A History of Money and Banking in the United States: The Colonial Era to World War II (27 page)

In this way, the Wall Street–federal government establishment was able to control the banking system, and inflate the supply of notes and deposits in a coordinated manner.

But there were still problems. The national banking system provided only a halfway house between free banking and government central banking, and by the end of the nineteenth century, the Wall Street banks were becoming increasingly unhappy
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with the status quo. The centralization was only limited, and, above all, there was no governmental central bank to coordinate inflation, and to act as a lender of last resort, bailing out banks in trouble. No sooner had bank credit generated booms when they got into trouble and bank-created booms turned into recessions, with banks forced to contract their loans and assets and to deflate in order to save themselves. Not only that, but after the initial shock of the National Banking Acts, state banks had grown rapidly by pyramiding their loans and demand deposits on top of national bank notes. These state banks, free of the high legal capital requirements that kept entry restricted in national banking, flourished during the 1880s and 1890s and provided stiff competition for the national banks themselves. Furthermore, St. Louis and Chicago, after the 1880s, provided increasingly severe competition to Wall Street. Thus, St. Louis and Chicago bank deposits, which had been only 16 percent of the St. Louis, Chicago, and New York City total in 1880, rose to 33

percent of that total by 1912. All in all, bank clearings outside of New York City, which were 24 percent of the national total in 1882, had risen to 43 percent by 1913.

The complaints of the big banks were summed up in one word: “inelasticity.” The national banking system, they charged, did not provide for the proper “elasticity” of the money supply; that is, the banks were not able to expand money and credit as much as they wished, particularly in times of recession. In short, the national banking system did not provide sufficient room for inflationary expansions of credit by the nation’s banks.1

1On the national banking system background and on the increasing unhappiness of the big banks, see Murray N. Rothbard, “The Federal Reserve as a Cartelization Device: The Early Years, 1913–1920,” in
Money in
Crisis,
Barry Siegel, ed. (San Francisco: Pacific Institute, 1984), pp. 89–94; Ron Paul and Lewis Lehrman,
The Case for Gold: A Minority Report on the
U.S. Gold Commission
(Washington, D.C.: Cato Institute, 1982); and Gabriel Kolko,
The Triumph of Conservatism: A Reinterpretation of American
History
(Glencoe, Ill.: Free Press, 1983), pp. 139–46.

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

By the turn of the century the political economy of the United States was dominated by two generally clashing financial aggregations: the previously dominant Morgan group, which had begun in investment banking and expanded into commercial banking, railroads, and mergers of manufacturing firms; and the Rockefeller forces, which began in oil refining and then moved into commercial banking, finally forming an alliance with the Kuhn, Loeb Company in investment banking and the Harriman interests in railroads.2

Although these two financial blocs usually clashed with each other, they were as one on the need for a central bank. Even though the eventual major role in forming and dominating the Federal Reserve System was taken by the Morgans, the Rockefeller and Kuhn, Loeb forces were equally enthusiastic in pushing, and collaborating on, what they all considered to be an essential monetary reform.

THE BEGINNINGS OF THE “REFORM” MOVEMENT:

THE INDIANAPOLIS MONETARY CONVENTION

The presidential election of 1896 was a great national referendum on the gold standard. The Democratic Party had been captured, at its 1896 convention, by the Populist, ultra-inflationist, anti-gold forces, headed by William Jennings Bryan. The older Democrats, who had been fiercely devoted to hard money and the gold standard, either stayed home on election day or voted, for the first time in their lives, for the hated Republicans. The Republicans had long been the party of prohibition and of greenback inflation and opposition to gold. But since the early 1890s, 2Indeed, much of the political history of the United States from the late nineteenth century until World War II may be interpreted by the closeness of each administration to one of these sometimes cooperating, more often conflicting, financial groupings: Cleveland (Morgan), McKinley (Rockefeller), Theodore Roosevelt (Morgan), Taft (Rockefeller), Wilson (Morgan), Harding (Rockefeller), Coolidge (Morgan), Hoover (Morgan), and Franklin Roosevelt (Harriman–Kuhn, Loeb–Rockefeller).

