A History of Money and Banking in the United States: The Colonial Era to World War II

by Murray N. Rothbard

  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. In December, the commission hired the inevitable Charles A. Conant for research, public relations, and agitprop. Behind the façade of the congressmen and senators on the commission, Senator Aldrich began to form and expand his inner circle, which soon included Warburg and Vanderlip. Warburg formed around him a subcircle of friends and acquaintances from the currency committee of the New York Merchants’ Association, headed by Irving T. Bush, and from the top ranks of the American Economic Association, to whom he had delivered an address advocating central banking in December 1908. Warburg met and corresponded frequently with leading academic economists advocating banking reform, including E.R.A. Seligman; Thomas Nixon Carver of Harvard; Henry R. Seager of Columbia; Davis R. Dewey, historian of banking at MIT, longtime secretary-treasurer of the AEA and brother of the progressive philosopher John Dewey; Oliver M.W. Sprague, professor of banking at Harvard, of the Morgan-connected Sprague family; Frank W. Taussig of Harvard; and Irving Fisher of Yale.

  During 1909, however, the reformers faced an important problem: they had to bring such leading bankers as James B. Forgan, head of the Rockefeller-oriented First National Bank of Chicago, solidly into line in support of a central bank. It was not that Forgan objected to centralized reserves or a lender of last resort—quite the contrary. It was rather that Forgan recognized that, under the national banking system, large banks such as his own were already performing quasi–central banking functions with their own country bank depositors; and he didn’t want his bank deprived of such functions by a new central bank.

  The bank reformers therefore went out of their way to bring such men as Forgan into enthusiastic support for the new scheme. In his presidential address to the powerful American Bankers Association in mid-September 1909, George M. Reynolds not only came out flatly in favor of a central bank in America, to be modeled after the German Reichsbank; he also assured Forgan and others that such a central bank would act as depository of reserves only for the large national banks in the central reserve cities, while the national banks would continue to hold deposits for the country banks. Mollified, Forgan held a private conference with Aldrich’s inner circle and came fully on board for the central bank. As an outgrowth of Forgan’s concerns, the reformers decided to cloak their new central bank in a spurious veil of “regionalism” and “decentralism” through establishing regional reserve centers, that would provide the appearance of virtually independent regional central banks to cover the reality of an orthodox European central bank monolith. As a result, noted railroad attorney Victor Morawetz made his famous speech in November 1909, calling for regional banking districts under the ultimate direction of one central control board. Thus, reserves and note issue would be supposedly decentralized in the hands of the regional reserve banks, while they would really be centralized and coordinated by the central control board. This, of course, was the scheme eventually adopted in the Federal Reserve System.65

  On September 14, at the same time as Reynolds’s address to the nation’s bankers, another significant address took place. President William Howard Taft, speaking in Boston, suggested that the country seriously consider establishing a central bank. Taft had been close to the reformers—especially his Rockefeller-oriented friends Aldrich and Burton—since 1900. But the business press understood the great significance of this public address, that it was, as the Wall Street Journal put it, a crucial step “toward removing the subject from the realm of theory to that of practical politics.”66

  One week later, a fateful event in American history occurred. The banking reformers moved to escalate their agitation by creating a virtual government-bank-press complex to drive through a central bank. On September 22, 1909, the Wall Street Journal took the lead in this development by beginning a notable, front-page, 14-part series on “A Central Bank of Issue.” These were unsigned editorials by the Journal, but they were actually written by the ubiquitous Charles A. Conant, from his vantage point as salaried chief propagandist of the U.S. government’s National Monetary Commission. The series was a summary of the reformers’ position, also going out of the way to assure the Forgans of this world that the new central bank “would probably deal directly only with the larger national banks, leaving it for the latter to rediscount for their more remote correspondents.”67 To the standard arguments for a central bank—“elasticity” of the money supply, protecting bank reserves by manipulating the discount rate and the international flow of gold, and combating crisis by bailing out individual banks—Conant added a Conant twist: the importance of regulating interest rates and the flow of capital in a world marked by surplus capital. Government debt would, for Conant, provide the important function of sopping up surplus capital; that is, providing profitable outlets for savings by financing government expenditures.

  The Wall Street Journal series inaugurated a shrewd and successful campaign by Conant to manipulate the nation’s press and get it behind the idea of a central bank. Building on his experience in 1898, Conant, along with Aldrich’s secretary, Arthur B. Shelton, prepared abstracts of commission materials for the newspapers during February and March of 1910. Soon Shelton recruited J.P. Gavitt, head of the Washington bureau of the Associated Press, to scan commission abstracts, articles, and forthcoming books for “newsy paragraphs” to catch the eye of newspaper editors.

