America's Bank: The Epic Struggle to Create the Federal Reserve

by Roger Lowenstein

  To judge from newspaper sales, the public was more interested in and better informed on these issues than ever before. But Aldrich was unaccustomed to courting public opinion (he was chosen by the legislature, one recalls, not by the Rhode Island electorate at large). His success at accumulating a fortune had made him less—not more—tolerant of his social inferiors. He had little faith in the ability of the mass of people to govern themselves, and he had little interest in the vast sections of America outside his ken—farmers, for instance, or what farmers thought and felt about banking. It is true that much of what passed for political discourse on banking was unsophisticated and demagogic, and often wrong. But Aldrich did not try to engage these other opinions, or even debate his rivals in the Senate. Despite his ability to get things done behind closed doors, he did not really subscribe to democratic give-and-take. As his authority in the chamber waned, his interest flagged. Also, for much of the winter of 1910 he was laid up by a troublesome cold. He had one solace and searing ambition, which was to reform the country’s banking system.

  Warburg alternately prodded and encouraged him. When a poll of bankers responded, conditionally, that they favored a central bank, Warburg wrote to the senator, “One cannot help feeling very confident.” But he was careful not to alienate Aldrich by moving too quickly, for he knew that the senator was not yet ready to publicly commit to a central bank.

  Warburg also delivered a pair of speeches that showed his keen understanding of the American character. His “United Reserve Bank” lecture at the YMCA of New York, in March 1910, offered a twist on his earlier “modified central bank.” For one thing, the term “central bank” had been banished. His new appellation, “united bank,” suggested a more federal structure, patterned on the federal government itself. To allay the fear that it would reincarnate the Second Bank (the long-ago dragon slain by Andrew Jackson), Warburg envisioned a network of twenty reserve banks scattered around the United States. And rather than belittle the fear of centralization, he made it sound familiar, not an unfortunate current in American thought so much as a distinctive element of Americana, one to be respectfully accommodated. Warburg’s scheme, therefore, was an adaptation: “It is a scheme based upon conditions peculiar to our country and our form of government. It recognizes the vast territorial area of the United States, the diversity and dissimilarity of interests, and even the traditional, sectional, and partisan prejudices of the people.”

  Although Warburg was building on Morawetz’s concept of sectional banks, there was a key difference. Morawetz was proposing unconnected banks; Warburg’s would be joined. “These sectional reserve banks,” he stressed, “must in the end act as a unit.” To avoid repeating the catastrophic experience of 1907, when the banks of each city or region had to fend for themselves, reserves at the various branches of Warburg’s “united bank” would be part of a single larger reserve. Notwithstanding his seductive nomenclature, Warburg ultimately envisioned “one big bank.”

  In a second lecture in 1910, before the Academy of Political Science, Warburg tried to establish a link between central banking and America’s frontier traditions. He argued that a central reserve would be a plus for country banks, freeing them from the need to depend on Wall Street. Indeed, he argued, “central banks are not oligarchic but democratic institutions.” This was turning Jacksonism on its head.

  The “United Reserve Bank” lecture paid a serious dividend: the Merchants’ Association, the group that Warburg had been methodically lobbying, abruptly dropped its opposition and endorsed a central bank. This ratified Warburg’s suspicion that businesspeople were fluid in their thinking and would succumb to his efforts at persuasion. He boldly capitalized on his alliance with the Merchants’ Association by persuading it to distribute thirty thousand copies of his address. By the late spring of 1910, Warburg could claim considerable progress.

  It was roughly then that Theodore Roosevelt, having emerged from his African hunting expedition to civilization in Khartoum, got news of Taft’s capitulation on the tariff and of other supposed heresies of the President. An uneasy correspondence between the two men followed. In June, after a string of regal visits to European capitals, Roosevelt disembarked in New York to a hero’s welcome—an exuberant throng met him at the dock. For five miles along his route, people stood to greet the former president. Out of respect for Taft, Roosevelt promised to stay silent on politics for sixty days. After four days, he broke his pledge. Soon, he traveled to see Taft at his summer home in Beverly, Massachusetts. Pleasantries were exchanged, noble sentiments professed, but the friendship was over.

