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Journey to Jekyll Island Part III

The campaign for a central bank was kicked off by a fateful speech in January 1906 by the powerful Jacob H. Schiff, head of the Wall Street investment bank of Kuhn, Loeb and Company, before the New York Chamber of Commerce. Schiff complained that in the autumn of 1905, when “the country needed money,” the Treasury, instead of working to expand the money supply, reduced government deposits in the national banks, thereby precipitating a financial crisis, a “disgrace” in which the New York clearinghouse banks had been forced to contract their loans drastically, sending interest rates sky-high. An “elastic currency” for the nation was therefore imperative, and Schiff urged the New York chamber’s committee on finance to draw up a comprehensive plan for a modern banking system to provide for an elastic currency. A colleague who had already been agitating for a central bank behind the scenes was Schiff’s partner, Paul Moritz Warburg, who had suggested the plan to Schiff as early as 1903. Warburg had emigrated from the German investment firm of M.M. Warburg and Company in 1897, and before long his major function at Kuhn, Loeb was to agitate to bring the blessings of European central banking to the United States.

As a severe financial crisis, the panic of 1907, struck in early October. Not only was there a general recession and contraction, but the major banks in New York and Chicago were, as in most
other depressions in American history, allowed by the government to suspend specie payments, that is, to continue in operation while being relieved of their contractual obligation to redeem their notes and deposits in cash or in gold. While the Treasury had stimulated inflation during 1905–1907, there was nothing it could do to prevent suspensions of payment, or to alleviate “the competitive hoarding of currency” after the panic, that is, the attempt to demand cash in return for increasingly shaky bank notes and deposits.

Very quickly after the panic, banker and business opinion consolidated on behalf of a central bank, an institution that could regulate the economy and serve as a lender of last resort to bail banks out of trouble. The reformers now faced a twofold task: hammering out details of a new central bank, and more important, mobilizing public opinion on its behalf. The first step in such mobilization was to win the support of the nation’s academics and experts. The task was made easier by the growing alliance and symbiosis between academia and the power elite.

Paul Warburg, who lectured on the superiority of European over American banking, particularly in (1) having a central bank, as against decentralized American banking, and (2)—his old hobby horse—enjoying “modern” acceptance paper instead of single-name promissory notes. Warburg emphasized that these two institutions must function together. In particular, tight government central bank control must replace competition and decentralization: “Small banks constitute a danger.”

Warburg basically outlined the structure of his beloved German Reichsbank, by insisting that the reserve bank replace the hated single-name paper system of commercial credit dominant in the United States by the European system whereby a reserve bank provided a guaranteed and subsidized market for two-named commercial paper endorsed by acceptance banks. In this way, the united reserve bank would correct the “complete lack of modern bills of exchange” (that is, acceptances) in the United States. Warburg added that the entire idea of a free and self-regulating market was obsolete, particularly in the money market. Instead, the action of the market must be replaced by “the best judgment of the best experts.” And guess who was slated to be one of the best of those best experts?

The legislative lead in banking reform was taken by the formidable Senator Nelson W Aldrich (R-R.I.), head of the Senate Finance Committee. He introduced the Aldrich Bill, which focused on a relatively minor interbank dispute about whether and on what basis the national banks could issue special emergency currency. But the coup in the Bill was the establishment of the National Monetary
Commission (NMC) was the apotheosis of the clever commission concept, launched in Indianapolis a decade earlier. Aldrich lost no time setting up the NMC, which was launched in June 1908. The official members were an equal number of senators and representatives, but these were mere window dressing. The real work would be done by the copious staff, appointed and directed by Aldrich, who told his counterpart in the House, Cleveland Republican Theodore Burton:
“My idea is, of course, that everything shall be done in the most quiet manner possible, and without any public announcement.” From the beginning, Aldrich determined that the NMC would be run as an alliance of Rockefeller, Morgan, and Kuhn, Loeb people. Having gathered information and advice in Europe in the fall of 1908, the NMC was ready to go into high gear by the end of the year.