  The academic organizations proved particularly helpful to the NMC, lending their cloak of disinterested expertise to the endeavor. In February, Robert E. Ely, secretary of the APS, proposed to Aldrich that a special volume of its Proceedings be devoted to banking and currency reform, to be published in cooperation with the NMC, in order to “popularize in the best sense, some of the valuable work of [the] Commission.”68 And yet, Ely had the gall to add that, even though the APS would advertise the NMC’s arguments and conclusions, it would retain its “objectivity” by avoiding its own specific policy recommendations. As Ely put it, “We shall not advocate a central bank, but we shall only give the best results of your work in condensed form and untechnical language.”

  The AAPSS, too, weighed in with its own special volume, Banking Problems (1910), featuring an introduction by A. Piatt Andrew of Harvard and the NMC and articles by veteran bank reformers such as Joseph French Johnson, Horace White, and Morgan Bankers Trust official Fred I. Kent. But most of the articles were from leaders of Rockefeller’s National City Bank of New York, including George E. Roberts, a former Chicago banker and U.S. Mint official about to join National City.

  Meanwhile, Paul M. Warburg capped his lengthy campaign for a central bank in a famous speech to the New York YMCA on March 23, on “A United Reserve Bank for the United States.” Warburg basically outlined the structure of his beloved German Reichsbank, but he was careful to begin his talk by noting a recent poll in the Banking Law Journal that 60 percent of the nation’s bankers favored a central bank provided it was “not controlled by ‘Wall Street or any monopolistic interest.’” To calm this fear, Warburg insisted that, semantically, the new reserve bank not be called a central bank, and that the reserve bank’s governing board be chosen by government officials, merchants and bankers—with bankers, of course, dominating the choices. He also provided a distinctive Warburg twist 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 greatest cheerleader for the Warb
urg plan, and the man who introduced the APS’s Reform of the Currency (1911), the volume on banking reform featuring Warburg’s speech, was Warburg’s kinsman and member of the Seligman investment banking family, Columbia economist E.R.A. Seligman.69

  So delighted was the Merchants’ Association of New York with Warburg’s speech that it distributed 30,000 copies during the spring of 1910. Warburg had paved the way for this support by regularly meeting with the currency committee of the Merchants’ Assocation since October 1908, and his efforts were aided by the fact that the resident expert for that committee was none other than Joseph French Johnson.

  At the same time, in the spring of 1910, the numerous research volumes published by the NMC poured onto the market. The object was to swamp public opinion with a parade of impressive analytic and historical scholarship, all allegedly “scientific” and “value-free,” but all designed to aid in furthering the common agenda of a central bank. Typical was E.W. Kemmerer’s mammoth statistical study of seasonal variations in the demand for money. Stress was laid on the problem of the “inelasticity” of the supply of cash, in particular the difficulty of expanding that supply when needed. While Kemmerer felt precluded from spelling out the policy implications—establishing a central bank—in the book, his acknowledgments in the preface to Fred Kent and the inevitable Charles Conant were a tip-off to the cognoscenti, and Kemmerer himself disclosed them in his address to the Academy of Political Science the following November.

  Now that the theoretical and scholarly groundwork had been laid, by the latter half of 1910, it was time to formulate a concrete practical plan and put on a mighty putsch on its behalf. In Reform of the Currency, published by the APS, Warburg made the point with crystal clarity: “Advance is possible only by outlining a tangible plan” that would set the terms of the debate from then on.70

  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. Attendants at the conference included Frank Vanderlip, Elihu Root, Thomas W. Lamont of the Morgans, Jacob Schiff, and J.P. Morgan. The formal sessions of the conference were organized around papers by Kemmerer, Laughlin, Johnson, Bush, Warburg, and Conant, and the general atmosphere was that bankers and businessmen were to take their general guidance from the attendant scholars. As James B. Forgan, Chicago banker who was now solidly in the central banking camp, put it: “Let the theorists, those who... can study from past history and from present conditions the effect of what we are doing, lay down principles for us, and let us help them with the details.” C. Stuart Patterson pointed to the great lessons of the Indianapolis Monetary Commission, and the way in which its proposals triumphed in action because “we went home and organized an aggressive and active movement.” Patterson then laid down the marching orders of what this would mean concretely for the assembled troops:

  That is just what you must do in this case, you must uphold the hands of Senator Aldrich. You have got to see that the bill which he formulates... obtains the support of every part of this country.71

  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. Facilities for their meeting were arranged by club member and co-owner J.P. Morgan. The cover story released to the press was that this was a simple duck-hunting expedition, and the conferees took elaborate precautions on the trips there and back to preserve their secrecy. Thus, the attendees addressed each other only by first name, and the railroad car was kept dark and closed off from reporters or other travelers on the train. One reporter apparently caught on to the purpose of the meeting, but was in some way persuaded by Henry P. Davison to maintain silence.

