A History of Money and Banking in the United States: The Colonial Era to World War II (29 page)

On January 26, the convention delegates duly endorsed the preliminary report with virtual unanimity, after which Professor J. Laurence Laughlin was assigned the task of drawing up a more elaborate final report, which was published and distributed a few months later. Laughlin’s—and the convention’s—

final report not only came out in favor of a broadened asset base for a greatly increased amount of national bank notes, but also called explicitly for a central bank that would enjoy a monopoly of the issue of bank notes.16

out that Conant’s and Hadley’s major works of 1896 were both published by G.P. Putnam’s Sons of New York. President of Putnam’s was George Haven Putnam, a leader in the new banking reform movement. Ibid., p.

561, n. 2.

14Frank W. Taussig, “What Should Congress Do About Money?”
Review of Reviews
(August 1893): 151, quoted in Joseph Dorfman,
The
Economic Mind in American Civilization
(New York: Viking Press, 1949), 3, p. xxxvii. See also ibid., p. 269.

15Ibid., pp. 392–93.

16The final report, including its recommendations for a central bank, was hailed by F.M. Taylor, in his “The Final Report of the Indianapolis Monetary Commission,”
Journal of Political Economy
6 (June 1898): 293–322. Taylor also exulted that the convention had been “one of the most notable movements of our time—the first thoroughly organized movement of the business classes in the whole country directed to the bringing about of a radical change in national legislation.” Ibid., p. 322.

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The convention delegates took the gospel of banking reform to the length and breadth of the corporate and financial communities. In April 1898, for example, A. Barton Hepburn, president of the Chase National Bank of New York, at that time a flagship commercial bank for the Morgan interests and a man who would play a large role in the drive to establish a central bank, invited Indianapolis Monetary Commissioner Robert S.

Taylor to address the New York State Bankers Association on the currency question, since “bankers, like other people, need instruction upon this subject.” All the monetary commissioners, especially Taylor, were active during the first half of 1898 in exhorting groups of businessmen throughout the nation for monetary reform.

Meanwhile, in Washington, the lobbying team of Hanna and Conant was extremely active. A bill embodying the suggestions of the monetary commission was introduced by Indiana Congressman Jesse Overstreet in January, and was reported out by the House Banking and Currency Committee in May. In the meantime, Conant met almost continuously with the banking committee members. At each stage of the legislative process, Hanna sent letters to the convention delegates and to the public, urging a letter-writing campaign in support of the bill.

In this agitation, McKinley Secretary of the Treasury Lyman J.

Gage worked closely with Hanna and his staff. Gage sponsored similar bills, and several bills along the same lines were introduced in the House in 1898 and 1899. Gage, a friend of several of the monetary commissioners, was one of the top leaders of the Rockefeller interests in the banking field. His appointment as Treasury secretary had been gained for him by Ohio’s Mark Hanna, political mastermind and financial backer of President McKinley, and old friend, high-school classmate, and business associate of John D. Rockefeller, Sr. Before his appointment to the cabinet, Gage was president of the powerful First National Bank of Chicago, one of the major commercial banks in the Rockefeller ambit. During his term in office, Gage tried to operate the Treasury as a central bank, pumping in money during
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A History of Money and Banking in the United States:
The Colonial Era to World War II

recessions by purchasing government bonds on the open market, and depositing large funds with pet commercial banks. In 1900, Gage called vainly for the establishment of regional central banks.

Finally, in his last annual report as secretary of the Treasury in 1901, Lyman Gage let the cat completely out of the bag, calling outright for a government central bank. Without such a central bank, he declared in alarm, “individual banks stand isolated and apart, separated units, with no tie of mutuality between them.” Unless a central bank established such ties, Gage warned, the panic of 1893 would be repeated.17 When he left office early the next year, Lyman Gage took up his post as president of the Rockefeller-controlled U.S. Trust Company in New York City.18

THE GOLD STANDARD ACT OF 1900 AND AFTER

Any reform legislation had to wait until after the elections of 1898, for the gold forces were not yet in control of Congress. In the autumn, the executive committee of the Indianapolis Monetary Convention mobilized its forces, calling on no less than 97,000 correspondents throughout the country through whom it had distributed the preliminary report. The executive committee urged its constituency to elect a gold-standard Congress; when the gold forces routed the silverites in November, the results of the election were hailed by Hanna as eminently satisfactory.

