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

by Roger Lowenstein

  Robert L. Owen, chairman of the Senate Banking and Currency Committee, and a disciple of Bryan, demanded that control over the Fed rest in the federal government. Glass wanted private bankers to retain some control.

  With farmers, bankers, progressives, and westerners each insisting on distinct amendments, it was left to Wilson to break the logjam in Congress. He wrote to a friend, “The struggle goes on without intermission.”

  Signing of the Federal Reserve Act, December 23, 1913, painting by Wilbur G. Kurtz. From left to right: Lindley Garrison, secretary of war; Josephus Daniels, secretary of the Navy; Franklin K. Lane, secretary of the interior; Albert S. Burleson, postmaster general; Senator Owen; Champ Clark, Speaker of the House; Secretary McAdoo; President Wilson (seated); Representative Glass; Representative Oscar Underwood; William B. Wilson, secretary of labor.

  ACKNOWLEDGMENTS

  Many people helped me with this book. I am grateful to Sarah Binder, Michael D. Bordo, J. Lawrence Broz, Gary Gorton, Richard S. Grossman, Douglas A. Irwin, William L. Silber, and Ellis Tallman—super scholars and historians who provided me with encouragement and help, in some cases often, in all cases graciously. I am grateful, as well, to John Hunter for a stimulating tour of the Jekyll Island Museum and historic site, and to Michelle A. Smith, nonpareil assistant to the Federal Reserve Board, and to the Fed’s Sara Messina, for tracking down some details on the operation of the present-day central bank. To my friend José Souto, your legwork on Wall Street is not forgotten. Alex Beam, Neil Barsky, Ron Chernow, and David Moss—that would be three writer-historians and one journalist-filmmaker: four good friends—provided advice, answered queries, and encouraged me as only colleagues can. Who could ask for more? Jeffry Frieden, Geoffrey Lewis, Matthew Lowenstein, Mitch Rubin, Jeffrey Tannenbaum, and Mark Williams (five friends and a certain relative) read every word of this book in progress. With each of you, editing calls were a labor of love, even as they were instructional and frank. To a writer in the midst, that is as good as it gets. My sister Jane Ruth Mairs lent her sharp editor’s eye when I needed it. My in-laws, Janet and Gil Slovin, and my mother, Helen Lowenstein, read and absorbed more about bankers, populists, and turn-of-the-century politicians than I had a right to expect. None of you feigned neutrality; your partisanship on my behalf was richly appreciated.

  Apart from the narrative in the book, there is a narrative of the book, which every author lives from the moment of inception until the distant moment of publication. The early going, in the summer of 2012, was difficult indeed. I have countless family and friends to thank for sustaining me in that time, not least my cousins Michael and Carol Lowenstein and Wendy and Neil Sandler. When research and other aspects of everyday life had all but come to a standstill, Dr. Virany Hillard, my daughter’s surgeon at Westchester Medical Center, together with her colleagues and staff, turned an enveloping nightmare into a story of redemption, now steadily receding in the rearview mirror. I must also mention Lisa Berkower (and Mitch, too)—in whose warm abode, and at whose polished-walnut dining room table, I labored on this book. Next time, I promise to use coasters.

  When bad things happen you discover who your friends are. Melanie Jackson, my agent, and Ann Godoff, my editor, demonstrated by word and deed that their personal feeling trumped editorial and business concerns. Hard to forget that. I am as grateful as ever to Melanie for her professionalism and loyalty. Ann’s insights and discerning judgment made a telling difference on every page; I am also deeply grateful to her for believing, from the beginning, that a hundred-year-old banking story could be brought to exciting life. I am also indebted to the entire crew at Penguin Press; with them, publishing remains an art form and a collaboration. Last and assuredly not least, Judy, my wife, read and critiqued this book numerous times. She read it on buses, planes, and trains; she read it upstairs and downstairs; she read it in fair weather and, during our present epic winter, foul. Her dedication was remarkable; her literary skills are equally formidable. Judy told me at the outset she was a reader. She did not divulge that she is also a superior editor and critic. For her generosity, her talent, and her love, I am profoundly grateful.

  ROGER LOWENSTEIN

  Boston, March 2015

  NOTES

  UNPUBLISHED PAPERS AND COLLECTIONS

  The principal archives consulted for this book, which are often cited in the notes that follow, can be found in these locations:

  Nelson W. Aldrich Papers: Manuscript Division, Library of Congress, Washington, D.C.