  The conferees worked for a solid week at Jekyll Island to hammer out the draft of the Federal Reserve bill. In addition to Aldrich, the conferees included Henry P. Davison, Morgan partner; Paul Warburg, whose address in the spring had greatly impressed Aldrich; Frank A. Vanderlip, vice president of the National City Bank of New York; and finally, A. Piatt Andrew, head of the NMC staff, who had recently been made assistant secretary of the Treasury by President Taft. After a week of meetings, the six men had forged a plan for a central bank, which eventually became the Aldrich Bill. Vanderlip acted as secretary of the meeting, and contributed the final writing.

  The only substantial disagreement was tactical, with 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.” It is amusing that the bankers were the more politically astute, while the politician Aldrich wanted to waive political considerations. Warburg and the bankers won out, and the final draft was basically the Warburg plan with a decentralized patina taken from Morawetz.

  The financial power elite now had a bill. The significance of the composition of the small meeting must be stressed: two Rockefeller men (Aldrich and Vanderlip), two Morgans (Davison and Norton), one Kuhn, Loeb person (Warburg), and one economist friendly to both camps (Andrew).72

  After working on some revisions of the Jekyll Island draft with Forgan and George Reynolds, Aldrich presented the Jekyll Island draft as the Aldrich Plan to the full NMC in January 1911. But here an unusual event occurred. Instead of quickly presenting this Aldrich Bill to the Congress, its drafters waited for a full year, until January 1912. Why the unprecedented year’s delay?

  The problem was that the Democrats swept the congressional elections in 1910, and Aldrich, disheartened, decided not to run for re-election to the Senate the following year. The Democratic triumph meant that the reformers had to devote a year of intensive agitation to convert the Democrats, and to intensify propaganda to the rest of banking, business, and the public. In short, the reformers needed to regroup and accelerate their agitation.

  THE FINAL PHASE: COPING WITH THE DEMOCRATIC ASCENDANCY

  The final phase of the drive for a central bank began in January 1911. At the previous January’s meeting of the National Board of Trade, Paul Warburg had put through a resolution setting aside January 18, 1911, as a “monetary day” devoted to a “Business Men’s Monetary Conference.” This conference, run by the National Board of Trade, and featuring delegates from metropolitan mercantile organizations from all over the country, had C. Stuart Patterson as its chairman. The New York Chamber of Commerce, the Merchants’ Association of New York, and the New York Produce Exchange, each of which had been pushing for banking reform for the previous five years, introduced a joint resolution to the monetary conference supporting the Aldrich Plan, and proposing the establishment of a new “businessmen’s monetary reform league” to lead the public struggle for a central bank. After a speech in favor of the plan by A. Piatt Andrew, the entire conference adopted the resolution. In response, C. Stuart Patterson appointed none other than Paul M. Warburg to head a committee of seven to establish the reform league.

  The committee of seven shrewdly decided, following the lead of the old Indianapolis convention, to establish the National Citizens’ League for the Creation of a Sound Banking Sy
stem in Chicago rather than in New York, where the control really resided. The idea was to acquire the bogus patina of a “grassroots” heartland operation and to convince the public that the league was free of dreaded Wall Street control. As a result, the official heads of the league were Chicago businessmen John V. Farwell and Harry A. Wheeler, president of the U.S. Chamber of Commerce. The director was University of Chicago monetary economist J. Laurence Laughlin, assisted by his former student, Professor H. Parker Willis.

  In keeping with its Midwestern aura, most of the directors of the Citizens’ League were Chicago nonbanker industrialists: men such as B.E. Sunny of the Chicago Telephone Company, Cyrus McCormick of International Harvester (both companies in the Morgan ambit), John G. Shedd of Marshall Field and Company, Frederic A. Delano of the Wabash Railroad Company (Rockefeller-controlled), and Julius Rosenwald of Sears, Roebuck. Over a decade later, however, H. Parker Willis frankly conceded that the Citizens’ League had been a propaganda organ of the nation’s bankers.73

  The Citizens’ League swung into high gear during the spring and summer of 1911, issuing a periodical, Banking and Reform, designed to reach newspaper editors, and subsidizing pamphlets by such pro-reform experts as John Perrin, head of the American National Bank of Indianapolis, and George E. Roberts of the National City Bank of New York. Consultant on the newspaper campaign was H.H. Kohlsaat, former executive committee member of the Indianapolis Monetary Convention. Laughlin himself worked on a book on the Aldrich Plan, to be similar to his own report of 1898 for the Indianapolis convention.

  Meanwhile, a parallel campaign was launched to bring the nation’s bankers into camp. The first step was to convert the banking elite. For that purpose, the Aldrich inner circle organized a closed-door conference of 23 top bankers in Atlantic City in early February, which included several members of the currency commission of the American Bankers Association (ABA), along with bank presidents from nine leading cities of the country. After making a few minor revisions, the conference warmly endorsed the Aldrich Plan.