  While not yet ready for a public break, Roosevelt privately charged that Taft was corrupted by his alliance with Aldrich. Writing to his friend Senator Henry Cabot Lodge, Roosevelt fumed, “We have had no national leadership of any real kind since election day 1908. Taft is absolutely connected in the popular mind with Aldrich . . . and company.” Roosevelt conveniently overlooked the working arrangement that he, as president, had forged with Aldrich as well as his own cowardice when it came to tariff reform. In fact, he overlooked his own letter to the same Henry Cabot Lodge of precisely a year earlier, in which he had observed, “My intercourse with Aldrich gave me a steadily higher opinion of him.” But his judgment that Aldrich had become political dynamite was correct.

  As progressives battled for control of the party, particularly in the Mississippi Valley, they wielded the shame of the Payne-Aldrich tariff as a cudgel against Taft and the party regulars. Aldrich now was less a leader of his party than its greatest liability. In midsummer, Senator Joseph L. Bristow, a Republican from Kansas (yet another Aldrich detractor from the Plains), accused Aldrich of having raised the tariff on rubber to boost the value of his personal holding in Intercontinental Rubber Company. The Kansas Republicans were in the midst of a vicious primary battle, and Aldrich was a useful target. The insurgents swept the primary, winning six of eight contested seats. It happened that Bristow’s charge was groundless: Payne-Aldrich had raised the duty on manufactured rubber goods, but Intercontinental exclusively sold crude rubber. Because there was no domestic supply of the raw material, duties were irrelevant. Due to the seriousness of the allegation, Aldrich broke his customary policy of refusing to comment and issued a lengthy denial, which included the sentence “The Senator’s statement that I had any pecuniary interest in the [tariff] change is absurdly false in every particular.” Bristow never attempted to substantiate his charge.* Nonetheless, Aldrich’s reputation was further tarnished.

  With the Payne-Aldrich tariff weighing on voters’ minds, Roosevelt boarded a private railroad car for a tour of sixteen states that provided fresh evidence of the progressive juggernaut. In town after town he was greeted like a faith healer. Vanderlip reported, “Roosevelt is certainly making a triumphal progress through the West. . . . The popularity of the man is amazing.” Significantly, Roosevelt proposed a far more radical agenda than he had pursued as president—steeply progressive taxes, workmen’s compensation, child labor protections, the right of the “community” to restrict private property for the general good. He called for a more representative political system, for a “moral awakening” of the people, and for a considerably more active federal government.

  In another time, Aldrich’s scheme for a central bank might have fit neatly into this agenda. Aldrich envisioned a central bank as an antidote to individualism run amok. This was an enlightened idea—a “progressive” idea—but at that moment, nothing proposed by Aldrich would be entertained by his party’s liberal wing. When it came to banking, western so-called progressives were backward-looking and prone to conspiracy theories. Roosevelt, an eastern progressive, was not an enemy of bankers, but he did not have the patience to study the issue in any depth. Although he supported the notion of financial reform, it was only in the vaguest terms.

  Aldrich intended to wait out the 1910 midterm elections, continue with the Monetary Commission after he retired from the Senate
in 1911, and draft a bill. But the bankers around him were worried. With the Republicans weakened by internal strife, their ability to effectively legislate was in doubt. In October, Perkins anxiously wrote to the overseas Morgan, “The political pot is boiling here.”

  Shifting tactics, Aldrich decided to escape from Washington and craft a plan for banking reform in virtual solitude, accompanied only by a few of his trusted allies. He was feeling battered from so much personal criticism and under pressure from the bankers to show some tangible results. The idea of a working trip in a warmer climate appealed.

