America's Bank

by Roger Lowenstein

  “stacks of green currency”: Quoted in Bruner and Carr, The Panic of 1907, 78.

  green-marbled public area: Ibid.

  “The consternation of the faces”: Lester V. Chandler, Benjamin Strong, Central Banker (Washington, D.C.: Brookings Institution, 1958), 28.

  “with Mr. Morgan presiding”: “Knickerbocker Will Not Open,” The New York Times, October 23, 1907.

  “This, then, is the place”: Thomas W. Lamont, Henry P. Davison: The Record of a Useful Life (New York: Harper and Brothers, 1933), 76.

  Harry Davison had been reared in: Ibid., especially 15.

  Strong had been raised: Background on Strong from Chandler, Benjamin Strong; see also “Mrs. Strong Kills Herself,” The New York Times, May 11, 1905; and Lamont, Henry P. Davison, 59–62.

  “making figures as we went along”: Carosso, The Morgans, 539–40.

  the fifth straight of panicky conditions: Ibid., 540–41; and Jean Strouse, Morgan, American Financier (New York: Random House, 1999), 579.

  By then, a new crisis was erupting: Carosso, The Morgans, 542.

  the Treasury’s surplus was exhausted: Annual Report of the Secretary of Treasury on the State of the Finances, 1907, 53–54. Cortelyou said his hands were “virtually tied.”

  “We sat quietly”: Vanderlip, From Farm Boy to Financier, 174–75.

  Grateful tributes streamed in to: The letters of appreciation to Morgan can be found in the Pierpont Morgan Papers, Box 7, book 12. See also Ron Chernow, The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Grove Press, 1990), 125; “J. P. Morgan Has a Cold,” The New York Times, October 26, 1907; and “Lord Rothschild’s Tribute to Morgan,” The New York Times, October 26, 1907.

  New York’s trusts lost: Author interview with Ellis W. Tallman, who cited call reports of the New York Superintendent of Banking. According to Tallman, from August 22 to December 19, 1907, deposits in New York City trusts fell 47.8 percent. The figure was inflated by the shuttering of the Knickerbocker, but even if the Knickerbocker is omitted from the calculation, deposits fell a hefty 33.7 percent.

  With panic spreading, clearinghouses: A. Piatt Andrew, “Substitutes for Cash in the Panic of 1907,” The Quarterly Journal of Economics 22, no. 4 (August 1908), 509.

  banks were forced to hand out: O. M. W. Sprague, National Monetary Commission, History of Crises Under the National Banking System, 61st Cong., 2d sess. (Washington, D.C.: Government Printing Office, 1910), 290.

  Many railroads, mining companies: Andrew, “Substitutes for Cash in the Panic of 1907,” 510–13.

  By mid-November, approximately half: Ibid., 501; the exact figures in the survey were 71 of 145 cities. In addition, Sprague, History of Crises, reports that 60 of 110 established clearinghouses made use, specifically, of loan certificates (p. 290). Quotations and other details in this paragraph come from Andrew, “Substitutes for Cash in the Panic of 1907,” especially 497, 504, and 507–8.

  $500 million of cash substitutes: Andrew, “Substitutes for Cash in the Panic of 1907,” 515. Andrew calculated (p. 507) that $238 million, or nearly half of the estimated total of cash substitutes, consisted of “regular” clearinghouse certificates, including $101 million of such certificates in New York.

  “to a greater or less degree”: Ibid., 501–2.

  Council Bluffs . . . Providence: Ibid., 502A. For banks’ discretion, see also Sprague, History of Crises, 287.

  in many states they encouraged banks: Andrew, “Substitutes for Cash in the Panic of 1907,” 498–500; and Sprague, History of Crises.

  “the most extensive and prolonged breakdown”: Andrew, “Substitutes for Cash in the Panic of 1907,” 497.

  “drafts on Philadelphia, Boston”: “Bankers Discuss Causes of Flurry,” The New York Times, December 3, 1907.

  Even the suggestion that banks: Sprague, History of Crises, 276. Sprague succinctly observed: “Suspension increases enormously the propensity to hoard money.”

  safe-deposit boxes: A. Piatt Andrew, “Hoarding in the Panic of 1907,” The Quarterly Journal of Economics 22, no. 2 (February 1908), 293–95.

  plunged by $350 million: Sprague, “The American Crisis of 1907,” 367. In “Hoarding in the Panic of 1907” (p. 293), Andrew suggests the far smaller figure of $230 million of currency that “passed out of the banks and disappeared from sight between August and December.”