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the Rockefeller forces, dominant in their home state of Ohio and nationally in the Republican Party, had decided to quietly ditch prohibition as a political embarrassment and as a grave deterrent to obtaining votes from the increasingly powerful bloc of German-American voters. In the summer of 1896, anticipating the defeat of the gold forces at the Democratic convention, the Morgans, previously dominant in the Democratic Party, approached the McKinley–Mark Hanna–Rockefeller forces through their rising young satrap, Congressman Henry Cabot Lodge of Massachusetts. Lodge offered the Rockefeller forces a deal: The Morgans would support McKinley for president and neither sit home nor back a third, Gold Democrat party, provided that McKinley pledged himself to a gold standard. The deal was struck, and many previously hard-money Democrats shifted to the Republicans. The nature of the American political party system was now drastically changed: previously a tightly fought struggle between hard-money, free-trade, laissez-faire Democrats on the one hand, and protectionist, inflationist, and statist Republicans on the other, with the Democrats slowly but surely gaining ascendancy by the early 1890s, was now a party system that would be dominated by the Republicans until the depression election of 1932.

The Morgans were strongly opposed to Bryanism, which was not only Populist and inflationist, but also anti–Wall Street bank; the Bryanites, much like Populists of the present day, preferred congressional, greenback inflationism to the more subtle, and more privileged, big-bank-controlled variety. The Morgans, in contrast, favored a gold standard. But, once gold was secured by the McKinley victory of 1896, they wanted to press on to use the gold standard as a hard-money camouflage behind which they could change the system into one less nakedly inflationist than populism but far more effectively controlled by the big-banker elites. In the long run, a controlled Morgan-Rockefeller gold standard was far more pernicious to the cause of genuine hard money than a candid free-silver or greenback Bryanism.

As soon as McKinley was safely elected, the Morgan-Rockefeller forces began to organize a “reform” movement to cure the
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A History of Money and Banking in the United States:
The Colonial Era to World War II

“inelasticity” of money in the existing gold standard and to move slowly toward the establishment of a central bank. To do so, they decided to use the techniques they had successfully employed in establishing a pro–gold standard movement during 1895 and 1896. The crucial point was to avoid the public suspicion of Wall Street and banker control by acquiring the patina of a broad-based grassroots movement. To do so, the movement was deliberately focused in the Middle West, the heartland of America, and organizations developed that included not only bankers, but also businessmen, economists, and other academics, who supplied respectability, persuasive-ness, and technical expertise to the reform cause.

Accordingly, the reform drive began just after the 1896 elections in authentic Midwest country. Hugh Henry Hanna, president of the Atlas Engine Works of Indianapolis, who had learned organizing tactics during the year with the pro–gold standard Union for Sound Money, sent a memorandum, in November, to the Indianapolis Board of Trade, urging a grassroots Midwestern state like Indiana to take the lead in currency reform.3

In response, the reformers moved fast. Answering the call of the Indianapolis Board of Trade, delegates from boards of trade from 12 Midwestern cities met in Indianapolis on December 1, 1896. The conference called for a large monetary convention of businessmen, which accordingly met in Indianapolis on January 12, 1897. Representatives from 26 states and the District of Columbia were present. The monetary reform movement was now officially under way. The influential
Yale
Review
commended the convention for averting the danger of arousing popular hostility to bankers. It reported that “the conference was a gathering of businessmen in general rather than bankers in particular.”4

3For the memorandum, see James Livingston,
Origins of the Federal
Reserve System: Money, Class, and Corporate Capitalism, 1890–1913
(Ithaca, N.Y.: Cornell University Press, 1986), pp. 104–05.