  A. Piatt Andrew Papers: Hoover Institution Archives, Stanford, California.

  Carter Glass Collection: Albert and Shirley Small Special Collections Library, University of Virginia, Charlottesville, Virginia.

  Edward M. House Papers: Manuscripts and Archives, Sterling Memorial Library, Yale University, New Haven, Connecticut.

  Thomas W. Lamont Papers: Baker Business Historical Collections, Harvard University, Cambridge, Massachusetts.

  James Laurence Laughlin Papers: Manuscript Division, Library of Congress, Washington, D.C.

  Pierpont Morgan Papers and J. P. Morgan Jr. Papers: Morgan Archives, Morgan Library and Museum, New York, New York.

  George W. Perkins Sr. Papers: Rare Book and Manuscript Library, Butler Library, Columbia University, New York, New York.

  Frank A. Vanderlip Papers: Rare Book and Manuscript Library, Butler Library, Columbia University, New York, New York. (All quoted letters from “Part B.”)

  Paul Moritz Warburg Papers: Manuscripts and Archives, Sterling Memorial Library, Yale University, New Haven, Connecticut.

  Henry Parker Willis Papers: Rare Book and Manuscript Library, Butler Library, Columbia University, New York, New York.

  The Aldrich Papers warrant elaboration. They include Aldrich’s papers and correspondence, as well as his personal financial records, over his lengthy (1879–1911) congressional career and beyond, and the archives of the National Monetary Commission, which Aldrich directed. They also include detailed notes compiled by Jeannette P. Nichols and Nathaniel W. Stephenson for the latter’s biography, Nelson W. Aldrich: A Leader in American Politics (1930), along with associated correspondence. These notes include material culled from interviews and from other archival sources, including the papers of Paul Warburg and of Piatt Andrew. When possible, the origin of such material is indicated with an annotation such as “Biographer’s notes” or the parenthetical “(from Warburg Papers).” Whatever their source, the materials in the Aldrich Papers represent a treasure trove.

  I benefited from several exceptional unpublished works and dissertations, cited more fully below but worthy of mention here. They include: Harry Edward Poindexter, “From Copy Desk to Congress: The Pre-Congressional Career of Carter Glass” (1966); Michael Clark Rockefeller, “Nelson W. Aldrich and Banking Reform: A Conservative Leader in the Progressive Era” (1960); Jerome L. Sternstein, “Nelson W. Aldrich: The Making of the ‘General Manager of the United States,’ 1841–1886” (1959); and William Diamond, The Economic Thought of Woodrow Wilson (1943).

  Among the most valuable published sources were the memoirs, biographies, diaries, and compilations of the main characters, including of Aldrich, Piatt Andrew, William Jennings Bryan, Harry Davison, Carter Glass, Colonel Edward M. House, William G. McAdoo, J. P. Morgan, Robert L. Owen, Theodore Roosevelt, William Howard Taft, Frank Vanderlip, Paul Warburg, H. Parker Willis, and Woodrow Wilson. Three merit particular mention: Warburg’s two-volume The Federal Reserve System: Its Origin and Growth—Reflections and Recollections (1930); Willis’s The Federal Reserve System: Legislation, Organization and Operation (1923); and The Papers of Woodrow Wilson. The Wilson Papers, a massive undertaking edited by Arthur S. Link, comprise sixty-nine volumes and were published between 1966 and 1994; I consulted volume 8 (1970) and volumes 18–29 (1975–80).

  INTRODUCTION

  Alexander Hamilton proposed: Ron Chernow, Alexander Hamilton (New York: Penguin Press,
2004), 347.

  To modern eyes, the Bank: Richard Grossman, Wrong: Nine Economic Policy Disasters and What We Can Learn from Them (Oxford: Oxford University Press, 2013), 45. Grossman’s third chapter, “Establish, Disestablish, Repeat,” is an elegant summary of the purposes of central banking internationally and of America’s first two aborted experiments.

  But the Bank was doomed: Ibid., 45.

  “object of intense hatred”: Alexis de Tocqueville, Democracy in America (1835; repr., New York: Library of America, 2004), 448.

  “Americans are obviously preoccupied”: Ibid., 443.

  For the opposition to central banking: Grossman, Wrong, 43.

  when Jackson was elected president: Richard Hofstadter, The American Political Tradition and the Men Who Made It (New York: Knopf, 1991), 69.

  They relied less on labor: Robert Kuttner, Debtors Prison: The Politics of Austerity vs. Possibility (New York: Knopf, 2013), 183–85.