The decks were now cleared for the McKinley administration to submit its bill, and the Congress that met in December 1899

quickly passed the measure; Congress then passed the conference report of the Gold Standard Act in March 1900.

The currency reformers had gotten their way. It is well known that the Gold Standard Act provided for a single gold 17Livingston,
Origins
, p. 153.

18Rothbard, “Federal Reserve,” pp. 94–95.

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standard, with no retention of silver money except as tokens.

Less well known are the clauses that began the march toward a more “elastic” currency. As Lyman Gage had suggested in 1897, national banks, previously confined to large cities, were now made possible with a small amount of capital in small towns and rural areas. And it was made far easier for national banks to issue notes. The object of these clauses, as one historian put it, was to satisfy an “increased demand for money at crop-moving time, and to meet popular cries for ‘more money’ by encouraging the organization of national banks in comparatively undeveloped regions.”19

The reformers exulted over the passage of the Gold Standard Act, but took the line that this was only the first step on the much-needed path to fundamental banking reform. Thus, Professor Frank W. Taussig of Harvard praised the act, and greeted the emergence of a new social and ideological alignment, caused by “strong pressure from the business community” through the Indianapolis Monetary Convention. He particularly welcomed the fact that the Gold Standard Act “treats the national banks not as grasping and dangerous corporations but as useful institutions deserving the fostering care of the legislature.” But such tender legislative care was not enough; fundamental banking reform was needed. For, Taussig declared, “The changes in banking legislation are not such as to make possible any considerable expansion of the national system or to enable it to render the community the full service of which it is capable.” In short, the changes allowed for more and greater expansion of bank credit and the supply of money. Therefore, Taussig concluded, “It is well nigh certain that eventually Congress will have to consider once more the further remodeling of the national bank system.”20

In fact, the Gold Standard Act of 1900 was only the opening gun of the banking reform movement. Three friends and financial 19Livingston,
Origins
, p. 123.

20Frank W. Taussig, “The Currency Act of 1900,”
Quarterly Journal of
Economics
14 (May 1900): 415.

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

journalists, two from Chicago, were to play a large role in the development of that movement. Massachusetts-born Charles A.

Conant (1861–1915), a leading historian of banking, wrote
A History of Modern Banks of Issue
in 1896, while still a Washington correspondent for the
New York Journal of Commerce
and an editor of
Bankers Magazine
. After his stint of public relations work and lobbying for the Indianapolis convention, Conant moved to New York in 1902 to become treasurer of the Morgan-oriented Morton Trust Company. The two Chicagoans, both friends of Lyman Gage, were, along with Gage, in the Rockefeller ambit: Frank A.

Vanderlip was picked by Gage as his assistant secretary of the Treasury, and when Gage left office, Vanderlip came to New York as a top executive at the flagship commercial bank of the Rockefeller interests, the National City Bank of New York.

Meanwhile, Vanderlip’s close friend and mentor at the
Chicago
Tribune,
Joseph French Johnson, had also moved east to become professor of finance at the Wharton School of the University of Pennsylvania. But no sooner had the Gold Standard Act been passed when Joseph Johnson sounded the trump by calling for more fundamental reform.

Professor Johnson stated flatly that the existing bank note system was weak in not “responding to the needs of the money market,” that is, not supplying a sufficient amount of money.

Since the national banking system was incapable of supplying those needs, Johnson opined, there was no reason to continue it.

