Morgan to act as a “lender of last resort” was not sustainable. Congress responded with the Aldrich-Vreeland Act (1908), which created the National Monetary Commission. Just six years later, in 1913, the Federal Reserve System was born.

Why India Is Safer Today

In India, the RBI has put guardrails in place so that such a scenario is far less likely. Banks must maintain several ratios that act as buffers:

• Cash Reserve Ratio (CRR): a portion of deposits (around 3%) kept with the RBI in cash.
• Statutory Liquidity Ratio (SLR): 18% of deposits invested in safe government securities.
• Liquidity Coverage Ratio (LCR): enough high-quality liquid assets to cover 30 days of outflows.
• Capital Adequacy Ratio (CAR): at least 9% capital against risk-weighted assets, higher than global Basel norms.

These requirements don’t remove all risk, but they make the “everyone withdraws at once” scenario far less dangerous than in 1907.

Final Take

The Panic of 1907 was a classic bank run, only it hit trust companies instead of banks. A failed stock gamble set off a chain of withdrawals, which exposed the fragility of a system with no central bank. J.P. Morgan’s intervention saved the day, but the crisis proved the U.S. needed a permanent backstop.

Today, with the Federal Reserve in the U.S. and RBI safeguards in India, the system is far more resilient. Yet the lesson of 1907 remains: banking is built on confidence. When that breaks, panic can spread faster than any balance sheet can cope with.

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