A History of Money and Banking in the United States: The Colonial Era to World War II (36 page)

On September 14, at the same time as Reynolds’s address to the nation’s bankers, another significant address took place.

65Victor Morawetz was an eminent attorney in the Morgan ambit who served as chairman of the executive committee of the Morgan-run Atchison, Topeka and Santa Fe Railway, and member of the board of the Morgan-dominated National Bank of Commerce. In 1908, Morawetz, along with J.P. Morgan’s personal attorney, Francis Lynde Stetson, had been the principal drafter of an unsuccessful Morgan-National Civic Federation bill for a federal incorporation law to regulate and cartelize American corporations. Later, Morawetz was to be a top consultant to another “progressive” reformer of Woodrow Wilson’s, the Federal Trade Commission. On Morawetz, see Rothbard, “Federal Reserve,” p. 99.

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

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.

66
Wall Street Journal,
16 September 1909, p. 1. Cited in Livingston,
Origins
, p. 191.

67Ibid.

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249

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.” 68Ibid., p. 194.

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

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 Warburg 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.

69See Rothbard, “Federal Reserve,” pp. 98–99. Also, on Warburg’s speech, see Livingston,
Origins
, pp. 194–98.

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251

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 attend-ing 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 70Livingston,
Origins
, p. 203.

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

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 precau-tions on the trips there and back to preserve their secrecy. Thus, 71Ibid., pp. 205–07.

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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

72See Rothbard, “Federal Reserve,” pp. 99–101; and Frank A.

Vanderlip,
From Farm Boy to Financier
(New York: D. Appleton-Century, 1935), pp. 210–19.

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

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.