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

by Roger Lowenstein

  Aldrich would not consider withdrawing. And his allies in New York put intense pressure on Laughlin to rally around the Aldrich Plan. Trying to reach a modus vivendi, Laughlin held a parley on Aldrich’s yacht with Andrew, Davison, and Warburg as well as Ben Strong, the banker who had helped J. P. Morgan sort out good banks from bad in 1907. Annoyingly to the New Yorkers, the league continued to assert its independence, although it stopped short of proposing a rival plan.

  Surprisingly, in spite of this internal turmoil, both the Aldrich Plan and the Citizens’ League steadily gained momentum. By the late fall, the league had branches in more than thirty states and it was circulating a bimonthly newsletter with a circulation of 20,000, in addition to producing a handbook on banking reform. Laughlin also made impressive strides at broadening the constituency for reform. Touring the South, he plausibly stressed the benefits to farmers if bills for cotton shipments were to be convertible into Reserve Association notes. He also tried to make reform more than a one-party crusade, arguing that it was “high time for Democrats” to get involved.

  Meanwhile, endorsements rolled in. No fewer than twenty-nine state banking associations signed on; the Aldrich Plan was beginning to look like an unstoppable juggernaut. President Taft again expressed his approval, although that was the extent of his support. Treasury Secretary MacVeagh was harder to crack. MacVeagh recognized that the Aldrich Plan would reduce the department’s role in monetary matters; he also was resentful of the time that Andrew, his subordinate, was spending with Aldrich, with whom his relations were chilly. Nevetheless, MacVeagh threw in the towel and endorsed the Plan.

  Aldrich’s return to action provided a spur. Under his leadership, the Monetary Commission snapped to life with public hearings intended to rope in farmers and representatives of labor. Aldrich made a round of speeches in the West, pleading that people study the Plan and not reject it out of hand or due to political preconceptions. A latecomer to reform, he could taste the potential for an achievement that was more enduring than his endless revisions of the tariff. He worked relentlessly on incorporating the ABA’s points into a revised draft. He also was buoyed by favorable press—in the East, at any rate. The Journal of Commerce commented approvingly that under the Aldrich Plan, Wall Street control would be “impossible.”

  But in the interior of the country, fear of Wall Street domination would not go away. To midwestern progressives it was axiomatic that the Aldrich Plan was a tool of New York bankers. They saw it as a stalking horse for the “Money Trust”—a hazy expression understood by ordinary Americans to mean the Wall Street cabal that, it was said, manipulated the levers of the country’s finances.

  And in mid-1911 the Money Trust was catapulted onto the front pages—with disastrous consequences for the Aldrich Plan. The first inkling of trouble arose in June, when Vanderlip’s National City Bank divulged a plan for a new affiliated unit, to be known as National City Co. The affiliate would have the same shareholders and officers as the bank but a separate corporate identity. In plain terms, it was an end run around the law. The affiliate was intended, as Vanderlip candidly put it in a circular to the bank’s shareholders, to “make investments and transact other business, which, though often very profitable, may not be within the express corporate powers of a National bank.” One of those purposes was to purchase stocks in other banks. And no sooner was the affiliate established than it scooped up shares in fifteen of its competitors, including controlling stakes of several small banks in New York.

  The disclosure set off a tempest. To casual observers, National City resembled a would-be monopolist. A big bank buying shares in smaller banks seemed akin to a Rockefeller buying a string of oil refiners. New York banking was already a clubby affair, in which Morgan, Baker, and Stillman/Vanderlip tacitly agreed to restrict competition to well-defined lines of business and openly colluded in others.

  What truly sounded alarm bells was the seeming linkage between the National City affiliate and the Aldrich Plan. It was easy to imagine that if the Aldrich Plan was adopted, a chain of banks, jointly owned by a holding company such as National City, might gain voting control of the National Reserve Association. The Citizens’ League was alarmed, for the mere possibility of such a vehicle undermined its strategy of marketing the Aldrich Plan as a democratic reform. As the Times put it, “It is a waste of breath to urge upon the people of the country the acceptance of the Aldrich plan so long as one National bank, through a holding company, may control twenty, fifty, or one hundred other National banks.”

