Lecture Notes: Stock Market Panics and Short Squeezes

Introduction to Stock Market Panics

• Key Events:
  • Tesla (2020), GameStop, AMC Theaters (2021)
  • Panic of 1901
• Main Drivers:
  • Greed
  • Fear

The Panic of 1901

• Background:
  • Triggered by Edward Henry Harriman's attempt to corner Northern Pacific shares
  • Retaliation against JP Morgan
• Historical Context:
  • Industrial Revolution and railroad expansion
  • Financial panics and crises were common due to regulatory laxity

Key Figures and Their Roles

• Edward Henry Harriman:
  • Took control of Union Pacific
  • Allied with Jacob Schiff of Loeb and Co.
  • Supported by financial backing from Rockefellers, Vanderbilts, Golds
• JP Morgan:
  • Influential financier
  • Key player in railroad monopoly ambitions
  • Saved the gold standard in 1895
• James J. Hill:
  • Morgan’s ally, expanded the Great Northern Railroad
  • Acquired Northern Pacific Railroad with Morgan

The Battle for Railroad Supremacy

• Significant Railroads:
  • Chicago Burlington and Quincy Railroad
  • Burlington was crucial for controlling crop shipments and Asian goods
• Events Leading to Panic:
  • Harriman vs. Morgan over Burlington
  • Harriman tried to buy Northern Pacific shares
  • Ordinary investors fueled by speculation

Escalation of the Panic

• Market Reactions:
  • Harriman's aggressive stock purchases led to panic
  • Northern Pacific stocks skyrocketed causing short squeeze
  • Morgan and Hill’s defensive actions
• Impact on Investors:
  • Wild speculation led to significant market volatility
  • Short sellers faced mounting losses

Resolution and Aftermath

• Harriman and Morgan's Alliance:
  • Temporary truce to avoid financial catastrophe
• Formation of Northern Securities Company:
  • Merged Northern Pacific, Great Northern, Burlington railroads
  • Prompted public backlash against monopolies

Legal and Political Consequences

• Government Intervention:
  • Roosevelt’s administration targeted monopolies
  • Sherman Antitrust Act lawsuit led to dissolution of Northern Securities Company
• Impact on Roosevelt’s Presidency:
  • Strengthened public image as the "trustbuster"
  • Contributed to re-election success in 1904

Conclusion

• Legacy of the Panic of 1901:
  • Illustrated the danger of unregulated markets and monopolies
  • Significant historical example of a short squeeze in the stock market