  However, hoarding by individuals: Elmus Wicker, The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (Columbus: Ohio State University Press, 2005), 39.

  “It is said that many of our people”: Annual Report of the Secretary of the Treasury on the State of the Finances, 1907, 53.

  “We were broke with a pocket full of money”: Banking and Currency Reform: Hearings Before the Subcommittee of the Committee on Banking and Currency, Charged with Investigating Plan of Banking and Currency Reform and Reporting Constructive Legislation Thereof, 62nd Cong., 3rd sess., House of Representatives January 7, 1913 (Washington, D.C.: Government Printing Office, 1913), 262, available at http://books.google.com/books?id=pc0qAAAAYAAJ&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false.

  bolstered their reserves: Andrew, “Hoarding in the Panic of 1907,” 296–97 (for San Antonio, Indianapolis, Wichita, Portland, and Galveston).

  Vanderlip sourly surmised: Vanderlip, From Farm Boy to Financier, 171.

  well below the legal minimum: Myron T. Herrick, “The Panic of 1907 and Some of Its Lessons,” Annals of the American Academy of Political and Social Science 31 (March 1, 1908), 9. The cumulative reserve deficit of the national banks in New York City was $54 million, the largest ever.

  Charges and countercharges flew: See, for instance, Sprague, “The American Crisis of 1907,” 367.

  The problem was that the system: Sprague, History of Crises, 304.

  a town without a fire department: Paul M. Warburg, The Federal Reserve System: Its Origin and Growth—Reflections and Recollections (New York: Macmillan, 1930), 2:125.

  Britain had not experienced a banking suspension: Andrew, “Hoarding in the Panic of 1907,” 290.

  America had been scorched: J. Lawrence Broz, “Origins of the Federal Reserve System: International Incentives and the Domestic Free-Rider Problem,” International Organization 53, no. 1 (Winter 1999), 44. The five severe crises occurred in 1873, 1884, 1890, 1893, and 1907.

  “All institutions had to run”: Timberlake, The Origins of Central Banking in the United States, 183–84.

  Quickly on the heels of the Panic: Sprague, “The American Crisis of 1907,” 368; and Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press, 1971), 156. From December 1906 to November 1907, the Dow Industrials fell 40.9 percent.

  “Too late now, Mr. Stillman”: Warburg, The Federal Reserve System, 1:18–19.

  “a modern central bank”: “Mr. Warburg Urges Government Bank,” The New York Times, November 14, 1907.

  One episode in particular soured: This account is based on Strouse, Morgan, American Financier, 582–88.

  “group of financiers who withhold”: Ibid., 589.

  “unreasoning distrust and pessimism”: Ibid. (italics added).

  “inscrutable and mysterious power”: Lucy D. Chen, “Banking Reform in a Hostile Climate: Paul M. Warburg and the National Citizens’ League” (working paper, April 2010), available at www.fas.harvard.edu/~histecon/crisis-next/1907/docs/Chen-Warburg_Final_Paper.pdf.

  “statesmen”—leaders in society: William Diamond, The Economic Thought of Woodrow Wilson (Baltimore: Johns Hopkins University Press, 1943), 78–79.

  “this turmoil of undefined wickedness”: “Dr. Wilson Defines Material Issues,” The New York Times, November 24, 1907.

  Columbia University sponsored: The title page of The Currency
Problem and the Present Financial Situation, a book reproducing the Columbia lectures, can be found in the Nelson W. Aldrich Papers.

  Warburg unapologetically advised: Paul M. Warburg, “American and European Banking Methods and Bank Legislation Compared,” February 3, 1908, reprinted in Warburg, The Federal Reserve System, 2:43, 48, and 54.

  introduced the arguments for centralization to a wider public: Wicker, The Great Debate on Banking Reform, 38.

  a “modified” central bank: Warburg’s plan was published as a letter to the Times on November 14, 1907, under the headline “Mr. Warburg Urges Government Bank.” Warburg, in his later collection of speeches and essays (The Federal Reserve System, 2:29–36), recycled a version of this plan under the more memorable title “A Plan for a Modified Central Bank”; he said it had been published on November 12. The discrepancy between dates is unexplained.

  an umbrella organization of clearinghouses: Warburg, “A Plan for a Modified Central Bank,” in Warburg, The Federal Reserve System, 2:34–35.

  never permit the system to truly change: Warburg, The Federal Reserve System, 1:31.

  Aldrich, now sixty-six: The biographical details on Aldrich in this paragraph are from Michael Clark Rockefeller, “Nelson W. Aldrich and Banking Reform: A Conservative Leader in the Progressive Era,” A.B. thesis, Harvard College, 1960, 12–13.