The tangible plan phase of the central bank movement was launched by the ever pliant APS, which held a monetary conference in November 1910, in conjunction with the New York Chamber of Commerce and the Merchants’ Association of New York. The members of the NMC were the guests of honor at this conclave, and delegates were chosen by governors of 22 states, as well as presidents of 24 chambers of commerce. Also attending were a large number of economists, monetary analysts, and representatives of most of the top banks in the country.

With the New York monetary conference over, it was now time for Aldrich, surrounded by a few of the topmost leaders of the financial elite, to go off in seclusion and hammer out a detailed plan around which all parts of the central bank movement could rally. Someone in the Aldrich inner circle, probably Morgan partner Henry P. Davison, got the idea of convening a small group of top leaders in a super-secret conclave to draft the central bank bill. On November 22, 1910, Senator Aldrich, with a handful of companions, set forth in a privately chartered railroad car from Hoboken, New Jersey, to the coast of Georgia, where they sailed to an exclusive retreat, the Jekyll Island Club on Jekyll Island, Georgia.

In an amusing twist of fate the bankers were the more politically astute the politician Aldrich. Aldrich attempting to hold out for a straightforward central bank on the European model, while Warburg and the other bankers insisted that the reality of central control be cloaked in the politically palatable camouflage of “decentralization.” Warburg and the bankers won out, and the final draft was basically the Warburg plan with a decentralize system.

The final phase of the drive for a central bank began in January 1911. By November 1911, it was easy pickings to have the full American Bankers Association endorse the Aldrich Plan. The nation’s banking community was now solidly lined up behind the drive for a central bank. At the Atlantic City conference, of the American Bankers Association James Forgan had succinctly explained the purpose of the Aldrich Plan and of the conference itself. “The real purpose of the conference was to discuss winning the banking community over to government control directly by the bankers for their own ends. . . . It was generally appreciated that the [Aldrich Plan] would increase the power of the big national banks to compete with the rapidly growing state banks, help bring the state banks under control, and strengthen the position of the national banks in foreign banking activities.”

However, 1912 and 1913 were years of some confusion and backing and filling, as the Republican Party split between its insurgents and regulars, and the Democrats won increasing control over the federal government, culminating in Woodrow Wilson’s gaining the presidency in the November 1912 elections.
The Aldrich Plan, introduced into the Senate by Theodore Burton in January 1912, died a quick death, but the reformers saw that what they had to do was to drop the fiercely Republican partisan name of Aldrich from the bill, and with a few minor adjustments, rebaptize it as a Democratic measure. Fortunately for the reformers, this process of transformation was eased greatly in early 1912, when H. Parker Willis was appointed administrative assistant to Carter Glass, the Democrat from Virginia
who now headed the House Banking and Currency Committee.

In an accident of history, Willis had taught economics to the two sons of Carter Glass at Washington and Lee University, and they recommended him to their father when the Democrats assumed control of the House.

The minutiae of the splits and maneuvers in the banking reform camp during 1912 and 1913, which have long fascinated historians, are fundamentally trivial to the basic story. They largely revolved around the successful efforts by Laughlin, Willis, and the Democrats to jettison the name Aldrich. Moreover, while the bankers had preferred the Federal Reserve Board to be appointed by the bankers themselves, it was clear to most of the reformers that this was politically unpalatable.

They realized that the same result of a government-coordinated cartel could be achieved by having the president and Congress appoint the board, balanced by the bankers electing most of the officials of the regional Federal Reserve Banks, and electing an advisory council to the Fed. However, much would
depend on whom the president would appoint to the board. The reformers did not have to wait long. Control was promptly handed to Morgan men, led by Benjamin Strong of Bankers Trust as all-powerful head of the Federal Reserve Bank of New York. The reformers had gotten the point by the end of congressional wrangling over the Glass bill, and by the time the Federal Reserve Act was passed in December 1913, the bill enjoyed overwhelming support from the banking community.

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