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Crash of the Titans: Copper and Ice Speculation Leads to the Panic of 1907 and the Creation of the U.S. Federal Reserve System

Posted on 12/02/2020

Ice is a remarkable substance, solid yet transparent, alternately useful and vexatious in cold climates, marvelous in tropical ones, made of water yet it floats. The arrival of ice in Calcutta, India, caused a sensation, in 1833 when Frederic Tudor shipped his first cargo of ice from Boston to that place. Natives there speculated that perhaps ice grew on trees and were keen to learn how they could cultivate some. At first Tudor gave his ice away on the basis of building a market. Solid ice of any size was an utter novelty in India; people didn’t know what to do with it and in early years it couldn’t be reliably stored.  But in coming years people were happy to pay Tudor handsomely for it. 

Ice has also been presented in apocalyptic terms by writers such as Kurt Vonnegut in his novel Cat’s Cradle, and by Robert Frost in his poem “Fire and Ice.” English author Rudyard Kipling wrote about the novelty of ice in India in his short story “The Undertakers” from the second Jungle Book (1895). The speaker in this excerpt is a large stork who experiences his own personal apocalypse and revelation through an encounter with ethereal, imperial ice: 

From the insides of this boat they were taking out great pieces of white stuff, which in a little while turned to water. Much split off and fell about on the shore, and the rest they swiftly put into a house with thick walls. But a boatman, who laughed, took a piece no larger than a small dog and threw it to me. I—all my people—swallow without reflection, and that piece I swallowed as is our custom. Immediately I was afflicted with an excessive cold that, beginning in my crop, ran down to the extreme end of my toes, and deprived me even of speech, while the boatmen laughed at me. Never have I felt such cold. I danced in my grief and amazement till I could recover my breath, and then I danced and cried out against the falseness of this world; and the boatmen derided me till they fell down. The chief wonder of the matter, setting aside that marvelous coldness, was that there was nothing at all in my crop when I had finished my lamentings!

The seeds of the financial apocalypse known as the Panic of 1907 were nurtured by ice. Its proximate cause was the crash of the copper market. Charles W. Morse, one of the major instigators of that crash, made his fortune in the ice trade and succeeded Frederic Tudor as the American man known as the “Ice King.” The United States economy has suffered many financial calamities but this one was different; the U.S. Federal Reserve System was born from the 1907 wreckage of the ice and copper trusts. 

In 1805 Frederic Tudor was a young man of twenty-two pursuing a modest West Indian trade importing peppers, wood and spirits from an office on India Wharf in Boston. He came from a prosperous family that could afford iced beverages, and he surmised that ice could bring relief for yellow fever victims. At some point that year Tudor hit upon the notion of selling ice as a commodity in temperate and tropical climates. 

His first shipment went to the French island of Martinique on his own ship and consisted of 130 tons of ice cut from his family’s pond in Saugus, Massachusetts. He lost money on the venture, but he refined his approach and kept trying. 

THE fine fast sailing brig FAVORITE, Thomas Pearson master, will sail in ten days. For Passage, apply to the Capt. on board at Charlestown, or of FREDERIC TUDOR.

One of the realities Tudor grasped was that ships sailing from American ports often set out with stone as ballast in lieu of revenue-producing goods. Another thing he realized was that ice had much in common with conventional “crops”: it was perishable, it could only be produced in certain environmental conditions, it had unique culinary and medicinal qualities (similar to valuable spices), and its profitable production and distribution was mostly a logistical problem that would yield to technology and labor. He bet correctly that ice would become indispensable, but he may not have foreseen that reliable refrigeration would dramatically improve living conditions wherever it was available. 

His second shipment, of 240 tons, went to Havana, Cuba. That too lost money. Tudor persisted. In November 1811 the following advertisement appeared in Boston’s Columbian Centinel

ICE Wanted.
THE Subscriber wishes to contract for twelve hundred tons of ICE, to be delivered in this town from the latter end of December to the middle of next May. Any person disposed to supply the whole or part of the above mentioned quantity will apply to FREDERIC TUDOR, Court street. 

Tudor was gradually building a market for commercial ice, but political events and the War of 1812 intervened to defer the realization of his goals and put him in debtor’s prison. He decided that in order to grow his business to a sustainable scale he needed monopolies in whatever markets he wanted to serve. 

He began to acquire exclusive trading rights, duty-free terms for his cargoes, and concessions of land on which to build ice houses. To diversify his revenue and increase demand, he shipped perishables with his ice. He ingratiated himself with barkeepers and taught hoteliers how to make ice cream. Before he was crowned “Ice King” Tudor was its foremost ambassador and consul general. 

Exportation of Ice. — We are happy to learn that our enterprizing townsman, Frederic Tudor, Esq. has obtained from the French government the exclusive privilege of supplying the Islands of Gaudaloupe and Martinique with ice, for ten years, commencing on the first of Jan. 1820. The use of this article has been introduced at hospitals, and we hope it will have the happy effect of counteracting fatal diseases of tropical climates. 