4
Yale Review
5 (1897): 343–45, quoted in ibid., p. 105.

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The conventioneers may have been businessmen, but they were certainly not very grassrootsy. Presiding at the Indianapolis Monetary Convention of 1897 was C. Stuart Patterson, dean of the University of Pennsylvania Law School and a member of the finance committee of the powerful, Morgan-oriented Pennsylvania Railroad. The day after the convention opened, Hugh Hanna was named chairman of an executive committee which he would appoint. The committee was empowered to act for the convention after it adjourned. The executive committee consisted of the following influential corporate and financial leaders: John J. Mitchell of Chicago, president of the Illinois Trust and Savings Bank, and a director of the Chicago and Alton Railroad; the Pittsburgh, Fort Wayne and Chicago Railroad; and the Pullman Company. Mitchell was named treasurer of the executive committee.

H.H. Kohlsaat, editor and publisher of the
Chicago Times-Herald
and the Chicago
Ocean Herald
, trustee of the Chicago Art Institute, and a friend and adviser of Rockefeller’s main man in politics, President William McKinley.

Charles Custis Harrison, provost of the University of Pennsylvania, who had made a fortune as a sugar refiner in partnership with the powerful Havemeyer (“Sugar Trust”) interests.

Alexander E. Orr, New York City banker in the Morgan ambit, who was a director of the Morgan-run Erie and Chicago, Rock Island, and Pacific Railroads; of the National Bank of Commerce; and of the influential publishing house, Harper Brothers.

Orr was also a partner in the country’s largest grain merchan-dising firm and a director of several life insurance companies.

Edwin O. Stanard, St. Louis grain merchant, former governor of Missouri, and former vice president of the National Board of Trade and Transportation.

E.B. Stahlman, owner of the
Nashville Banner
, commissioner of the cartelist Southern Railway and Steamship Association, and former vice president of the Louisville, New Albany, and Chicago Railroad.

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

A.E. Willson, influential attorney from Louisville and a future governor of Kentucky.

But the two most interesting and powerful executive committee members of the Indianapolis Monetary Convention were Henry C. Payne and George Foster Peabody. Henry Payne was a Republican Party leader from Milwaukee and president of the Morgan-dominated Wisconsin Telephone Company, long associated with the railroad-oriented Spooner-Sawyer Republican machine in Wisconsin politics. Payne was also heavily involved in Milwaukee utility and banking interests, in particular as a longtime director of the North American Company, a large public utility holding company headed by New York City financier Charles W. Wetmore. So close was North American to the Morgan interests that its board included two top Morgan financiers.

One was Edmund C. Converse, president of Morgan-run Liberty National Bank of New York City, and soon-to-be founding president of Morgan’s Bankers Trust Company. The other was Robert Bacon, a partner in J.P. Morgan and Company, and one of Theodore Roosevelt’s closest friends, whom Roosevelt would make assistant secretary of state. Furthermore, when Theodore Roosevelt became president as the result of the assassination of William McKinley, he replaced Rockefeller’s top political operative, Mark Hanna of Ohio, with Henry C. Payne as postmaster general of the United States. Payne, a leading Morgan lieu-tenant, was reportedly appointed to what was then the major political post in the Cabinet, specifically to break Hanna’s hold over the national Republican Party. It seems clear that replacing Hanna with Payne was part of the savage assault that Theodore Roosevelt would soon launch against Standard Oil as part of the open warfare about to break out between the Rockefeller–Harriman–Kuhn, Loeb camp and the Morgan camp.5

Even more powerful in the Morgan ambit was the secretary of the Indianapolis Monetary Convention’s executive committee, 5See Philip H. Burch, Jr.,
Elites in American History,
vol. 2
, The Civil War
to the New Deal
(New York: Holmes and Meier, 1981), p. 189, n. 55.

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George Foster Peabody. The entire Peabody family of Boston Brahmins had long been personally and financially closely associated with the Morgans. A member of the Peabody clan had even served as best man at J.P. Morgan’s wedding in 1865.

George Peabody had long ago established an international banking firm of which J.P. Morgan’s father, Junius, had been one of the senior partners. George Foster Peabody was an eminent New York investment banker with extensive holdings in Mexico, who was to help reorganize General Electric for the Morgans, and was later offered the job of secretary of the Treasury during the Wilson administration. He would function throughout that administration as a “statesman without portfolio.”6