  Then, in late October, his plans were delayed again. Aldrich, who was in New York, exited a trolley at Sixtieth Street and Madison Avenue and began walking west, toward the apartment of his son Winthrop, when he realized that Winthrop’s apartment, on Park Avenue, was actually to the east. The senator, a fortnight shy of his sixty-ninth birthday, pivoted and started toward Park without noticing a trolley headed southbound. The collision hurled him several feet and knocked him unconscious. He awoke in a confused state, described as “a slight shock.” Taft, who had remained loyal to his friend, immediately cabled, “I am greatly distressed to hear of the accident to you and sincerely hope the injury is only slight. I shall be glad to be assured on this point.”

  On election day, Taft and the Republicans received a shellacking. The Democrats won the House, decisively, for the first time in sixteen years. In the Senate, the Democrats gained twelve seats, enough to combine with Republican insurgents and effectively control the upper chamber. Thus, the entire Congress was suddenly tilted toward the progressives. Democrats also picked up a stack of governorships, including that of Woodrow Wilson in New Jersey. The leftward shift in the electorate seemed to reflect a more general upheaval in American society. As the historian Frederick Jackson Turner remarked the following month, “It is hardly an exaggeration that we are witnessing the birth of a new nation in America.” This nation counted over 90 million people, of whom more than a third were immigrants or the offspring of immigrants, largely eastern and southern Europeans, and of whom 8 million belonged to labor unions. The days of building a political stronghold on small Rhode Island towns were over.

  Aldrich, for so long a leader in a conservative era, was now in the strange position of having to appeal to a Congress he barely recognized and to a political consensus from which he was excluded. His only hope was that the commission plan—once it was written—would be judged impartially. “We shall appeal to the thoughtful men of this country,” he told a posh crowd of seven hundred, largely bankers, at the Hotel Astor. And yet any hope that the new Congress, in the heat of its crusading fervor, would grant Aldrich an unbiased evaluation, strictly on the merits, he must have known was a pipe dream. He was dejected by his party’s loss at the polls and saw no hope in conventional politics. Sufficiently recovered from his accident, he reinstated his plan for a working trip. His plan was so secret that when the Monetary Commission met after the election, Aldrich did not even mention it.

  Two years earlier, Stillman had suggested that Aldrich convene a private bankers’ group at Warwick, but November was no time to be in Rhode Island. Instead, Aldrich opted for a rendezvous on Jekyl Island, in the warm waters off the coast of Georgia. At long last energized, he hastily assembled his team of bankers.

  CHAPTER SEVEN

  JEKYL ISLAND

  A Banker uses the money of others; as long as he uses his own money he is only a capitalist.

  —DAVID RICARDO

  Public utility is more truly the object of public banks, than private profit.

  —ALEXANDER HAMILTON

  THE MISSION TO JEKYL ISLAND was undertaken in rare seclusion. Today it is a lost art, but in 1910, a prominent U.S. senator and some of the leading men of Wall Street could drop off the grid without a trace and plot a complete overhaul of the banking system.

  Nelson Aldrich insisted on absolute secrecy, knowing that any plan would be doomed if it could be traced to Wall Street. He deliberately picked bankers who were senior enough to be able to leave work and cancel appointments on a moment’s notice. Harry Davison, with whom Aldrich felt a close connection, helped to compile the list and was included as a matter of course. Davison approached Paul Warburg on November 15 and asked if he could cut loose for a week or two on an expedition to an unspecified location three days hence. Davison must have said something about the purpose of the trip but made it clear that Warburg could not tell his partners or anyone else where he was going and on what errand.

  Aldrich also recruited Frank Vanderlip, president of National City, and Professor Piatt Andrew, who had taken a job as assistant secretary of the Treasury. Andrew had to pledge not to disclose their mission to his boss, the Treasury secretary—not even a cabinet member was to know! The final member was Arthur Shelton, Aldrich’s personal secretary. In all there were six co-conspirators—three bankers, a senator, his secretary, and a senior Treasury official—charged with drafting a new banking regime in the remote pine and palmetto groves of southern Georgia.