In 1825 Tudor partnered with Nathaniel Wyeth, an inventor and hotel owner who among other innovations created tools to cut standardized ice blocks using horse power. Wyeth included the following lists in an article in The Polynesian (Honolulu, Kingdom of Hawaii) in 1849 describing the extent of the ice trade in 1847. Tudor was gaining traction with his ice! 

A reliable supply of retail and wholesale ice had a tremendous impact on the provision of food and medical care. Merchants could warehouse and ship meat, produce and other perishable commodities with little fear of spoilage. Restaurants and grocers reduced their losses dramatically. Breweries began year-round production. Consumers’ iceboxes kept food safe and appealing. Hospitals used ice to alleviate fever and inflammation. 

The ice industry itself used sawdust—formerly a waste product of lumber operations—to preserve its stock, and utilized relatively unskilled labor during the depth of winter when agriculture was at a standstill. Cartage of ice in the summer complemented the provision of coal during the winter. Commercial ice presented a brilliant business model, and Tudor died a millionaire in 1864. 

As ice became more central to Americans’ lives, engineers began to investigate ways to make it mechanically rather than relying on natural harvests. One of the pioneers of artificial refrigeration, Dr. John Gorrie of South Carolina, received a patent in 1850 for a workable ice-making machine similar to those used today. It compressed air to release heat, then further cooled that air and expanded it quickly to generate freezing temperatures in a circulating mechanism to which water was introduced. But Gorrie died in 1855, and his technology was appropriated by others who did not commercialize it. His obituary in the New-York Atlas describes the unrealized potential of Gorrie’s machine. 

We never saw any one of Doctor Gorrie’s ice manufacturing machines and dwelling house refrigerators in operation; but, we are informed by those who are familiar with the invention, that one of them is capable of producing twenty tons of ice a day with perfect ease and with the utmost facility. And what is more, the ice can be formed, during the process of manufacture, into any shape taste or fancy may suggest. 

Machines like these would not, of course, be of any particular value in this high region; but, in the tropics, and the East and West Indies—everywhere, where ice is unknown, and where supplies can only be obtained at an enormous expense, from high Southern and Northern latitudes, they would be found invaluable and indispensable. We have been informed that one of these machines would, with ease, manufacture ten tons of ice at an expense of one dollar. If this be the case, they would be of infinite importance even in this latitude. They are now, we learn, in successful operation in London and Paris.

The U.S. Civil War curtailed sales of northern ice to Confederate states, and the Boston ice trade eventually faced competition from ice companies in upstate New York and Maine where cold temperatures were more consistent and ice could be loaded directly onto ships. 

In 1876 while still in college Charles W. Morse used his connections through his family’s tow-boat business on the Kennebec River to ship ice from Maine directly to New York City, bypassing Boston. Morse then used his profits to buy his competitors’ businesses or acquire shares in their companies until he controlled most of the ice supply in New York City.

Ice was now big business, second only to cotton as a U.S. export in the nineteenth century. It was natural that Morse would form a trust. When he needed favors and New York dock space for the barges he introduced into the trade, he acquired political support from Tammany Hall boss Richard Croker and New York Mayor Robert Van Wyck. Despite legal investigations his influence and commercial holdings continued to grow. 

Of “the man behind the mayor,” the man who managed within three months to induce Mayor Van Wyck to become interested in ice trust stock of the par value of more than 1 million dollars little has been written, for of him little has been known. He has been content to remain in the background. No reporter saw him except in a court room, flanked by lawyers; he would see no newspaper representatives. He had accomplished his purpose, he had created his monopoly—the manner and scheme of its creation he has left to the mayor and the politicians to explain. The man behind the mayor is not prone to boast of his power. He is almost as modest as a violet. Publicity does not appeal to his sense of the fitness of things. On the contrary, it has proved a detriment to his plans. 

Since he dealt in ships, Morse began acquiring steamship lines; since he dealt with banks he began acquiring those as well or served on their boards of directors. In 1901, while his sister Jennie in Maine raised the children from his first marriage, Morse married Clemence Dodge, a divorcée of whom he eventually tired. He then set in motion a convoluted scheme to have his marriage annulled. The ensuing scandal landed this modest “violet” in the daily papers for over a year. When his annulment did not come to fruition he remained with Dodge. This was fortuitous as she would later lead a successful campaign to get him out of prison. 

At last Mrs. Clemence C. Dodge-Morse knows whose wife she is. The appellate division of the supreme court handed down a decision today making her the wife of Charles W. Morse, the ice king. This ends one phase of the most remarkable case that ever claimed the attention of New York courts. For more than a year Mrs. Morse has been uncertain whether she was the wife of Charles W. Morse or Charles F. Dodge. In that time she has been declared the wife of Dodge, the wife of Morse, and the wife of neither. Worse than all, it appeared at one time that she was the wife of both. 