  In actual fact, there was not much prospect of National City’s controlling the Reserve Association. America had well more than twenty thousand banks of various types—Wall Street’s collusive tendencies notwithstanding, banking remained far more competitive than oil, steel, sugar, or any of the industries dominated by a classic trust. And the Reserve Association, were it to be established, would dwarf the assets even of National City. Warburg tried to placate worried officials of the Citizens’ League, but his sarcasm got the better of him. Writing to the league’s president, he drily remarked that taking over the Reserve Association “was as remote to the managers of the National City Bank as the Northpole [sic].”

  Laughlin was not amused. Even if New York did not appreciate the damage done by National City, he reproachfully replied to Warburg, the news “could not have come out at a more unfortunate time.”

  Laughlin was right: National City Co. represented an aggressive thrust by the country’s biggest bank, and the public’s suspicion of its motives was perfectly understandable. In fact, Vanderlip himself had foreseen it. In a letter to Stillman on June 20, just a week before Vanderlip’s circular to the shareholders, Vanderlip raised the alarming possibility that the government might seek to bring antitrust cases against the big banks. The Supreme Court had, in recent weeks, ordered the dissolution of both Standard Oil and the Tobacco Trust, so Vanderlip was paying more than his usual nervous attention to the Justice Department. “My intuition is that there is going to be a great deal of talk about banking combinations and concentrated financial power,” he prophesied. “It is going to come from demagogues, but not from them alone.”

  Vanderlip’s creation of a new affiliate did much to make his prophecy a true one. Vanderlip had been impatient to expand National City’s charter and to win for national banks some of the freedoms of lesser-regulated state banks. Frustrated with the slow pace of reform, he had committed a colossal blunder.

  Washington reacted quickly. Attorney General George Wickersham concluded that National City Co. violated the spirit of the banking law. However, since Treasury Secretary MacVeagh disagreed, Taft ordered the papers sent to him so that he could resolve the issue.* Since any decision would anger either progressives or bankers, the President dithered. In November, Vanderlip wisely defused the issue by disposing of the affiliate’s investments and, in effect, admitting his error.

  However, the political outcry would not be quieted. Even as Wickersham was launching a government probe, Charles August Lindbergh, a Republican congressman from the Sixth District of Minnesota, a hotbed of prairie populism (later the seat of Tea Party militant Michele Bachmann) called for a congressional investigation of the Money Trust. Lindbergh was the son of a bank embezzler who had fled from Sweden, and the father of the future aviator. He was a serious, scholarly lawyer who also sat on the board of the First National Bank of tiny Little Falls, Minnesota. Like so many midwestern progressives, he feared that East Coast financiers were conspiring to hijack America’s economy, and the revelation of National City’s investment affiliate struck him like a call to Jesus. Lindbergh saw a parallel plot at work in the Aldrich Plan, which he said was a device to take away from communities the local funds that, rightly, should stay in those communities. His call for an investigation rocketed across the progressive firmament with, in short order, dramatic consequences. The backers of the Aldrich Plan now faced the impossible burden of disproving that they were a
gents of the Money Trust.

  Among the first to strike was William Jennings Bryan. The Great Commoner privately acknowledged that some reform would be necessary, but was repelled by the two most salient features of the Aldrich Plan—centralization and banker control. Bryan had sketched out a very different idea for dividing the banks into regional associations, with each association being able to borrow, on liberal terms, from the government. In some ways, this was closer than the Aldrich Plan to the eventual Federal Reserve Act. However, Bryan’s plan was not developed, nor did he engage the Aldrich plan on the merits. Rather than admit the complexities of an issue, Bryan always preferred to simplify. Typically, he went on the attack, baldly declaring that the Aldrich Plan would lead to nothing less than “absolute commercial and industrial slavery.” Despite his three failed presidential campaigns, Bryan remained the most revered of Democrats, and his opposition was a serious matter.