  Jefferson in particular was: Hofstadter, American Political Tradition, 36.

  The U.S. dollar was a second-rate currency: Ed Conway, The Summit: Bretton Woods, 1944, J. M. Keynes and the Reshaping of the Global Economy (New York: Pegasus, 2015), 39, citing Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (New York: Oxford University Press, 2011), 32.

  CHAPTER ONE: THE FORBIDDEN WORDS

  “I am in favor of a national bank”: Illinois Ancestors, speech available at www.illinoisancestors.org/lincoln/firstspeech.html. Accounts of the speech differ, but there is no doubt that during the 1840s Lincoln frequently advocated a national bank.

  “to carry with him the coin necessary”: Andrew McFarland Davis, National Monetary Commission, The Origin of the National Banking System, 61st Cong., 2d sess. (Washington, D.C.: Government Printing Office, 1910), 12–13.

  “the frequently worthless issues”: Ibid., 13–14, quoting John Jay Knox, “By a Western Banker,” Hunt’s Merchants’ Magazine, January 1863. Knox was later U.S. comptroller of the currency.

  In theory, these notes: Ibid., 12–14.

  “The speculator comes to Indianapolis”: Ibid., 20–21.

  “with no other security than”: Ibid., 19, quoting Cooke’s memoirs.

  8,370 varieties of notes: Ibid., 25, quoting Chicago Tribune, February 13, 1863.

  “Counterfeit Detectors”: Ibid., 23, 24.

  However, note circulation was: Alexander Dana Noyes, National Monetary Commission, History of the National-Bank Currency, 61st Cong., 2d sess. (Washington, D.C.: Government Printing Office, 1910), 10–14, 18; and Richard T. McCulley, Banks and Politics During the Progressive Era: The Origins of the Federal Reserve System, 1897–1913 (New York: Garland, 1992), 21–23.

  “the vast demands of the war”: Davis, The Origin of the National Banking System, 103.

  “This system of currency has”: McCulley, Banks and Politics During the Progressive Era, 15.

  “for purely speculative purposes”: Carter Glass, An Adventure in Constructive Finance (Garden City, N.Y.: Doubleday, 1927), 61–62.

  note circulation sharply declined: McCulley, Banks and Politics During the Progressive Era, 21–23; and Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1971), 31–32.

  “we could no longer claim”: Richard H. Timberlake Jr., The Origins of Central Banking in the United States (Cambridge, Mass.: Harvard University Press, 1978), 158–59.

  less peasants than little businessmen: Alexis de Tocqueville, Democracy in America (1835; repr., New York: Library of America, 2004), 644.

  There were fewer bank notes issued: McCulley, Banks and Politics During the Progressive Era, 18, 19–20.

  Carter Glass was one of those: For details on Robert Glass, as well as on Carter Glass, see Harry Edward Poindexter, “From Copy Desk to Congress: The Pre-Congressional Career of Carter Glass,” Ph.D. diss., University of Virginia, 1966, 37–38. See also Rixey Smith and Norman Beasley, Carter Glass (New York: Longmans, Green and Co., 1939), 3–36; James E. Palmer Jr., Carter Glass: Unreconstructed Rebel (Roanoke: Institute of American Biography, 1938), 12–33; and Matthew Fink, “The Unlikely Reformer: Carter Glass’s Approach to Financial Legislation” (unpublished manuscript), 4.

  Glass’s view of this calamity: Poindexter, “From Copy Desk to Congress,” 137.

  “But when I see the merciless forces”: Ibid., 224, 183.

  from 1867 to 1897: Friedman and Schwartz, Monetary History of the United States, 24, 41, and 91.

  a bushel of winter wheat: George Frederick Warren, Crop Yields and Prices, and Our Future Food Supply (Ithaca, N.Y.: Cornell University Press, 1914), 196.

  “You do not want an honest dollar”: Timberlake, Origins of Central Banking in the United States, 161–62.

  “the fate of the Western institution”: Alexander D. Noyes, “The Banks and the Panic of 1893,” Political Science Quarterly 9, no. 1 (March 1894), 17.

  The Panic of 1893 exposed: Ibid., especially 16–18, 24; and Robert L. Owen, The Federal Reserve Act (New York: Century, 1919), 2–3.

  “Fear of a silver basis prevailed”: Barton Hepburn, A History of Currency in the United States (New York: Macmillan, 1924), 349–50.

  forced to go hat in hand: James Grant, Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken (New York: Farrar, Straus and Giroux, 1992), 74.