All the while Morse was wheeling and dealing at a furious pace. His activities were described in 1905 by “a large independent ice dealer of New York,” J.N. Briggs: 

The secret methods of the Ice trust and Charles W. Morse were revealed to the public at the annual meeting of the American Ice company, held in Jersey City. The revelation came from J.N. Briggs, a large independent ice dealer of New York, who declared that, although he now held only five shares of common stock in the trust, which cost him $6 a share, he was Charles W. Morse’s “banner victim,” having lost $330,000 by his operations. 

“Charles W. Morse,” said Mr. Briggs, “controls the destinies of the Ice trust just as much to-day as he ever did. He juggles the stock at will, and you stockholders stand meekly by and see him take your money away from you. He puts the stock up and then unloads, and when the price drops again he buys. I advise every man that has a share of American Ice to sell when the price goes up. 

Although one could argue that buying low and selling high is the essence of capitalism, when a person or firm owns or controls most of a vital commodity that monopoly power can undermine the integrity of the marketplace. Morse had already incurred a great deal of debt in his ice, shipping and banking operations. Then in October 1907 he tried to “corner the market” in copper with German investor F. Augustus Heinze and his brother Otto. But the Ice King got cold feet and sold his copper holdings prematurely.

The Heinzes couldn’t acquire those shares at prices that would support their attempt to buy up a controlling amount of copper, and they had insufficient credit to pay for their prior purchases.  They defaulted on their obligations and the price of copper collapsed which led to runs on the banks and brokerages associated with the Heinzes and Morse. 

Charles W. Morse, who is suspected of having betrayed F. Augustus Heinze by deserting his United Copper pool and unloading 17,000 shares of stock on the pool, is remarkable for the number of industries in which he has become a dominant factor. He was once the uncrowned king of ice as head of the ice trust, and now he controls the coasting steamship business of the United States. He is also interested in a string of banks that makes him one of the most notable bankers in the country. Mr. Heinze has also been acquiring a line of banks since he whipped the Standard Oil crowd in the Montana copper war, and it is surmised that the rivalry of the two men, both interested in the Mercantile National Bank, led to the recent smash in United Copper shares, breaking two brokerage firms and causing Mr. Heinze to give up the presidency of the bank.

The New York Clearing House Association, which facilitated bank transactions and supported member institutions, was able to quell bank depositors’ fears. But by then the unsecured and loosely regulated trusts associated with the Heinzes and Morse were also facing runs on their deposits. Unlike the banks, the trusts had no associations to guarantee or stabilize their operations. They looked for a savior in financier J.P. Morgan. 

When Morgan initially refused to lend money to support the trusts, the prominent Knickerbocker Trust Company suspended operations. Banks became reluctant to make short-term loans; this paralyzed the stock exchange. Stock prices fell, compounding the crisis of faith in the already stressed financial system. People couldn’t get to their money or cut their losses. Interest rates soared. The City of New York itself nearly went bankrupt. 

Morgan finally stepped in with a combination of purchases, loans and diplomacy that compelled the banks and trusts to shore up their weakest institutions. The U.S. Treasury deposited millions of dollars in New York banks. Trust-busting President Theodore Roosevelt forbore using the Sherman Antitrust Act against Morgan’s U.S. Steel when it acquired a dangerously unstable competitor. After about six weeks the Panic of 1907 was finally resolved.  America was littered with bank failures. J.P. Morgan himself lost twenty-one million dollars. And Morse? He was “down and out.” 

Following the example of Frederick Augustus Heinze, the spectacular copper plunger, Charles W. Morse, by turns ice, lumber and steamship magnate, has become a full-fledged member of Wall Street’s “down and out club.” 

Morse’s participation in the market collapse led to a result familiar to those who have ever played the “Monopoly” board game: “Go to jail. Go directly to jail.” He was sentenced to fifteen years for misappropriating funds to finance his speculation. He would get out of jail in two years when President Taft commuted his sentence for reasons relating to Morse’s uncertain health. The world would later learn that while in prison Morse had been eating soap to bring about just such an outcome. Eight months in Europe and a soap-free diet worked a miraculous cure on him, and he lived until 1933. His later career would feature charges of war profiteering. 

After the tumult died down, in 1908 the U.S. Congress created the bipartisan National Monetary Commission to see what could be done to prevent future financial crises. It was chaired by Senator Nelson Aldrich who was also chair of the Senate Finance Committee. 

After two years, however, when the commission could not agree on its recommendations, Aldrich invited a few key members of the financial community to the Jekyll Island Club off the coast of Georgia. They proposed a central bank with a Board of Governors and fifteen reserve branches distributed geographically to allay popular fears of Eastern elites controlling the financial system. 

A version of the Jekyll Island plan sponsored by Representative Carter Glass and Senator Robert Owen was signed into law by President Woodrow Wilson in 1913 as the Federal Reserve Act. It created twelve branch banks that would act as lenders of last resort and control the money supply in a way similar to the role J.P. Morgan played during the Panic of 1907. Due to dissent among branch banks and enduring pressures against central banking, this reform did not stop the 1929 stock market crash or the Great Depression but it was a measure promising more stability. 

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