  Even more damaging was the antagonism toward the Aldrich Plan from within the Republican Party, which percolated along with the insurgents’ growing dissatisfaction with Taft. By the middle of 1911, Senator La Follette was openly mulling a challenge to the President the following year. The Wisconsin senator, famous for his pompadour and fighting spirit, had received acclaim when, as a lawyer in Madison in the early 1890s, he claimed he had been offered (and had rejected) a bribe by a party leader. The episode convinced him that the Republicans had betrayed their liberal origins. La Follette then began to champion such popular causes as direct election of senators—which was finally moving through the Congress—voter primaries, a minimum wage, progressive taxation, and corporate regulation. As his state’s governor from 1901 to 1906, he promoted a working relationship between the statehouse and the University of Wisconsin, in the belief that government policies should be founded on competent research. He was sufficiently earnest that Warburg spent an evening with the senator’s adviser on banking, laying out the supposed advantages of the Aldrich Plan.

  As a progressive, La Follette was in favor of “reforming” the banks, but he feared that any powerful body run by bankers would draw capital, and influence, away from the small communities of the Midwest. In particular, he feared that a national association would come under the sway of metropolitan bankers—not an unreasonable opinion. Although the Aldrich Plan had genuinely democratic safeguards, La Follette’s opinion of it was tainted by his acid view of Aldrich. Finally, La Follette had a political self-interest in distancing himself from the Republican mainstream that Aldrich represented. As with Bryan, he made no attempt to debate the Aldrich Plan on its particulars; rather, La Follette proclaimed that it was simply a plot to siphon “the people’s money” to monopolies and trusts. Indeed, he would declare by the end of the year that the Plan was “the greatest menace to competition at the present time.”

  Lurking in the shadows of the La Follette challenge to Taft was the specter of a more potent bid by Theodore Roosevelt to reclaim the White House from his former friend. Roosevelt agreed not to publicly criticize the Aldrich Plan, as a favor to Laughlin, his old instructor at Harvard. Nonetheless, the Rough Rider represented a powerful threat to Republican solidarity, and that in itself put the Aldrich Plan in serious trouble.

  Vanderlip sized up the turbulent politics of 1911 in a stream of letters to his Paris correspondent, and his reports grew steadily darker. Taft’s chances seemed to have evaporated; the progressive idea was showing remarkable persistence; the fortunes of New Jersey’s Governor Wilson seemed to be on the rise; Aldrich had bungled his chances for a bill. And so on and so on, letter after letter.

  The political pot came to a boil late in October, when Taft’s Justice Department brought an antitrust case against U.S. Steel, a Morgan-created trust that had always enjoyed Roosevelt’s favor. Since the suit charged that U.S. Steel’s acquisition of Tennessee Coal, Iron & Railroad—which Roosevelt had approved during the heat of the Panic of 1907—was illegal, and implied that Roosevelt had been duped, the former president regarded it as an affront to his honor. His break with Taft was now irreversible.

  Morgan, who had been troubled all year by the gathering pace of investigations, spent a weekend in Vermont huddled with Aldrich, Baker, and Davison to review the ramifications of the U.S. Steel suit. Morgan and Aldrich were both pessimistic—not just about the case but about the drift toward progressive politics in general. Aldrich, Vanderlip reported, “felt that all the old moorings were cut loose politically and that the outlook was only that a bad situation might get still worse.”

  In November, the Aldrich group reunited in New Orleans for the ABA convention. Warburg spoke stirringly. He observed that in Europe credit was actually more useful than cash—a condition he judged that, with the passage of the Aldrich Plan, could be replicated in the United States. But the spotlight belonged to Aldrich. Appealing to southern bankers, he noted that America had exported $650 million of cotton in the previous year—most of it financed in Liverpool, London, Paris, or Berlin. He implored the crowd, was it not worth taking the United States “out of a condition of dependent helplessness”? Once more, Aldrich insisted that his plan was nonpartisan, that it dealt purely with “business questions,” that it envisaged not a bank but a cooperative union of all banks. He pleaded to the assembly, “We have a right to expect that the plan presented will be considered fairly on its merits. We do not think it fair that men who admit they have not read the Plan should raise the cry of a central bank or summon the ghost of Andrew Jackson.”

