David Fettig - Managing Editor
Published August 1, 1989 | August 1989 issue
One of Montana's most colorful early entrepreneurs, F. Augustus Heinze, not only had a major impact on that state's copper mining industry, but he may also be closely linked to events that eventually led to the formation of the Federal Reserve System.
It is generally accepted that the Panic of 1907a credit crunch that spread from New York to the whole country, closing banks and businesseswas the major impetus for the formation of the Federal Reserve System. While the nation had considered central banking systems in the past, it was the severity of the Panic of 1907 (the fourth in 34 years) that inspired congressional action leading to establishment of the Fed.
The "spark" of the Panic, howeverlike many economic phenomenais open to speculation. One Montana historian, Sarah McNelis, in her biography, "Copper King at War," writes that Heinze was at the forefront of a financial battle that resulted in the October 1907 panic within the financial systema view shared by others.
Heinze, a member of a Montana copper mining family, sold most of his mining shares for $12 million in 1906, moved to New York, bought a bank and became a director in a national financial chain involving banks and trustsan affiliation that embroiled him in the growing battle between banks and trust companies.
At the turn of the century the banking industry felt threatened by the new trust companies (and their young, wealthy financiers) and decided to sway public and congressional opinion by making an example of a trust company with connections to Heinze, namely, Knickerbocker Trust. If Knickerbocker Trust would falter, then Congress and the public would lose faith in all trust companies and banks would stand to gain, the bankers reasoned.
"Silent runs" began on Heinze's bank and Knickerbocker Trust, and Heinze made a questionable loan to his brothers, who were faltering as owners of a copper company. In October 1907, Heinze's brothers made a failed attempt to corner the copper market on the stock exchange, which allowed a competitor to exploit the Heinze family's financial problems. Heinze was then forced to resign as president of his bank, "scare headlines" appeared in newspapers, runs started on both Heinze's bank and Knickerbocker Trust, and both institutions were initially denied financial aid to keep from failingeach event purposely caused, according to McNelis.
"The panic had long since been decreed and prepared and was inevitably on its way ... The Clearing House refused to help and [Knickerbocker Trust] had to close its doors. Charles Barney, its president, shot and killed himself that night and runs started on nearly every bank and trust company in New York," wrote one of Heinze's brothers.
The financial fires that were intended to ruin Heinze and the trust companies quickly roared out of control and the Panic of 1907 became a nondiscriminatory economic catastrophe for the entire nation. Six years later, partly as a means to quench such fires, the Federal Reserve System was born.
In her analysis, McNelis does not disregard other factors for the cause of the 1907 bank runsfor example, corporate speculation, overextended capital and the general demand for money. Indeed, she says those problems alone were possibly enough to touch off a financial panic that year just as they had in years pastbut such a possibility does not eliminate the evidence of a personal vendetta gone awry.
As for Heinze, the events of October 1907 brought a total of 16 counts of financial malfeasance. However, a series of fortunate incidents in the courts led to his complete exoneration in 1909, and on Nov. 7 of that year he returned to Butte, Mont.:
"His arrival was a monumental event. Reception committees met his train ... A lively band and an automobile procession of his followers paraded into town ... A large rope was attached to the wagon tongue so more men could assist in pulling their hero."
Despite full exoneration by the courts and a triumphant return home (Montanans never lost touch with Heinze, having followed his New York exploits in the local press), the events of October 1907 left an indelible mark on his life: his mining ventures collapsed, his relationships with his brothers (former business partners) were destroyed, his marriage failed and his health disintegrated. He became "distraught in appearance"; at 37, his hair was almost completely white.
In 1914, just 44 years old, Heinze suffered a hemorrhage of the stomach caused by cirrhosis of the liver, and died.
"There was discussion of establishing a scholarship or erecting a monument to retain his name and contribution to the city [Butte]," McNelis writes. "After the initial shock of his death faded, however, the talk must have ceased; no such memorial was established."
"Copper King at War," published in 1968 by the University of Montana Press and currently out of print, is based on McNelis' master's thesis completed in 1947. Among her many sources for her thesis was a 72-page collection of correspondence she had with Otto Heinze, F. Augustus' brother, between 1943 and 1947. That collection remains in the author's possession.
McNelis received a bachelor's degree from St. Mary College of Leavenworth, Kan., in 1933. Her 1947 master's degree in history and political science was received from the University of MontanaMissoula. A retired teacher, she lives in Butte.