  Gazing on Aldrich for the first time: Notes found in Aldrich Papers, Reel 61. See also Warburg, The Federal Reserve System, 1:31–32.

  Schiff advised that it would be a grave mistake: Notes found in Aldrich Papers, Reel 61.

  Four days later: Warburg, The Federal Reserve System, 1:32.

  “Did not the last panic”: Paul Warburg to Aldrich, December 31, 1907, Aldrich Papers, Reel 61; reprinted in Warburg, The Federal Reserve System, 1:555–57.

  CHAPTER FIVE: THE CROSSING

  “This central reserve, or whatever name”: Banking and Currency Reform: Hearings Before the Subcommittee of the Committee on Banking and Currency, Charged with Investigating Plan of Banking and Currency Reform and Reporting Constructive Legislation Thereof, 62nd Cong., 3rd sess., House of Representatives, January 7, 1913 (Washington, D.C.: Government Printing Office, 1913), 69, available at http://books.google.com/books?id=pc0qAAAAYAAJ&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false.

  “Well timed reform alone averts revolution”: Theodore Roosevelt to Everett Colby, October 3, 1913; George W. Perkins Sr. Papers, Box 13.

  Congress crafted a legislative response: Harold Kellock, “Warburg, the Revolutionist,” The Century Magazine 90 (n.s. 68—May to October 1915).

  But 1908 did not start auspiciously: Paul Warburg to Hon. Theodore E. Burton, April 30, 1908, in Paul M. Warburg, The Federal Reserve System: Its Origin and Growth—Reflections and Recollections (New York: Macmillan, 1930), 1:553–54.

  The Aldrich bill proposed: See various items in Nelson W. Aldrich Papers, Reel 61, including “Aldrich Becomes Converted to Idea of a Central Bank, May–October 1908”; as well as Michael Clark Rockefeller, “Nelson W. Aldrich and Banking Reform: A Conservative Leader in the Progressive Era,” A.B. thesis, Harvard College, 1960, 18–19; Henry Parker Willis, The Federal Reserve System: Legislation, Organization and Operation (New York: Ronald Press, 1923), 45–46; and Richard T. McCulley, Banks and Politics During the Progressive Era: The Origins of the Federal Reserve System, 1897–1913 (New York: Garland, 1992), 152–54.

  “We are all thoroughly disgusted”: Perkins to J. P. Morgan, May 22, 1908, Perkins Papers, Box 9.

  There was little enthusiasm: McCulley, Banks and Politics During the Progressive Era, 153–54.

  “Thoughtful students of economic history”: Speech of Senator Nelson W. Aldrich on S. Bill No. 3023, February 10, 1908, quoted in Warburg, The Federal Reserve System, 1:32.

  Given carte blanche to do as little: 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), 122–23. Tallies of the number of National Monetary Commission volumes differ. Andrew cites thirty-five volumes; see Andrew to Woodrow Wilson, November 23, 1911, A. Piatt Andrews Papers, Box 22, folder 7; however, Andrew L. Gray, Andrew’s grandnephew, cites twenty-three volumes in “Who Killed the Aldrich Plan?” The Bankers Magazine 54 (Summer 1971), 62–74.

  Aldrich did seek help: “Minutes of Meetings of Monetary Commission, 1908–1911” and “Chronology on Monetary Commission Work of Senator Aldrich,” both in Aldrich Papers, Reel 61. Regarding the recommendation of Davison, see Perkins to J. P. Morgan, July 14, 1908, Perkins Papers, Box 9.

  Morgan had been so impressed: Jean Strouse, Morgan, American Financier (New York: Random House, 1999), 602.

  “It is understood Davison”: Perkins to J. P. Morgan, July 23, 1908, telegram, Perkins Papers, Box 9.

  was furiously lobbying Congress to weaken: Correspondence in the Perkins Papers (Box 9) documents efforts for antitrust relief, both in general and specifically for International Harvester and U.S. Steel, each the fruit of Morgan-orchestrated mergers. See also Robert H. Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Chicago: Elephant, 1989), 46–47. On rate fixing, Perkins’s April 21, 1908, letter to Morgan (also in Perkins Papers, Box 9) contains this gem: “The most important thing that really has been accomplished—and it is very important—is that at least we have succeeded in getting practically all the railroad Presidents together in an agreement to raise freight rates. We had a great deal of difficulty in convincing Mr. [George Frederick] Baer, Mr. [Henry] Walters and one or two others that this ought to be done. They have finally come into line and yesterday, at a meeting of the Presidents here, they all agreed to the principle and gave out a statement to that effect. . . . It is estimated that this ought to add about $100,000,000 a year to the railroads’ revenues.” Finally, my understanding of the Morgan ethos was indelibly affected by reading The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance (New York: Grove Press, 1990); for that and more, I am indebted to its author, my friend Ron Chernow.