  The ABA leadership stifled dissent from country bankers, and the Plan was approved without discussion. As in the original draft, the Reserve Association would be a self-regulatory body of bankers, democratically governed. Wall Street applauded the greater dose of centralization; Chicago approved because the federal government was mostly excluded. Banks were given greater license, such as the right to lend on real estate. But a flaw in the Plan was that, since participation was voluntary, scattering reserves among local banks would still be possible.

  Aldrich received a five-minute ovation, but he knew even before he left New Orleans that he faced a brutal resistance. La Follette was making opposition to Aldrich a linchpin of his insurgency. In a noonday speech in Hamilton, Ohio—part of an early winter campaign swing through the Midwest—he declared, “The Progressives are prepared to fight because they understand what Aldrich is trying to do for those he represents.” Newspaper coverage was withering. In general, critics focused not on the plan but on the man behind it. A devastating observation, probably accurate, in the Rocky Mountain News held that “the only thing the country feels sure about the Aldrich currency plan is that it is devised by the author of the present tariff.”

  Aldrich and his fellow plotters were partly to blame, for they had ignored a crucial tenet of progressivism—accountability to the public. Although the Reserve Association, according to its creators, would be a body with “semi-public” powers, including acting as chief fiscal agent of the U.S. government, the public was nearly excluded from its deliberations. In this, Aldrich and his comrades badly misjudged the temper of the times.

  In December, Representative Lindbergh formally introduced a resolution to investigate the Money Trust. Meanwhile, the Monetary Commission met in nearly daily session, preparing the Aldrich Plan for submission to an increasingly hostile Congress. For appearance’ sake, the commission further weakened the influence of Wall Street. In the finished document, New York banks, which held 20 percent of the nation’s banking capital, could elect no more than three of thirty-nine representatives to the board of the Reserve Association—a disproportionately small share.

  Aldrich confessed to Taft that he would gladly retire from public life once his plan was enacted. But although the President was his ally, his chances of being reelected—and actually helping Aldrich—seemed ever more slim. The backers of the Aldrich Plan might well have to cultivate some other patron in the White House. Roosevelt, perhaps? Andrew sent the former president a
complete set of the Monetary Commission publications, some thirty-five volumes. Roosevelt graciously accepted them, but it is unlikely that he gave them any thought; political economy was never his cup of tea.

  The other possibility was Woodrow Wilson. By late 1911 the governor was a leading candidate among several contenders for the Democratic nomination and perhaps for the White House. Vanderlip reported that the “current is drifting very strongly toward Woodrow Wilson.” Whether Wilson would be open to the Aldrich Plan was a matter of intense speculation.

  Although Wilson was not a financial expert, he was well versed in the Founding Fathers’ early conflicts over central banking. Wilson’s upbringing favored laissez-faire, but his professional training had steered him in the direction of centralism. The son of a Presbyterian minister, born in Virginia and raised in various communities in the South, Wilson attended Princeton, where he gobbled up the study of American government. After dabbling at law, he opted for a career in academia and wrote a widely praised doctoral dissertation in which he strongly criticized congressional domination of the executive branch.* By then, Wilson was convinced of the virtue of a strong central government; indeed, he was to say of his life after Princeton, “Ever since I have had independent judgments of my own I have been a Federalist.” As a mature political scientist, he heaped praise on Hamilton, the father of the first Bank of the United States, labeling him “one of the greatest figures in our history.” He was distinctly cooler to Jefferson, that hater of banks, whom he dubbed “a great man, not a great American.” In 1902, the same year Wilson was named president of Princeton, he published his massive A History of the American People, which included the distinctly anti-Jacksonian passage: “The supporters of the second bank were in a measure justified in claiming that for such a purpose the very government itself had been set up.” And not only had the Second Bank shown potential, according to Wilson; it had “proved itself” to be “a great commanding bank.” For a student of American government, these were strong words. It is worth noting that even then—some eight years before Wilson ran for elective office—he confided to the historian Frederick Jackson Turner, “I was born a politician and must be at the task for which by means of my historical writing, I have all these years been in training.”