Johnson deplored the U.S. banking system as the worst in the world, and pointed to the glorious central banking system as existed in Britain and France.21 But no such centralized banking system yet existed in the United States:

21Joseph French Johnson, “The Currency Act of March 14, 1900,”
Political Science Quarterly
15 (1900): 482–507. Johnson, however, deplored the one fly in the Bank of England ointment—the remnant of the hard-money Peel’s Bank Act of 1844 that placed restrictions on the quantity of bank note issue. Ibid., p. 496.

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In the United States, however, there is no single business institution, and no group of large institutions, in which self-interest, responsibility, and power naturally unite and conspire for the protection of the monetary system against twists and strains.

In short, there was far too much freedom and decentralization in the system. In consequence, our massive deposit credit system “trembles whenever the foundations are disturbed,” that is, whenever the chickens of inflationary credit expansion came home to roost in demands for cash or gold. The result of the inelasticity of money, and of the impossibility of interbank cooperation, Johnson opined, was that we were in danger of losing gold abroad just at the time when gold was needed to sustain confidence in the nation’s banking system.22

After 1900, the banking community was split on the question of reform, the small and rural bankers preferring the status quo. But the large bankers, headed by A. Barton Hepburn of Morgan’s Chase National Bank, drew up a bill as head of a commission of the American Bankers Association, and presented it in late 1901 to Representative Charles N. Fowler of New Jersey, chairman of the House Banking and Currency Committee, who had introduced one of the bills that had led to the Gold Standard Act. The Hepburn proposal was reported out of committee in April 1902 as the Fowler Bill.23

The Fowler Bill contained three basic clauses. One allowed the further expansion of national bank notes based on broader assets than government bonds. The second, a favorite of the big banks, was to allow national banks to establish branches at home and abroad, a step illegal under the existing system due to fierce opposition by the small country bankers. While branch banking is consonant with a free market and provides a sound and efficient system for calling on other banks for redemption, the big banks had little interest in branch banking unless accom-22Ibid., pp. 497f.

23Kolko,
Triumph
, pp. 149–50.

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

panied by centralization of the banking system. Thus, the Fowler Bill proposed to create a three-member board of control within the Treasury Department to supervise the creation of the new bank notes and to establish clearinghouse associations under its aegis. This provision was designed to be the first step toward the establishment of a full-fledged central bank.24

Although they could not control the American Bankers Association, the multitude of country bankers, up in arms against the proposed competition of big banks in the form of branch banking, put fierce pressure upon Congress and managed to kill the Fowler Bill in the House during 1902, despite the agitation of the executive committee and staff of the Indianapolis Monetary Convention.

With the defeat of the Fowler Bill, the big bankers decided to settle for more modest goals for the time being. Senator Nelson W. Aldrich of Rhode Island, perennial Republican leader of the U.S. Senate and Rockefeller’s man in Congress,25 submitted the Aldrich Bill the following year, allowing the large national banks in New York to issue “emergency currency” based on municipal and railroad bonds. But even this bill was defeated.

Meeting setbacks in Congress, the big bankers decided to regroup and turn temporarily to the executive branch. Foreshadowing a later, more elaborate collaboration, two powerful representatives each from the Morgan and Rockefeller banking interests met with Comptroller of the Currency William B.

Ridgely in January 1903, to try to persuade him, by administrative fiat, to restrict the volume of loans made by the country 24See Livingston,
Origins
, pp. 150–54.

25Nelson W. Aldrich, who entered the Senate a moderately wealthy wholesale grocer and left years later a multimillionaire, was the father-in-law of John D. Rockefeller, Jr. His grandson and namesake, Nelson Aldrich Rockefeller, later became vice president of the United States, and head of the “corporate liberal” wing of the Republican Party.

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banks in the New York money market. The two Morgan men at the meeting were J.P. Morgan and George F. Baker, Morgan’s closest friend and associate in the banking business.26 The two Rockefeller men were Frank Vanderlip and James Stillman, longtime chairman of the board of the National City Bank.27