  “the levelest headed man in the country”: William Howard Taft to Aldrich, June 27, 1908, Aldrich Papers, Reel 61.

  “make men good by law”: McCulley, Banks and Politics During the Progressive Era, 160.

  Taft denounced the Oklahoma plan: Ibid., 159–61.

  Aldrich told the press his aim: “Aldrich Satisfied with Currency Law,” The New York Times, August 1, 1908.

  Aldrich reserved a $260 suite: North German Lloyd Steamship Co. to Arthur P. Shelton, July 23, 1908, Aldrich Papers, Reel 27.

  Davison had sailed ahead: Perkins to Morgan, July 23, 1908, George W. Perkins Sr. Papers.

  Aldrich exhaustively prepared: Nathaniel Wright Stephenson, Nelson W. Aldrich: A Leader in American Politics (New York: Scribner’s, 1930), 335–36.

  he took unusual precautions: Ibid., 336; and Aldrich Papers, Reel 61.

  Professor Andrew brought banking textbooks: Aldrich Papers, Reel 27; Rockefeller, “Nelson W. Aldrich and Banking Reform,” 28; and Stephenson, Nelson W. Aldrich, 335.

  Andrew hailed from La Porte: Typed “Family History,” A. Piatt Andrew Papers, Box 43, folder 8.

  At Princeton he had studied: Andrew to W. G. Brown, December 5, 1911, ibid., Box 22, folder 7.

  teacher to the young Franklin D. Roosevelt: “Family History.” Andrew’s social outings with FDR are mentioned in his Diary of Abram Piatt Andrew, 1902–1914, ed. E. Parker Hayden Jr. and Andrew L. Gray (Princeton, N.J., 1986).

  Economics in the Gilded Age: Andrew, Diary; for Andrew’s government salary, see Aldrich Papers, Reel 58.

  the Bank of England acquired: Walter Bagehot, Lombard Street: A Description of the Money Market (London, 1873). Bagehot stresses that the duty as lender of last resort was merely tacit, not written down or “acknowledged”—see especially pp. 25, 71.

  In the famous
phrase of Walter Bagehot: Bagehot, Lombard Street, 19, 21; see also ibid., 66-67, 78.

  roughly twenty in all: Forrest Capie, Charles Goodhart, and Norbert Schnadt, “The Development of Central Banking” (1994), available at http://eprints.lse.ac.uk/39606/1/The_development_of_central_banking_%28LSERO%29.pdf. Specifically, its table 1.2, “The Number of Central Banks 1900–1990” (p. 6), states there were eighteen in 1900 and twenty in 1910. Background on central bank history and development is based on J. Lawrence Broz’s trenchant “The Origins of Central Banking: Solutions to the Free-Rider Problem,” delivered at the 1996 Annual Meeting of the American Political Science Association, and published in International Organization 52, no. 2 (Spring 1998), 231–68.

  the big three of European banking: Bagehot, Lombard Street, 16, 28, and 84–85.

  In Germany, management was in the hands: National Monetary Commission, Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy, 61st Cong., 2d sess. (Washington, D.C.: Government Printing Office: 1910), 336.

  Morgan lost no time in requesting: Stephenson, Nelson W. Aldrich, 336.

  Interviews at the Bank of England: Biographer’s notes, Aldrich Papers, Reel 61.

  naïve and unprepared: Stephenson, Nelson W. Aldrich, 335.

  Matters improved after a few days: “Minutes of Meetings of Monetary Commission.”

  Aldrich also enlisted George Reynolds: Stephenson, Nelson W. Aldrich, 335; and Rockefeller, “Nelson W. Aldrich and Banking Reform,” 32.

  Davison took the lead: Biographer’s notes, Aldrich Papers, Reel 61; and Rockefeller, “Nelson W. Aldrich and Banking Reform,” 28.

  Commercial banks kept: Bagehot, Lombard Street, 11–13.

  had relatively little gold: J. Lawrence Broz, “The Domestic Politics of International Monetary Order: The Gold Standard,” in Contested Social Orders and International Politics, ed. David Skidmore (Nashville: Vanderbilt University Press, 1997), 53–91.

  Aldrich liberally buying economics books: Biographer’s notes, Aldrich Papers, Reel 61; and Stephenson, Nelson W. Aldrich, 337–38.