  It was Davison who arranged for the group to stay at Jekyl Island, an exclusive club where J. P. Morgan was a member. The ruse was that they were going duck hunting, and so Warburg, feeling faintly ridiculous, obtained a hunting rifle and cartridges that he had not the slightest idea how to use. On a frigid night, softened by falling snow, the voyagers, traveling singly and incognito, made their way to the Pennsylvania Station across the Hudson River, where Aldrich’s private railcar was attached to the rear of a southbound train. The blinds were drawn, with slivers of amber light marking the window frames. Inside, the car was all polished brass, mahogany, and velvet. Warburg found Vanderlip on board; Davison was soon to arrive. This trio represented the elite of American banking—Kuhn, Loeb; Morgan’s; and National City—yet none had a typical Wall Street pedigree. Davison had weathered a Dickensian upbringing in Pennsylvania; Vanderlip, bred on a farm, had come to banking via newspapers and government; and Warburg, though heir to a family bank, was a foreigner and a Jew. Each was enough of the outsider to see the system for its faults.

  As the engine purred in preparation for departure, Vanderlip convivially inquired of Warburg, “On what kind of an errand are we going, anyhow?”

  Warburg replied portentously, “It may be a wild goose chase instead of a duck shooting party, and it may be the biggest thing you and I ever did. That all depends on the courage that you and the others will show.”

  Warburg, having plotted a central bank for so long, was edgy. He had doubts about whether this small group could pull it off—doubts about the banking establishment in particular. He wondered whether Vanderlip’s National City, the largest and most powerful bank, would support a reform in which its prodigious reserves would be moved from its vaults to whatever new institution they might create. “When the test will come will you cling to these old conditions or, will you show courage enough and self-confidence?” Warburg demanded.

  Aldrich set a workmanlike tone, launching the group into their task at breakfast amid the clattering of cups and saucers in the rattling train car. They remained huddled around the table as the train sped southward, making little progress at first, but settling on certain preliminaries. To preserve secrecy, they were to address one another only by first names. Vanderlip offered to write down any point on which they were agreed, thus keeping a log of their progress. Aldrich was indisputably the head of the group; Warburg was the most knowledgeable (and the most opinionated) on monetary questions, although Vanderlip was a quick study. Davison’s role was to smooth out the human element—to inject a note of the lighthearted in a week of tense labors and to maintain a harmonious spirit.

  After a day’s journey they disembarked in Brunswick, Georgia, where they planned to board a launch to the island, with an ostentatious display of rifles and loud talk of hunting. The stationmaster cut them short. “Now gentlemen, this is all very pretty, but I must tell you that we know who you are and
the reporters are waiting outside,” he said. The travelers were crestfallen; was their cover blown already? Davison took the stationmaster by the arm, with his gentle touch, and said, “Come out, old man, I will tell you a story.” The two left the depot and strolled outside. What the story was Davison never revealed. He returned a moment later with a twinkle in his eye and reassured the others, “That’s all right, they won’t give us away.” For the next eight days the travelers were sequestered, without even a telegraph or telephone link to home.

  The Jekyl Island Club, founded in 1885, had been described by Munsey’s magazine as “the richest, the most exclusive, the most inaccessible” club in the world. The members, ranging from William Vanderbilt to Joseph Pulitzer, often arrived by yacht, but the premises were comfortable rather than opulent. The idea was to enjoy the natural setting—some 240 acres along the intercoastal seaway abutting marshlands and woods stocked with duck, pheasants, wild hogs, turkey, and deer. Members hunted and golfed and resided in pleasant little cottages. In winter, the club was a bustling, self-sufficient community of several hundred guests and staff. However, as Morgan had arranged that no other guests be present, the senator’s party stayed in the main house, a rambling, turreted Victorian structure with wooden floors and a captain’s walk with a timbered porch.

  Davison and Andrew generally arose at daybreak for a ride or swim, pausing on their return to admire the massive live oak trees laced with Spanish moss. After breakfast, which was prepared by servants, the plotters—masking their identities from the staff—gathered in a meeting room by a fireplace and worked through the day. “We were working so hard that we ate enormously,” Vanderlip would recall. “Without our ever stopping to hunt, deer, turkey and quail appeared on the table; there were pans of oysters not an hour old when they were scalloped.”