  Morgan turned a profit: Vincent P. Carosso, The Morgans: Private International Bankers, 1854–1913 (Cambridge, Mass.: Harvard University Press, 1987), 339.

  Glass believed, on no evidence: Poindexter, “From Copy Desk to Congress,” 177.

  “It is just the money power”: Ibid., 206–7.

  Virginia’s farmers were ruined: Ibid., 125.

  Cleveland held that people should: The precise Cleveland quote, widely cited, is “Though the people support the government; the government should not support the people.”

  party bosses insisted that he stand for gold: Nelson W. Aldrich Papers, Reel 59. Technically, McKinley promised to support a bimetallic system (gold and silver) if other nations did as well. Because most of Europe had no intention of switching, practically speaking, this meant that the Republicans were the party of gold.

  His editorials, a daily barrage: Poindexter, “From Copy Desk to Congress,” 15, 204, 224, and 234.

  Bryan did not analyze issues: Richard Hofstadter, The American Political Tradition and the Men Who Made It (New York: Knopf, 1991); see especially 188–91.

  Eyewitnesses reported a momentary silence: Robert A. Degen, The American Monetary System: A Concise Survey of Its Evolution Since 1896 (Lexington, Mass: D.C. Heath, 1987), 95; and Poindexter, “From Copy Desk to Congress,” 246–47.

  a noted Princeton professor: John Milton Cooper Jr., Woodrow Wilson (New York: Knopf, 2009), 73.

  Rather than a currency based on government bonds: “Report of the Monetary Commission to the Executive Committee of the Indianapolis Monetary Convention” (1897), available at openLibrary.org. See especially p. 37, discussing the phasing out of the requirement for depositing government bonds, and p. 43.

  “not a proper function of the Treasury Department”: Annual Report of the Secretary of the Treasury on the State of the Finances, 1896, lxxiii.

  “adjust itself automatically and promptly”: “Report of the Monetary Commission,” 4.

  getting the government out of banking: Annual Report of the Secretary of the Treasury on the State of the Finances, 1897, lxxiv–lxxvi; and Timberlake, Origins of Central Banking in the United States, 172.

  What further amplified the Treasury’s: McCulley, Banks and Politics During the Progressive Era, 56–57.

  “Money is plentiful throughout the country”: Arthur A. Housman to J. P. Morgan, June 14, 1899, J. P. Morgan Jr. Papers.r />
  “The cry everywhere”: Henry Morgenthau, All in a Life-Time (New York: Doubleday, 1922), 73.

  “havoc was wrought in the regular ongoing”: Annual Report of the Secretary of the Treasury on the State of the Finances, 1899, xc, xcii, xciv, and xcv.

  Legislators were irate that Gage: A. Piatt Andrew, “The Treasury and the Banks Under Secretary Shaw,” Quarterly Journal of Economics 21, no. 4 (August 1907), 528–29, 567.

  “orders for the transfer of existing bank credits”: Annual Report of the Secretary, 1899, xci; and Annual Report of the Secretary of the Treasury on the State of the Finances, 1901, 74.

  This 90 percent: Friedman and Schwartz, Monetary History of the United States, 135–36, 139.

  “ruling principle of self-preservation”: Annual Report of the Secretary, 1901, 76.

  a raid on Northern Pacific: Friedman and Schwartz, Monetary History of the United States, 142.

  “We justly boast of our political system”: Annual Report of the Secretary, 1901, 73-74, 77.

  CHAPTER TWO: PRIVILEGED BANKER, SELF-MADE SENATOR

  “Under our clumsy laws, the currency”: Alexander D. Noyes, “The Banks and the Panic of 1893,” Political Science Quarterly 9, no. 1 (March 1894).

  “The study of monetary questions”: Henry Dunning MacLeod, National Monetary Commission, An Address by Senator Nelson W. Aldrich Before the Economic Club of New York, November 29, 1909, 61st Cong., 2d sess. (Washington, D.C.: Government Printing Office, 1910), 26.

  Beginning in 1887: Author interview with Mark Williams.

  Critics roundly debated whether Shaw: A. Piatt Andrew, “The Treasury and the Banks Under Secretary Shaw,” Quarterly Journal of Economics 21, no. 4 (August 1907), 519–68; see especially 530–38 and 540–42. See also Richard T. McCulley, Banks and Politics During the Progressive Era: The Origins of the Federal Reserve System, 1897–1913 (New York: Garland, 1992), 102.